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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F/A (Amendment No. 1) o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934  Corporación Durango, S.A. 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) Torre Corporativa Durango
Potasio 150
Ciudad Industrial
Durango, Durango, Mexico 34220
+52 (618) 814-1658
and
+52 (618) 814-2799 (Address and telephone number of principal executive offices)    Name of each exchange on whichTitle of each class:
    
    registered:Series A Common Stock, without par value, or Series A Shares
    
    New York Stock Exchange*Ordinary Participation Certificates, or CPOs, each representing one Series A Share
    
    New York Stock Exchange*American Depositary Shares, or ADSs, each representing two CPOs
    
    New York Stock Exchange13 1/8% Senior Notes due 2006, or the 2006 notes
    
    New York Stock Exchange13 1/2% Senior Notes due 2008, or the 2008 notes
    
    New York Stock Exchange
   *
    
    Not for trading, but only in connection with the registration of
American Depositary Shares, pursuant to the requirements of the United
States Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report: 91,832,122 Series A Shares, without par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 x




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TABLE OF CONTENTS  PART IIIItem 18. Financial StatementsItem 19. ExhibitsSIGNATURESSec 302 Chief Executive Officer CertificationSec 302 Chief Financial Officer CertificationSec 906 Chief Executive Officer CertificationSec 906 Chief Financial Officer Certification    Table of Contents  EXPLANATORY NOTE This Amendment No. 1 on Form 20-F/A, or Amendment No. 1, is being filed
solely to amend the Annual Report on Form 20-F for the fiscal year ended
December 31, 2003, or the Original Form 20-F, as filed by Corporación Durango,
S.A. de C.V., or our company, with the U.S. Securities and Exchange Commission
on July 15, 2004 in the following ways:  
    
    to include the Reports of Independent Auditors relating to the
consolidated financial statements of our company, as of and for the
years ended December 31, 2003, 2002 and 2001;  
    
    to include the Reports of Independent Auditors relating to the
financial statements of Compañía Papelera de Atenquique, S.A. de C.V.,
as of and for the years ended December 31, 2003, 2002 and 2001;  
    
    to include the Reports of Independent Auditors relating to the
financial statements of Industrias Centauro, S.A. de C.V., as of and
for the years ended December 31, 2003, 2002 and 2001;  
    
    to include the certifications applicable to foreign private issuers
pursuant to Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002; and  
    
    to include the certifications applicable to foreign private issuers
pursuant to Rules 13a-14(b)/15d-14(b) as required by Section 1350 of
Chapter 63 of Title 18 of the United States Code, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. This Amendment No. 1 amends and restates in their entirety Items 18 and 19
of the Original Form 20-F. Other than as expressly set forth above, this
Amendment No. 1 does not, and does not purport to, amend, update or restate the
information in the Original Form 20-F or reflect any events that have occurred
after the Original Form 20-F was filed.




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PART III 
 Item 18. Financial Statements. See
pages F-1 to F-125, incorporated herein by reference. 
 Item 19. Exhibits. Documents filed as exhibits to this annual report:  1.1
    
    Bylaws of our company, as amended (English translation) (incorporated by
reference to Exhibit 1.1 to our companys annual report on Form 20-F filed
on July 15, 2004)2.1
    
    Form of Indenture between CODUSA and Wells Fargo Bank, National
Association (as successor by merger to Wells Fargo Bank Minnesota, N.A.,
and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase
Manhattan Bank), relating to the 2006 notes (incorporated by reference
from Registration Statement No. 333-13082 on Form F-1 filed on January 19,
2001)2.2
    
    First Supplemental Indenture, dated as of October 8, 2001, among CODUSA,
GIDUSA and Wells Fargo Bank, National Association (as successor by merger
to Wells Fargo Bank Minnesota, N.A., and successor in such capacity to
JPMorgan Chase Bank, f/k/a The Chase Manhattan Bank), relating to the
assumption by our company of CODUSAs obligations under the 2006 notes and
the indenture for the 2006 notes (incorporated by reference to Exhibit 2.3
to our companys annual report on Form 20-F filed on June 12, 2002)2.3
    
    Second Supplemental Indenture, dated as of June 24, 2002 among our
company, certain of our companys subsidiaries and Wells Fargo Bank,
National Association (as successor by merger to Wells Fargo Bank
Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank,
f/k/a The Chase Manhattan Bank), relating to the guarantee by certain of
our subsidiaries of the 2006 notes (incorporated by reference to Exhibit
2.4 to our companys annual report on Form 20-F filed on June 30, 2003)2.4
    
    Form of Indenture between CODUSA and Wells Fargo Bank, National
Association (as successor by merger to Wells Fargo Bank Minnesota, N.A.,
and successor in such capacity to JPMorgan Chase Bank, f/k/a The Chase
Manhattan Bank), relating to the 2009 notes (incorporated by reference to
Exhibit 2.8 to our companys annual report on Form 20-F filed on June 30,
2003)2.5
    
    First Supplemental Indenture, dated as of June 24, 2002, among our
company, certain of our companys subsidiaries and Wells Fargo Bank,
National Association (as successor by merger to Wells Fargo Bank
Minnesota, N.A., and successor in such capacity to JPMorgan Chase Bank,
f/k/a The Chase Manhattan Bank), relating to the guarantee by certain of
our subsidiaries of the 2009 notes (incorporated by reference to Exhibit
2.9 to our companys annual report on Form 20-F filed on June 30, 2003)2.6
    
    The total amount of long-term debt securities of our company and its
subsidiaries under any one instrument, other than the 2006 notes and the
2009 notes, 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.2.7
    
    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)2.8
    
    Trust Agreement, dated November 24, 1989, between NAFIN, as grantor, and
NAFIN, Trust Department, as CPO trustee, together with an English
translation (incorporated by reference to Exhibit 4.4 to our companys
registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)2.9
    
    Public Deed with respect to the CPOs, together with an English
translation (incorporated by reference to Exhibit 4.5 to our companys
registration statement No. 33-80148 on Form F-1 filed on June 10, 1994)2.10
    
    Instrument of Resignation, Appointment and Acceptance, dated as of
February 5, 2003, among our company, Wells Fargo Bank, National
Association (as successor by merger to Wells Fargo Bank Minnesota, N.A.)
and JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), relating to the
replacement of the trustee for our companys 2003 notes, 2006 notes, 2008
notes and 2009 notes (incorporated by reference to Exhibit 2.17 to our
companys annual report on Form 20-F filed on June 30, 2003)4.1
    
    Securities Purchase Agreement, dated as of October 7, 2002, between our
company and Operadora Omega Internacional, S.A. de C.V., relating to the
sale of 100% of the total issued and outstanding capital stock -3-




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and certain promissory notes of Durango Paper Company (incorporated by
reference to Exhibit 4.1 to our companys annual report on Form 20-F
filed on June 30, 2003)4.2
    
    Asset Purchase Agreement, dated as of February 3, 2003, among our
company, Titán and Empaques Moldeados de América Tecnologías, S.R.L. de
C.V., relating to the sale of assets of our companys molded pulp division
(incorporated by reference to Exhibit 4.2 to our companys annual report
on Form 20-F filed on June 30, 2003)4.3
    
    Amendment No. 1, dated February 28, 2003, to the Asset Purchase
Agreement, dated as of February 3, 2003, among our company, Titán and
Empaques Moldeados de América Tecnologías, S.R.L. de C.V., relating to the
sale of assets of our companys molded pulp division (incorporated by
reference to Exhibit 4.3 to our companys annual report on Form 20-F filed
on June 30, 2003)8
    
    List of Subsidiaries (incorporated by reference to Exhibit 8 to our
companys annual report on Form 20-F filed on July 15, 2004)12.1
    
    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 -4-




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SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this Amendment No. 1 on its behalf. CORPORACIÓN DURANGO, S.A. DE C.V.By:
    /s/ Mayela Rincón de VelascoName:
    Mayela Rincón de VelascoTitle:
    Chief Financial Officer Date: July 22, 2004 -5-




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INDEX TO FINANCIAL STATEMENTS CORPORACIÓN DURANGO, S.A. DE C.V. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003 PageReports of independent registered public accounting firms
    
    
    F-1Consolidated balance sheets as of December 31, 2002 and 2003
    
    
    F-5Consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-7Consolidated statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-9Consolidated statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-10Notes to combined and consolidated financial statements
    
    
    F-12
 COMPANIA PAPELERA DE ATENQUIQUE, S.A. DE C.V. INDEX TO FINANCIAL STATEMENTS  PageReports of independent registered public accounting firms
    
    
    F-61Balance sheets as of December 31, 2002 and 2003
    
    
    F-65Statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-67Statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-68Statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-69Notes to the consolidated financial statements
    
    
    F-71
 INDUSTRIAS CENTAURO, S.A. DE C.V. INDEX TO FINANCIAL STATEMENTS  PageReports of independent registered public accounting firms
    
    
    F-95Balance sheets as of December 31, 2002 and 2003
    
    
    F-99Statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-100Statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-101Statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-102Notes to the financial statements
    
    
    F-103
 1




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Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V. We have audited the accompanying consolidated balance sheet of Corporación
Durango, S. A. de C. V. and subsidiaries (the Company) as of December 31,
2003, and the related consolidated statements of operations, changes in
stockholders equity and changes in financial position for the year then ended,
all expressed in thousands of Mexican pesos of purchasing power of December 31,
2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in Mexico and with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion. In our opinion, the 2003 consolidated financial statements present fairly, in
all material respects, the financial position of Corporación Durango, S. A. de
C. V. and subsidiaries as of December 31, 2003, and the results of their
operations, changes in their stockholders equity and changes in their
financial position for the year then ended in conformity with accounting
principles generally accepted in Mexico. Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
stockholders equity and net loss as of and for the year ended December 31,
2003 to the extent summarized in Note 25. The accompanying consolidated financial statements as of December 31, 2003 and
for the year then ended have been prepared assuming that the Company will
continue as a going concern. As described in Note 1 to the financial
statements, since November 2002 the Company has failed to pay principal and
interest of certain obligations, and therefore the Company reclassified most of
its debt as short-term. In addition, during 2003 and 2002 the Company has
incurred significant consolidated net losses, and since 2001 its operating
margin has declined substantially. As of December 31, 2003 and 2002, the
Company had negative working capital and is experiencing severe liquidity
problems. Furthermore, as discussed in Note 23, the Company estimates that
upon the adoption of Bulletin C-15, Impairment of the Value of Long-Lived
Assets and Their Disposal, whose application is mandatory for fiscal years
beginning on or after January 1, 2004, a charge to results of operations for
the year 2004 of Ps.621,619, net of deferred income tax, will be required,
which will additionally reduce its stockholders equity. These factors, among
others, raise substantial doubt about its ability to continue as a going
concern. Managements plans concerning these matters, as well as its plan of
restructuring, are described in Note 1; however, this plan has not been
completed. The Companys ability to continue as a going concern is dependent
upon its ability to generate profits and to restructure its debt. The
accompanying financial statements do not include any additional adjustments
related to the valuation and presentation of assets or the presentation and
amount of liabilities that might result if the Company is unable to continue as
a going concern. F-1




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The accompanying financial statements have been translated into English for the
convenience of readers in the United States of America. Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu C.P.C. Claudia Leticia Rizo Navarro April 30, 2004
(June 28, 2004 as to Notes 1.e, 24, 25, 26 and 27) F-2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Mexico, D. F., April 25, 2003, except with respect to the restatement to constant pesos as
December 31, 2003 and Note 18 as to which the date is July 13, 2004. To the Board of Directors and Shareholders of
Corporación Durango, S.A. de C.V.: We have audited the accompanying consolidated balance sheet of Corporación
Durango, S.A. de C.V. and subsidiaries (formerly Grupo Industrial Durango, S.
A. de C. V. and subsidiaries), as of December 31, 2002 and the related
consolidated statements of income, of changes in shareholders equity and of
changes in financial position for each of the two years in the period ended
December 31, 2002, which, as described in Note 2, have been prepared on the
basis of accounting principles generally accepted in Mexico. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) as well as generally
accepted auditing standards in Mexico. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Corporación Durango, S. A. de C. V. and subsidiaries (formerly Grupo Industrial
Durango, S. A. de C. V. and subsidiaries), as of December 31, 2002 and the
consolidated results of their operations, the changes in their shareholders
equity and the changes in their financial position for each of the two years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in Mexico. Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles generally accepted in the
United Sates of America would have affected the determination of consolidated
net income (loss) for each of the two years in the period ended December 31,
2002 and the determination of consolidated shareholders equity as of December
31, 2002, to the extent summarized in Note 25 to the consolidated financial
statements. F-3




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1.
    
    The accompanying financial statements have been prepared considering the
Company will continue as a going concern, which assumes that assets will
be realized and liabilities will be settled in the normal course of
business operations. As mentioned in Note 10, the Company has significant
bank loans and bondholder debt, which requires, aside from compliance with
a number of financial ratios, compliance with prompt payment upon maturity
of capital and interest. As a result of both internal and external market
and economic factors, in the last quarter of the 2002, the Company
experienced a significant reduction in cash flow, which resulted in the
inability to pay capital and interest related to certain obligations which
matured in November and December 2002. As a result of these factors, the
Company reclassified several bank loans as short-term debt as the Company
was in default with its bank creditors and bondholders. The Companys
current financial situation raises substantial doubt about its ability to
continue as a going concern.  As a consequence, the Company shows negative working capital at December 31,
2002, amounting to $6,181,158 thousand, and a net loss of $3,738,924
thousand in the period ended December 31, 2002. Due to the above-mentioned
financial and operating deterioration, the Companys ability to continue
operating as a going concern will depend on managements ability to generate
profits, obtain waivers from its creditors and/or renegotiate the bank and
bond debts or obtain new financing. The accompanying financial statements
include no adjustment pertaining to the recoverability and classification of
the amounts recorded as assets and the amounts and classification of the
liabilities that may become necessary in the event that the Company is
unable to continue in operation as a going concern. Managements plans in
this regard are mentioned in Note 1.  2.
    
    As mentioned in Note 19.b, the Company sold the shares of Durango Paper
Co. to Operadora Omega, S.A de C.V. (related party) in October 2002, with
the effects mentioned in that note.  3.
    
    As mentioned in Note 1.b, at the General Extraordinary Shareholders
Meeting held on October 8, 2001, the shareholders approved the merger of
Corporación Durango, S.A. de C.V. (CODUSA) into its subsidiary Grupo
Industrial Durango, S.A. de C.V. (GIDUSA). The merger was effective for
financial reporting purposes on October 8, 2001. In connection with the
merger, the Company changed its name to Corporación Durango, S.A de C.V.
on February 7, 2002, when its bylaws were amended. The merger was
effected through the exchange of all of the outstanding shares in CODUSA
for shares in GIDUSA, which name was changed on the same date to
Corporación Durango, S.A. de C.V. PricewaterhouseCoopers /s/ Rafael Maya Urosa Rafael Maya Urosa
Public Accountant F-4




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Corporación Durango, S. A. de C. V. and Subsidiaries 
 Consolidated balance sheets
 As of December 31, 2003 and 2002
 (In thousands of Mexican pesos of purchasing power of December 31, 2003)
 Assets 2003
    
    2002Current assets:Cash and temporary investments
    
    Ps.
    649,955
    
    
    Ps.
    237,614Trade accounts receivable  Net
    
    
    1,798,935
    
    
    
    1,706,823Due from related parties
    
    
    14,283
    
    
    
    191,307Inventories  Net
    
    
    1,095,710
    
    
    
    1,143,981Prepaid expenses
    
    
    22,791
    
    
    
    30,080Current assets of discontinued operations
    
    
    84,190
    
    
    
    389,830Total current assets
    
    
    3,665,864
    
    
    
    3,699,635Restricted cash
    
    
    157,504Property, plant and equipment  Net
    
    
    11,341,126
    
    
    
    12,030,512Other assets Net
    
    
    540,333
    
    
    
    640,006Noncurrent assets of discontinued operations
    
    
    252,847
    
    
    
    1,702,993Total
    
    Ps.
    15,957,674
    
    
    Ps.
    18,073,146
 (continued) See accompanying notes to consolidated financial statements. F-5




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Liabilities and stockholders equity 2003
    
    2002Current liabilities:Short-term debt
    
    Ps.
    8,535,163
    
    
    Ps.
    7,595,462Current portion of long-term debt
    
    
    121,290
    
    
    
    278,577Notes payable
    
    
    52,095
    
    
    
    52,226Accrued interest
    
    
    1,387,990
    
    
    
    469,532Trade accounts payable
    
    
    910,329
    
    
    
    824,178Due to related parties
    
    
    
    
    
    
    5,590Accrued expenses and taxes other than income taxes
    
    
    453,717
    
    
    
    440,737Employee statutory profit sharing
    
    
    2,412
    
    
    
    2,433Current liabilities of discontinued operations
    
    
    84,676
    
    
    
    212,058Total current liabilities
    
    
    11,547,672
    
    
    
    9,880,793Long-term liabilities:Long-term debt
    
    
    399,423
    
    
    
    1,021,426Long-term notes payable
    
    
    101,206
    
    
    
    145,871Deferred income taxes
    
    
    1,918,847
    
    
    
    1,753,282Employee retirement obligations
    
    
    199,467
    
    
    
    166,112Long-term liabilities of discontinued operations
    
    
    190,246
    
    
    
    466,494Total long-term liabilities
    
    
    2,809,189
    
    
    
    3,553,185Total liabilities
    
    
    14,356,861
    
    
    
    13,433,978Commitments and contingenciesStockholders equity:Common stock
    
    
    4,742,288
    
    
    
    4,857,963Treasury stock
    
    
    
    
    
    
    (115,675
    )Additional paid-in capital
    
    
    1,387,056
    
    
    
    1,387,056Retained earnings
    
    
    2,466,882
    
    
    
    6,136,985Insufficiency in restated stockholders equity
    
    
    (4,160,313
    )
    
    
    (4,558,231
    )Additional liability for employee retirement
obligations
    
    
    
    
    
    
    (146,450
    )Cumulative initial effect of deferred income taxes
    
    
    (3,080,896
    )
    
    
    (3,080,896
    )Cumulative translation adjustment of foreign
subsidiaries
    
    
    178,020
    
    
    
    87,283Majority stockholders equity
    
    
    1,533,037
    
    
    
    4,568,035Minority stockholders equity in consolidated
subsidiaries
    
    
    67,776
    
    
    
    71,133Total stockholders equity
    
    
    1,600,813
    
    
    
    4,639,168Total
    
    Ps.
    15,957,674
    
    
    Ps.
    18,073,146
 (concluded) F-6




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Corporación Durango, S. A. de C. V. and Subsidiaries 
 Consolidated statements of operations
 For the years ended December 31, 2003, 2002 and 2001
 (In thousands of Mexican pesos of purchasing power of December 31, 2003, except
per share amounts)
 2003
    
    2002
    
    2001Net sales
    
    Ps.
    6,831,028
    
    
    Ps.
    8,124,497
    
    
    Ps.
    10,775,303Cost of sales
    
    
    5,957,305
    
    
    
    7,057,911
    
    
    
    9,065,847Gross profit
    
    
    873,723
    
    
    
    1,066,586
    
    
    
    1,709,456Selling, general and administrative expenses
    
    
    567,343
    
    
    
    569,960
    
    
    
    691,403Income from operations
    
    
    306,380
    
    
    
    496,626
    
    
    
    1,018,053Net comprehensive financing cost:Interest expense
    
    
    (1,186,232
    )
    
    
    (1,130,646
    )
    
    
    (1,118,520
    )Interest income
    
    
    42,428
    
    
    
    40,336
    
    
    
    70,227Exchange gain (loss)
    
    
    (821,389
    )
    
    
    (998,232
    )
    
    
    328,015Monetary position gain
    
    
    367,014
    
    
    
    406,673
    
    
    
    309,842(1,598,179
    )
    
    
    (1,681,869
    )
    
    
    (410,436
    )Other income (expenses)  Net
    
    
    (1,511,189
    )
    
    
    (3,126,962
    )
    
    
    476,430Income (loss) from continuing operations before
income taxes and employee statutory profit
sharing
    
    
    (2,802,988
    )
    
    
    (4,312,205
    )
    
    
    1,084,047Income tax benefit (expense)
    
    
    (216
    )
    
    
    677,223
    
    
    
    (48,557
    )Employee statutory profit sharing expense
    
    
    (1,733
    )
    
    
    (1,082
    )
    
    
    (4,908
    )Income (loss) from continuing operations
    
    
    (2,804,937
    )
    
    
    (3,636,064
    )
    
    
    1,030,582Discontinued operations
    
    
    (549,235
    )
    
    
    (102,860
    )
    
    
    152,868Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (317,947
    )Consolidated net income (loss)
    
    Ps.
    (3,354,172
    )
    
    Ps.
    (3,738,924
    )
    
    Ps.
    865,503
 (Continued) F-7




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##### Table of Contents



2003
    
    2002
    
    2001Net income (loss):Majority interest
    
    Ps.
    (3,348,336
    )
    
    Ps.
    (3,742,169
    )
    
    Ps.
    861,314Minority interest
    
    
    (5,836
    )
    
    
    3,245
    
    
    
    4,189Consolidated net income (loss)
    
    Ps.
    (3,354,172
    )
    
    Ps.
    (3,738,924
    )
    
    Ps.
    865,503Basic and diluted net income (loss) per share of:Continuing operations
    
    Ps.
    (30.12
    )
    
    Ps.
    (38.69
    )
    
    Ps.
    10.91Discontinued operations
    
    
    (5.91
    )
    
    
    (1.09
    )
    
    
    1.63Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (3.38
    )Basic and diluted net income (loss) per share
    
    Ps.
    (36.03
    )
    
    Ps.
    (39.78
    )
    
    Ps.
    9.16Weighted average shares outstanding
    
    
    92,942,916
    
    
    
    94,072,122
    
    
    
    94,072,122
 (Concluded) See accompanying notes to consolidated financial statements. F-8




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##### Table of Contents



Corporación Durango, S. A. de C. V. and Subsidiaries 
 Consolidated statements of changes in stockholders equity
 For the years ended December 31, 2003, 2002 and 2001
 (In thousands of Mexican pesos of purchasing power of December 31, 2003)
 InsufficiencyTreasury
    
    Additional Paid-in
    
    
    
    
    
    in RestatedCommon Stock
    
    Stock
    
    Capital
    
    Retained Earnings
    
    Stockholders EquityBalances as of January 1, 2001
    
    Ps.
    2,413,876
    
    
    Ps.
    
    
    
    Ps.
    (51,035
    )
    
    Ps.
    5,013,057
    
    
    Ps.
    (24,128
    )Effects of merger
    
    
    2,444,087
    
    
    
    
    
    
    
    1,373,290
    
    
    
    4,004,783
    
    
    
    (3,630,618
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    861,314
    
    
    
    (1,009,226
    )Balances as of December 31, 2001
    
    
    4,857,963
    
    
    
    
    
    
    
    1,322,255
    
    
    
    9,879,154
    
    
    
    (4,663,972
    )Cancellation of swaps
    
    
    
    
    
    
    (115,675
    )
    
    
    64,801Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,742,169
    )
    
    
    105,741Balances as of December 31, 2002
    
    
    4,857,963
    
    
    
    (115,675
    )
    
    
    1,387,056
    
    
    
    6,136,985
    
    
    
    (4,558,231
    )Reduction of common stock
    
    
    (115,675
    )
    
    
    115,675Transfer of additional
liability of employee
retirement obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (146,450
    )Allowance for accounts
receivable due from
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175,317
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,348,336
    )
    
    
    397,918Balances as of December 31, 2003
    
    Ps.
    4,742,288
    
    
    Ps.
    
    
    
    Ps.
    1,387,056
    
    
    Ps.
    2,466,882
    
    
    Ps.
    (4,160,313
    )
   [Continued from above table, first column(s) repeated] Additional Liability
    
    
    
    
    
    Cumulative
    
    Minorityfor Employee
    
    Cumulative Initial
    
    Translation
    
    Stockholders EquityRetirement
    
    Effect of Deferred
    
    Adjustment of
    
    in Consolidated
    
    Total StockholdersObligations
    
    Income Taxes
    
    Foreign Subsidiaries
    
    Subsidiaries
    
    EquityBalances as of January 1, 2001
    
    Ps.
    (13,160
    )
    
    Ps.
    (512,014
    )
    
    Ps.
    13,264
    
    
    Ps.
    1,564,204
    
    
    Ps.
    8,404,064Effects of merger
    
    
    
    
    
    
    (2,568,882
    )
    
    
    (11,559
    )
    
    
    (1,524,875
    )
    
    
    86,226Comprehensive loss
    
    
    (133,290
    )
    
    
    
    
    
    
    121,874
    
    
    
    4,188
    
    
    
    (155,140
    )Balances as of December 31, 2001
    
    
    (146,450
    )
    
    
    (3,080,896
    )
    
    
    123,579
    
    
    
    43,517
    
    
    
    8,335,150Cancellation of swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,874Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (36,296
    )
    
    
    27,616
    
    
    
    (3,645,108
    )Balances as of December 31, 2002
    
    
    (146,450
    )
    
    
    (3,080,896
    )
    
    
    87,283
    
    
    
    71,133
    
    
    
    4,639,168Reduction of common stock
Transfer of additional
liability of employee
retirement obligations
    
    
    146,450Allowance for accounts
receivable due from
shareholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (175,317
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    90,737
    
    
    
    (3,357
    )
    
    
    (2,863,038
    )Balances as of December 31, 2003
    
    Ps.
    
    
    
    Ps.
    (3,080,896
    )
    
    Ps.
    178,020
    
    
    Ps.
    67,776
    
    
    Ps.
    1,600,813
 See accompanying notes to consolidated financial statements. F-9




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##### Table of Contents



Corporación Durango, S. A. de C. V. and Subsidiaries 
 Consolidated statements of changes in financial position
 For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
 2003
    
    2002
    
    2001Operating activities:Consolidated income (loss) from continuing
operations
    
    Ps.
    (2,804,937
    )
    
    Ps.
    (3,636,064
    )
    
    Ps.
    1,030,582Items that did not require (generate) resources:Depreciation and amortization
    
    
    396,462
    
    
    
    457,828
    
    
    
    486,686Amortization of debt issuance costs and
other financing costs
    
    
    92,503
    
    
    
    123,633
    
    
    
    60,417Loss on sale of property, plant and equipment
    
    
    199,664
    
    
    
    29,540
    
    
    
    30,637Impairment of long-lived assets
    
    
    604,752
    
    
    
    1,569,532Loss on operations of Durango Paper Company
    
    
    315,091
    
    
    
    1,509,053Deferred income tax
    
    
    (71,892
    )
    
    
    (792,114
    )
    
    
    (194,795
    )Negative goodwill amortization
    
    
    
    
    
    
    
    
    
    
    (543,206
    )Other
    
    
    22,829
    
    
    
    213,436
    
    
    
    (3,931
    )(1,245,528
    )
    
    
    (525,156
    )
    
    
    866,390Changes in operating assets and liabilities:(Increase) decrease in:Trade accounts receivable  Net
    
    
    (90,405
    )
    
    
    451,812
    
    
    
    6,522Inventories Net
    
    
    48,271
    
    
    
    244,317
    
    
    
    933,029Prepaid expenses
    
    
    7,289
    
    
    
    (12,096
    )
    
    
    (65,552
    )Increase (decrease) in:Trade accounts payable
    
    
    86,151
    
    
    
    (353,832
    )
    
    
    (350,481
    )Accrued interest
    
    
    918,458
    
    
    
    158,831
    
    
    
    (85,506
    )Accrued expenses and taxes other than
income taxes
    
    
    12,959
    
    
    
    (41,443
    )
    
    
    (163,666
    )Other  Net
    
    
    (81,605
    )
    
    
    59,473
    
    
    
    (11,737
    )Assets of discontinued operations
    
    
    5,936
    
    
    
    (155,576
    )
    
    
    131,213Liabilities of discontinued operations
    
    
    75,308
    
    
    
    (113,511
    )
    
    
    (28,008
    )Net resources generated by (used
in) operating activities before
discontinued operations and
extraordinary loss
    
    
    (263,116
    )
    
    
    (287,181
    )
    
    
    1,232,204Discontinued operations, net of items that did
not require resources
    
    
    (178,732
    )
    
    
    129,587
    
    
    
    114,854Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (317,947
    )Net resources generated by (used
in) operating activities
    
    
    (441,898
    )
    
    
    (157,594
    )
    
    
    1,029,111
 (Continued) F-10




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##### Table of Contents



2003
    
    2002
    
    2001Financing activities:Short-term and long-term debt
    
    
    259,408
    
    
    
    2,588,475
    
    
    
    2,558,746Payments of long-term debt
    
    
    (405,978
    )
    
    
    (1,703,525
    )
    
    
    (3,230,584
    )Translation adjustment of foreign subsidiaries
    
    
    90,737
    
    
    
    (36,296
    )
    
    
    121,874Net resources generated by (used
in) financing activities
    
    
    (55,833
    )
    
    
    848,654
    
    
    
    (549,964
    )Investing activities:Restricted cash
    
    
    (157,504
    )Acquisition of machinery and equipment
    
    
    (106,719
    )
    
    
    (459,555
    )
    
    
    (846,649
    )Sale of property, plant and equipment
    
    
    231,070
    
    
    
    61,209
    
    
    
    310,579Revenues from sale of discontinued operations
    
    
    924,620Investment in subsidiaries
    
    
    
    
    
    
    (212,899
    )Other assets
    
    
    18,605
    
    
    
    (379,382
    )
    
    
    (261,487
    )Net resources generated by (used
in) investing activities
    
    
    910,072
    
    
    
    (990,627
    )
    
    
    (797,557
    )Cash and temporary investments:Increase (decrease)
    
    
    412,341
    
    
    
    (299,567
    )
    
    
    (318,410
    )Balance at beginning of year
    
    
    237,614
    
    
    
    537,181
    
    
    
    855,591Balance at end of year
    
    Ps.
    649,955
    
    
    Ps.
    237,614
    
    
    Ps.
    537,181
 (Concluded) See accompanying notes to consolidated financial statements. F-11




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##### Table of Contents



Corporación Durango, S. A. de C. V. and Subsidiaries 
 Notes to consolidated financial statements
 For the years ended December 31, 2003, 2002 and 2001
 (In thousands of Mexican pesos of purchasing power of December 31, 2003)
  1.
    
    Activities, significant developments and subsequent event  a.
    
    Activities Corporación Durango, S. A. de C. V. (CODUSA) and
subsidiaries (the Company) are primarily engaged in the
manufacturing and selling of packaging (corrugated boxes and
multi-wall sacks and bags), paper (containerboard, newsprint and bond)
to be used in the manufacturing of corrugated boxes, newspaper, books
and magazines, and other wood products (plywood and particleboard) in
Mexico and in the United States of America.b.
    
    Merger At the General Extraordinary Shareholders meeting held
on October 8, 2001, the shareholders of CODUSA approved the merger of
CODUSA into Grupo Industrial Durango, S. A. de C. V. (GIDUSA),
subsidiary company. The merger was effective for financial purposes on
October 8, 2001. In connection with the merger, the Company changed
its name to Corporación Durango, S.A. de C.V. on February 7, 2002,
when its bylaws were amended. The merger was effected through the
exchange of shares in CODUSA for shares in GIDUSA. As a result of the
merger, the Company recorded a net increase in stockholders equity of
Ps.86,226 and issued 72,257,378 common nominative shares without par
value. For accounting purposes the merger was accounted for in a
manner similar to a pooling-of-interests, and accordingly it has been
reflected retroactively in the financial statements for the year ended
December 31, 2001.c.
    
    Durango Paper Company In August 2002, Durango Paper Company
(DPC), then a subsidiary company, suffered a boiler explosion at one
of its plants located in Georgia, which resulted in the suspension of
operations and the generation of significant losses. Additionally, at
the date of the accident, the Company did not have insurance coverage
for such an event and was exposed to the entire loss relating to the
incident. In October 2002, the Company sold its investment in DPC to
Operadora Omega Internacional, S.A. de C.V., a related company. The
sale was made for an aggregate amount of US$100,000, allocated
US$50,000 for the purchase of the capital stock and US$50,000 for the
purchase of certain accounts receivable due to the Company. This sale
gave rise to an aggregate loss of Ps.1,509,053, which was included in
other expenses in the statement of operations. The Company granted
guarantees for a bank loan of and certain letters of credit issued by
DPC amounting to US$25.2 million. In 2003 the creditors called such
guarantees, and the Company has initiated negotiations to restructure
these debts. Due to the above, during 2003 a charge to the statement
of operations of Ps.262,185 (US$23.6 million) was recorded, which
corresponds to the balance of the bank debt and letters of credit at
the date the debt was transferred to the Company.d.
    
    Significant developments and subsequent event In order to
expand its production facilities, the Company has contracted
significant financing from banks in Mexico and abroad, mainly in the
U.S. Additionally, on different dates it sold bonds on the New York
securities market. However, since 2002 the Company has been severely
affected by a combination of economic factors, such as the slowdown of
the U.S. and the international economies, a significant drop in the
world price of paper, a drastic reduction in the demand for
manufactured products requiring the goods supplied by the Company, an
increase in the cost of raw materials, electric power, gas and labor,
and the entry of imported products into the Mexican market.The above-mentioned negative economic events led to a significant
reduction in the generation of cash flow for the Company and its
subsidiaries during the last quarter of 2002, and as a result since
November 2002 the Company has been unable to cover the payment of
interest and principal on certain debt and has not complied with
certain obligations and restrictions imposed by the banks and
bondholders to maintain the original maturities of the debt. As a
result, a portion of the debt has been reclassified as short term,
resulting in negative working capital and uncertainty as to the
ability of the Company to continue as a going concern. F-12




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##### Table of Contents



In November 2002, the Company initiated negotiations with the banks
and bondholders in an effort to restructure its debt and consider the
sale of non-strategic assets. In April 2003, the Company signed a
Forbearance Agreement with a significant portion of its creditors,
under which they agreed to continue productive financial discussions
regarding the terms of the debt restructuring. This agreement expired
on June 30, 2003.On April 30, 2004, the Company and a significant portion of its bank
lenders and bondholders signed a Plan Support Agreement regarding its
proposed debt restructuring. Under the proposed restructuring, the
Companys unsecured creditors would exchange their existing financial
debt for one or more tranches of new debt instruments, denominated the
Series A, Series B, Series C and Series D Notes, to be issued in an
aggregate principal amount of approximately US$715 million. In
addition, participating creditors would receive an aggregate of 17% of
the Companys share equity, on a fully diluted basis. Also, the
Company would make available US$43.5 million to acquire a portion of
its outstanding debt at purchase prices of no more than US$650 per
US$1,000 of principal.The Series A Notes will bear annual interest at LIBOR plus 3%, payable
quarterly. Principal under the Series A notes will be amortized based
on the following schedule: 5% in 2005; 12.5% in 2006; 15% in 2007; 15%
in 2008; 25% in 2009; and 27.5% in 2010.The Series B Notes will bear annual interest at the rate of 7.75%
until December 31, 2004, 8.75% during 2005, and 9.75% thereafter until
maturity on December 31, 2010. Interest on the Series B Notes will be
payable quarterly. The Series B Notes may be prepaid at the option of
the Company at any time on or after December 31, 2005, without premium
or penalty.The Series C Notes will not bear interest unless certain events occur,
in which case interest will accrue at the annual rate of 8%
retroactively from the date of issue. The Series C Notes will mature
on December 31, 2012, and will be subject to redemption at the option
of the Company under certain circumstances at a discount of up to 50%
of face value.The Series D Notes will bear annual interest at the rate of 10.5%.
Interest on the Series D Notes will be compounded annually and will be
payable upon maturity on December 31, 2013.Holders of the Series A and Series B Notes will receive a
restructuring fee, payable on the note issue date. The notes will be
guaranteed by certain of the Companys Mexican subsidiaries and be
secured by the fixed assets of the Company and such subsidiaries. The
Series C Notes will also be guaranteed by the Mexican subsidiaries,
which guarantee will be subordinate to the guarantee of the Series A
and Series B Notes, but without being secured by the fixed assets.
The Series D Notes will not be guaranteed or secured.Under the terms of this agreement in principle, the creditors would
support the Companys overall financial restructuring through an
exchange offer; in the event the exchange offer is not consummated but
the Company obtains the necessary approvals from its creditors to
support a consensual plan of reorganization, such plan could be filed
under the United States of Americas bankruptcy rules.e.
    
    Reorganization process On May 20, 2004 CODUSA announced that it
has filed for concurso mercantile before a Mexican court, which main
objective is to achieve a financial restructuring through the
reorganization process based on the Mexican Businnes Reorganization
Law. This process will take place at the CODUSAs legal entity level,
as a result, the operations of its subsidiaries will continue running
as usual. The reorganization process allows that with the support of
51% of the creditors, the restructuring plan described above, be
binding on all of CODUSAs creditors. CODUSA anticipates that it will
have the support of a sufficient percentage of votes to accomplish
this goal in an expeditious manner. F-13




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##### Table of Contents



2.
    
    Basis of presentation  a.
    
    Explanation for translation into English The accompanying
consolidated financial statements have been translated from Spanish
into English for use outside of Mexico. These consolidated financial
statements are presented on the basis of accounting principles
generally accepted in Mexico (Mexican GAAP). Certain accounting
practices applied by the Company that conform with Mexican GAAP may
not conform with accounting principles generally accepted in the
country of use.b.
    
    Going-concern The accompanying consolidated financial
statements have been prepared on the assumption that the Company will
continue as a going concern. As indicated in the accompanying
financial statements, during the years ended December 31, 2003 and
2002, the Company has incurred significant consolidated net losses and
since 2001 its operating margin has substantially declined. As of
December 31, 2003 and 2002 the Company has negative working capital
and is experiencing severe liquidity problems. These factors, among
others, raise substantial doubt about the Companys ability to
continue as a going concern.The accompanying consolidated financial statements do not include any
adjustments related to the valuation and presentation of assets or the
presentation and amount of liabilities that might result if the
Company is unable to continue as a going concern. As described in Note
1, since November 2002 the Company has not complied with principal and
interest payments on certain debt, which as a result has been
classified as short term. The Companys ability to continue as a going
concern is dependent upon its ability to generate profits and to
restructure its debt. As mentioned in Note 1.d, the Company is
committing significant resources to the debt restructuring efforts and
has reached an agreement in principle with a significant portion of
its creditors, who will support a comprehensive financial
restructuring; however, there can be no assurance that the Company
will be successful in its efforts.c.
    
    Consolidation of financial statements The consolidated
financial statements include those of CODUSA and its subsidiaries. The
ownership percentage in the capital stock of the significant
subsidiaries is shown below. Intercompany balances and transactions
have been eliminated in these consolidated financial statements. Group (or Company)
    
    Ownership Percentage
    
    ActivityIndustrias Centauro, S. A. de C. V.
    
    
    99
    %
    
    Manufacturing of containerboard, liner and mediumCompañía Papelera de Atenquique, S. A. de C. V.
    
    
    98
    %
    
    Manufacturing of containerboard, liner and mediumEnvases y Empaques de México, S.A. de C.V.
    
    
    100
    %
    
    Manufacturing of corrugated boxes and multi-wall sacksEmpaques de Cartón Titán, S. A. de C. V. and subsidiary
    
    
    100
    %
    
    Manufacturing of corrugated boxes and multi-wall sacksGrupo Pipsamex, S. A. de C. V. and subsidiaries
    
    
    100
    %
    
    Manufacturing of newsprint and bond paperDurango McKinley Paper Company
    
    
    100
    %
    
    Manufacturing of containerboard, liner and medium, and corrugated boxesPonderosa Industrial de México, S. A. de C. V.
    
    
    100
    %
    
    Manufacturing of plywood and particleboard
 F-14




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##### Table of Contents



d.
    
    Translation of financial statements of foreign subsidiaries To
consolidate the financial statements of foreign subsidiaries that
operate independently of the Company, the same accounting policies as
those of the Company are followed, and the local currency financial
statements are restated in the constant currency of the country in
which they operate. Subsequently, such foreign currency financial
statements are translated into Mexican pesos with the resulting
exchange differences presented in cumulative translation adjustment of
foreign entities within stockholders equity. For translation
purposes, amounts are translated into Mexican pesos using the
following exchange rates: (i) the closing exchange rate in effect at
the balance sheet date for all assets and liabilities, (ii) the
exchange rate in effect at the date the contributions were made for
common stock, (iii) the exchange rate in effect at the end of the year
in which the losses were generated for accumulated deficit, and (iv)
the exchange rate in effect at the end of the year for revenues and
expenses.The financial statements of foreign subsidiaries included in the 2002
and 2001 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 of the latest year
presented.e.
    
    Comprehensive loss Comprehensive loss presented in the
accompanying statements of changes in stockholders equity represents
all changes in stockholders equity during each year except those
resulting from investments by and distributions to owners, and is
comprised of the net income (loss) of the year, plus other
comprehensive loss items of the same period which, in accordance with
Mexican GAAP, are presented directly in stockholders equity without
affecting the consolidated statements of operations. In 2003, 2002
and 2001, the other comprehensive loss items consist of the excess
(insufficiency) in restated stockholders equity, adjustment for
additional liability for employee retirement obligation, and the
translation effects of foreign subsidiaries.f.
    
    Reclassifications Certain amounts in the financial statements
as of and for the years ended December 31, 2002 and 2001 have been
reclassified in order to conform to the presentation of the
consolidated financial statements as of and for the year ended
December 31, 2003.  3.
    
    Summary of significant accounting policiesThe accounting policies followed by the Company are in conformity with
Mexican GAAP, which require that management make certain estimates and use
certain assumptions that affect the amounts reported in the consolidated
financial statements and the accompanying notes. Although these estimates
are based on managements best knowledge of current events, actual results
may differ. The significant accounting policies of the Company are as
follows:  a.
    
    New accounting policies Beginning January 1, 2003, the Company
adopted the provisions of new Bulletin C-8, Intangible Assets, which
establishes that project development costs should be capitalized if
they fulfill the criteria established for recognition as assets;
preoperating costs that are not considered development costs should be
recorded as a period expense; and intangible assets considered to have
indefinite useful lives are not amortized, but instead are subject to
impairment tests. The unamortized balance of capitalized preoperating
costs up to December 31, 2002, will continue to be amortized according
to the provisions of the former Bulletin C-8. The adoption of this new
bulletin did not have significant effects on the Companys
consolidated financial position or results of operations.Beginning January 1, 2003, the Company also adopted the provisions of
new Bulletin C-9, Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments, which establishes additional guidelines
clarifying the accounting for provisions, accruals and contingent
liabilities, and establishes new standards for the use of present
value techniques to measure liabilities and accounting for the early
settlement or substitution of obligations. The adoption of this new
bulletin did not have significant effects on the Companys
consolidated financial position or results of operations. F-15




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b.
    
    Recognition of the effects of inflation The Company restates its
consolidated financial statements to Mexican peso purchasing power of
the most recent balance sheet date presented. Accordingly, the
consolidated financial statements of the prior years have been
restated to Mexican pesos of purchasing power of December 31, 2003
and, therefore, differ from those originally reported in the prior
years.c.
    
    Temporary investments Temporary investments are stated at the
lower of acquisition cost, plus accrued yields, or estimated net
realizable value.d.
    
    Inventories and cost of sales Inventories are stated at the
lower of net realizable value or average cost, which is similar to the
most recent purchase price or production cost. Cost of sales is stated
at estimated replacement cost at the time of sale.e.
    
    Property, plant and equipment Property, plant and equipment are
initially recorded at acquisition cost and restated using the National
Consumer Price Index (NCPI). For fixed assets of foreign origin,
restated acquisition cost expressed in the currency of the country of
origin is converted into Mexican pesos at the market exchange rate in
effect at the balance sheet date. Depreciation is calculated based on
units produced in the period in relation to the total estimated
production of the assets over their service lives. YearsBuildings
    
    
    25-50Industrial machinery and equipment
    
    
    23-40Vehicles
    
    
    1-5Computers
    
    
    1-3Office furniture and equipment
    
    
    5-10
  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.Comprehensive financing cost incurred during the period of
construction and installation of property, plant and equipment is
capitalized and restated using the NCPI.f.
    
    Impairment of long-lived assets in use The Company evaluates
potential impairment losses to long-lived assets by assessing whether
the unamortized carrying amount can be recovered over the remaining
life of the assets through undiscounted future expected cash flows
generated by the assets and without interest charges. If the sum of
the expected future undiscounted cash flow is less than the carrying
amount of the assets, a loss is recognized for the difference between
the fair value and carrying value of the assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Long-lived
assets for which management has committed to a plan of disposal are
recorded at the lower of the unamortized carrying amount or fair value
less disposal cost.g.
    
    Other assets Costs incurred in the development phase that meet
certain requirements and that the Company has determined will have
future economic benefits are capitalized and amortized based on the
straight-line method over their estimated useful life. Those
disbursements that do not meet such requirements are recorded in
results of the period in which they are incurred. Intangible assets
with indefinite lives are not amortized; however, their value is
subject to impairment tests. Preoperating costs incurred after January
1, 2003 are recorded directly in results of the period in which they
are incurred. Preoperating expenses incurred and capitalized up to
December 31, 2002 are amortized using the straight-line method over
three years. F-16




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##### Table of Contents



h.
    
    Financial instruments Financial assets and liabilities resulting
from any type of financial instrument, except for investments in
financial instruments held to maturity, are presented in the balance
sheet at fair value. The effects of the valuation of a financial asset
or liability are recognized in results of operations of the respective
period. Investments in financial instruments held to maturity are
valued at acquisition cost. The costs and yields of financial
instruments are recognized in results of the period in which they
occur. Dividends from equity financial instruments are recognized in
results of operations of the same period in which the fair value of
the financial instrument is adjusted by such dividends.i.
    
    Derivative financial instruments The internal control system
established by the Company includes policies and procedures to manage
its exposure to fluctuations in interest rates and in foreign currency
exchange rates using derivative financial instruments. These
instruments are traded only with authorized institutions and trading
limits have been established for each institution. The Company does
not carry out transactions with derivative financial instruments for
the purpose of speculation. As of December 31, 2003 and 2002, the
Company did not have derivative financial instruments.j.
    
    Goodwill Goodwill represents the excess of cost over recorded
value of subsidiaries as of the date of acquisition. It is restated
using the NCPI and is amortized using the straight-line method over
the estimated time period in which the acquired subsidiaries will
become integrated to the Company. During 2003, 2002 and 2001, the
Company did not record any amount in relation to goodwill, and there
was no amortization of goodwill.k.
    
    Negative goodwill This represents the excess of recorded value
over cost of subsidiary companies and is restated using the NCPI. It
is amortized using the straight-line method over the estimated time
period in which the acquired subsidiaries will become integrated into
the Company. During 2003 and 2002, there was no amortization of
negative goodwill, and amortization in 2001 was Ps.543,206. During
2003, 2002 and 2001, the Company did not record any amount in relation
to negative goodwill.l.
    
    Employee retirement obligations Seniority premiums and pension
plans are recognized as costs over employee years of service and are
calculated by independent actuaries using the projected unit credit
method at net discount rates. Severance is charged to results when
the liability is determined to be payable.m.
    
    Debt issuance costs Debt issuance costs, which are included in
other assets, are restated by applying the NCPI and are amortized over
the outstanding term of the debt on a straight-line basis.n.
    
    Provisions Provisions are recognized for obligations that
result from a past event, that are likely to result in the use of
economic resources and that can be reasonably estimated. Such
provisions are recorded at net present values when the effect of the
discount is significant.o.
    
    Income tax, tax on assets and employee statutory profit sharing
Income tax (ISR) and employee statutory profit sharing (PTU) are
recorded in results of the year in which they are incurred. Deferred
income tax assets and liabilities are recognized for temporary
differences resulting from comparing the book and tax values of assets
and liabilities plus any future benefits from tax loss carryforwards.
Deferred ISR assets are reduced by any benefits about which there is
uncertainty as to their realizability. Deferred PTU is derived from
temporary differences between the accounting result and income for PTU
purposes and is recognized only when it can be reasonably assumed that
they will generate a liability or benefit, and there is no indication
that circumstances will change in such a way that the liabilities will
not be paid or benefits will not be realized.The tax on assets paid that is expected to be recoverable is recorded
as an advance payment of ISR and is presented in the balance sheet
decreasing the deferred ISR liability. F-17




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##### Table of Contents



p.
    
    Foreign currency balances and transactions Foreign currency
transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable
exchange rate in effect at the balance sheet date. Exchange
fluctuations are recorded as a component of net comprehensive
financing cost in the consolidated statements of operations, except
those amounts capitalized as a component of construction cost.q.
    
    Excess (insufficiency) in restated stockholders equity Excess
(insufficiency) in restated stockholders equity represents the
accumulated monetary position result through the initial restatement
of the consolidated financial statements and the increase in the
restated value of machinery and equipment and inventories above
(below) inflation.r.
    
    Revenue recognition Revenues are recognized in the period in
which the risks and rewards of ownership of the inventories are
transferred to the customers, which generally coincides with the
delivery of products to customers in satisfaction of orders.s.
    
    Monetary position gain Monetary position gain, which represents
the erosion of purchasing power of monetary items caused by inflation,
is calculated by applying NCPI factors to monthly net monetary
position. Gains result from maintaining a net monetary liability
position.t.
    
    Net income (loss) per share Basic income (loss) per common
share is calculated by dividing net income (loss) of majority
stockholders by the weighted average number of shares outstanding
during the year. Diluted income (loss) per share is determined by
adjusting consolidated net income (loss) and common shares on the
assumption that the Companys commitments to issue or exchange its own
shares would be realized.  4.
    
    Cash and temporary investments 2003
    
    2002Cash
    
    Ps.
    233,448
    
    
    Ps.
    91,060Temporary investments
    
    
    416,507
    
    
    
    146,554Ps.
    649,955
    

    
    Ps.
    237,614
  5.
    
    Trade accounts receivable 2003
    
    2002Trade accounts receivable
    
    Ps.
    1,757,542
    
    
    Ps.
    1,747,003Recoverable taxes
    
    
    93,193
    
    
    
    39,945Other
    
    
    93,458
    
    
    
    52,2721,944,193
    
    
    
    1,839,220Allowance for doubtful accounts
    
    
    (145,258
    )
    
    
    (132,397
    )Ps.
    1,798,935
    
    
    Ps.
    1,706,823
 F-18




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##### Table of Contents



6.
    
    Inventories 2003
    
    2002Finished goods
    
    Ps.
    208,927
    
    
    Ps.
    236,379Production-in-process
    
    
    10,803
    
    
    
    30,717Raw materials
    
    
    327,731
    
    
    
    311,559Spare parts and materials for immediate consumption
    
    
    243,079
    
    
    
    305,088Molds and dies
    
    
    73,208
    
    
    
    73,679Other
    
    
    26,758
    
    
    
    15,754890,506
    
    
    
    973,176Allowance for obsolete inventories
    
    
    (28,344
    )
    
    
    (31,175
    )862,162
    
    
    
    942,001Advances to suppliers
    
    
    46,007
    
    
    
    52,488Merchandise-in-transit
    
    
    187,541
    
    
    
    149,492Ps.
    1,095,710
    
    
    Ps.
    1,143,981
  7.
    
    Restricted cash  Corresponds to US$14 million, which was provided from the resources
generated by the sale of the warehouse described in Note 16 and the sale of
the Companys participation in the equity of Productora Nacional de Papel,
S.A. de C.V. described in Note 18. Under the terms of a loan agreement, the
Company is required to use the resources obtained for capital expenditures.  8.
    
    Property, plant and equipment 2003
    
    2002Buildings
    
    Ps.
    3,365,735
    
    
    Ps.
    3,624,486Industrial machinery and equipment
    
    
    17,668,631
    
    
    
    17,654,725Vehicles, computers, office furniture and equipment
    
    
    1,192,198
    
    
    
    1,403,72322,226,564
    
    
    
    22,682,934Accumulated depreciation and amortization
    
    
    (9,523,226
    )
    
    
    (10,418,813
    )Accumulated impairment loss
    
    
    (2,174,284
    )
    
    
    (1,569,532
    )10,529,054
    
    
    
    10,694,589Land
    
    
    765,166
    
    
    
    1,096,667Construction-in-progress
    
    
    46,906
    
    
    
    239,256Ps.
    11,341,126
    
    
    Ps.
    12,030,512
  The Companys assets that were acquired through capital leases are as
follows: 2003
    
    2002Industrial machinery and equipment
    
    Ps.
    354,287
    
    
    Ps.
    368,352Accumulated depreciation
    
    
    (44,247
    )
    
    
    (31,775
    )Ps.
    310,040
    
    
    Ps.
    336,577
  Depreciation expense for the years ended December 31, 2003, 2002 and 2001
was Ps.374,262, Ps.442,683 and Ps.452,125, respectively. F-19




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##### Table of Contents



During 2003 and 2002, the Company reviewed the recoverable value of its
long-lived assets, which was determined by the future cash flow generated
over the useful lives of the corresponding assets, which extends from 20 to
35 years after 2003. As a result, the Company recorded Ps.604,752 and
Ps.1,569,532 during 2003 and 2002, respectively, as an impairment loss for
its long-lived assets. The deferred income tax effect for this reserve
resulted in a benefit of Ps.193,521 and Ps.502,250 during 2003 and 2002,
respectively.As of December 31, 2003 and 2002 the Company has assets temporarily out of
use for a net amount of Ps.92,988 and Ps.348,103, respectively.Some loans are collateralized with the machinery and equipment acquired
with those loans. Leased machinery has been pledged as collateral.The comprehensive financing costs capitalized in 2001 were Ps.34,145;
during 2003 and 2002, the Company did not capitalize any comprehensive
financing costs. Unamortized capitalized comprehensive financing cost was
Ps.69,349 and Ps.72,110 at December 31, 2003 and 2002, respectively.9.
    
    Other assets Intangible assetof employeeretirementobligation
    
    Debt issuance costs
    
    Other
    
    TotalAssets:Balance as of
January 1, 2003
    
    Ps.
    67,423
    
    
    Ps.
    616,658
    
    
    Ps.
    172,752
    
    
    Ps.
    856,833Increase in
additional
liability related
to seniority
premiums
    
    
    33,635
    
    
    
    
    
    
    
    
    
    
    
    33,635Write-off of debt
issuance costs
    
    
    
    
    
    
    (13,932
    )
    
    
    
    
    
    
    (13,932
    )Decrease in other
intangible assets 
Net
    
    
    
    
    
    
    
    
    
    
    (4,673
    )
    
    
    (4,673
    )Balance as of
December 31, 2003
    
    
    101,058
    
    
    
    602,726
    
    
    
    168,079
    
    
    
    871,863Accumulated
amortization:Balance as of
January 1, 2003
    
    
    
    
    
    
    211,367
    
    
    
    5,460
    
    
    
    216,827Amortization expense
    
    
    
    
    
    
    83,147
    
    
    
    31,556
    
    
    
    114,703Balance as of
December 31, 2003
    
    
    
    
    
    
    294,514
    
    
    
    37,016
    
    
    
    331,530Net balance as of
December 31, 2003
    
    Ps.
    101,058
    
    
    Ps.
    308,212
    
    
    Ps.
    131,063
    
    
    Ps.
    540,333
 F-20




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##### Table of Contents



During 2002 and 2001, the Company capitalized debt issuance costs amounting
to Ps.224,459 and Ps.261,487, respectively; during 2003 the Company did not
capitalize any debt issuance costs. In 2003, 2002 and 2001, the Company
amortized Ps.83,147, Ps.123,633 and Ps.60,417, respectively, of debt
issuance costs. For the year ended December 31, 2001, the Company wrote off
debt issuance costs related to the Yankee Bond issuances with maturities in
2001 and 2003 of Ps.21,657 and Ps.14,412, respectively.10.
    
    Short-term and long-term debt  a.
    
Short-term and long-term debt is summarized as follows: 2003
    
    2002Continuing operations:Short-term debt
    
    Ps.
    8,535,163
    
    
    Ps.
    7,595,462Current portion of long-term debt
    
    
    121,290
    
    
    
    278,577Long-term debt
    
    
    399,423
    
    
    
    1,021,4269,055,876
    
    
    
    8,895,465Discontinued operations:Current portion of long-term debt
    
    
    30,126
    
    
    
    16,148Long-term debt
    
    
    111,239
    
    
    
    104,956141,365
    
    
    
    121,104Ps.
    9,197,241
    
    
    Ps.
    9,016,569
  b.
    
    Total debt classified by the main classes of liabilities are as
follows: 2003
    
    2002Senior Notes
    
    Ps.
    5,678,562
    
    
    Ps.
    5,484,786Bank loans
    
    
    2,650,174
    
    
    
    2,628,890Notes
    
    
    540,487
    
    
    
    522,045Financial lease agreements
    
    
    194,706
    
    
    
    322,955Letters of credit
    
    
    74,599Euro Commercial Paper
    
    
    56,186
    
    
    
    54,269Other long-term debt
    
    
    2,527
    
    
    
    3,624Ps.
    9,197,241
    
    
    Ps.
    9,016,569
  Senior Notes are comprised of four series, which mature in 2003, 2006,
2008 and 2009, with a total principal amount of US$505.3 million as of
December 31, 2003; bearing interest at fixed rates that range from
12.625% to 13.75% annually. Wells Fargo Bank of Minnesota, N.A. acts
as trustee.As of December 31, 2003, bank loans amount to US$238.9 million, with
The Chase Manhattan Bank, N. A., Banco Nacional de México, S.A.,
California Commerce Bank, Bank of Albuquerque, N.A., Bancomext,
S.N.C., Bancomer, S.N.C., Bank of America, N. A. and Commerze Bank;
bearing interest at LIBOR plus a margin, which ranges from 1.5% to 8%.
Maturities are variable, through 2010. Some bank loans are secured by
the Companys machinery and equipment.Notes payable for US$48.1 million to HG Estate, LLC, bearing interest
at fixed rates, which range from 10% to 13% per annum, payable
semiannually.Financial lease agreements for US$17.4 million with Arrendadora Bank
of America, N.A. and GE Capital Leasing; bearing interest at LIBOR
plus 3.25% through 3.5% per annum. Maturities are variable through
2009. The leased machinery has been pledged as collateral. F-21




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##### Table of Contents



Letters of credit for US$6.7 million with JPMorgan Chase Bank and Bank
of America, N.A.The Euro Commercial Papers balance of US$5 million is derived from an
issuance matured in February 2003. This debt bore interest at 9.75%
annually prior to maturity.c.
    
    The Senior Notes, bank loans and financial lease agreements
contain covenants, obligations and restrictions with which CODUSA
and/or its subsidiaries must comply, mainly in respect of contracting
other credit lines, payment of dividends and decrease in capital
stock, restrictions on transactions with related parties and the
maintenance of certain financial ratios, as well as compliance with
prompt payment of interest and principal upon each maturity. Since
November 2002, the Company has failed to comply with the payment of
interest and principal maturing on certain bank loans and notes. As a
result, the Company is in default with respect to such obligations and
some of these bank loans and notes have matured and not been paid.
According to the terms of certain of the Companys debt instruments,
the banks and bondholders may demand in advance, the immediate payment
of principal and interest outstanding on the loans and bonds in
default. Therefore, the principal amount of the past due loans and
notes that are in default have been classified as short-term debt.Payments on certain debt are guaranteed, jointly and severally on an
unsecured basis by the following subsidiaries, Empaques de Cartón
Titán, S.A. de C.V., Compañía Papelera de Atenquique, S.A. de C.V.,
Ponderosa Industrial de Mexico, S.A. de C.V. and Industrias Centauro,
S.A. de C.V.d.
    
    As of December 31, 2003, long-term debt matures as follows: 2005
    
    Ps.
    128,2272006
    
    
    88,1462007
    
    
    87,4972008
    
    
    65,0222009
    
    
    30,531Thereafter
    
    Ps.
    399,423
  e.
    
    At December 31, 2003, minimum rental commitments under capital
leases are as follows: Total minimum lease obligations
    
    Ps.
    199,410Unearned interest
    
    
    4,704Present value of obligations
    
    
    194,706Current portion of obligations
    
    
    (75,113
    )Long-term portion of capital lease obligations
    
    Ps.
    119,593
  Capital lease obligations, which include a purchase option at the end
of the lease term, mature as follows:Year ending December 31, 2004
    
    Ps.
    75,1132005
    
    
    60,3062006
    
    
    17,8262007
    
    
    17,8262008
    
    
    17,826Thereafter
    
    
    5,809Ps.
    194,706
 F-22




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##### Table of Contents



11.
    
    Financial instruments and derivative 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. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.The carrying amounts 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 rates tied to market indicators, as appropriate. The
Companys long-term debt consists of debt instruments that bear
interest at fixed or variable rates tied to market indicators.As of December 31, 2003 and 2002, the Company was unable to calculate
a reasonable estimate of the fair value of the Companys long-term
debt, because the comparable market information required to determine
the estimated fair value of long-tem debt was not attainable due to
the financial situation of the Company. The fair value of the Senior
Notes was estimated based on quoted market prices, as follows: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueSenior Notes
    
    Ps.
    5,678,562
    
    
    Ps.
    3,378,869
    
    
    Ps.
    5,484,786
    
    
    Ps.
    1,668,307
  b.
    
    Derivative financial instruments The Company entered into
several equity swaPs. with respect to its American Depositary Receipts
(ADRs). The difference between the fair value and the acquisition
cost of those shares (including purchase expenses and premiums or
discounts) as well as financing cost was recorded directly to
stockholders equity through December 31, 2000. As a result of the
adoption of Bulletin C-2, during 2001, the Company recorded Ps.22,150
in the statement of operations. The fair value of the equity swaPs. is
estimated based on their quoted market price, which as of December 31,
2001, was equal to its carrying amount. The equity swap matured in May
2002, and in connection the Company purchased 2,240,000 shares that
were recorded as treasury stock.c.
    
    Concentration of credit risk The financial instruments that
potentially are subject to a concentration of credit risk are
principally cash and temporary investments and trade accounts
receivable. The Company deposits and invests its excess cash in
recognized financial institutions. The concentration of the credit
risk with respect to accounts receivable is limited due to the large
number of customers comprising the Companys customer base and their
dispersion across different locations in Mexico and the U.S. There
were no customers exceeding 10% of net sales for any of the periods
presented.  12.
    
    Employee retirement obligationsMéxico The Company maintains a pension plan for certain employees. In
addition, in accordance with the Mexican Labor Law, the Company provides
seniority premium benefits to employees under certain circumstances. These
benefits consist of a lump sum payment of 12 days wages for each year
worked, calculated using the most recent salary, not to exceed twice the
legal minimum wage established by law. The related liability and annual
cost of such benefits are calculated by an independent actuary on the basis
of formulas defined in the plans using the projected unit credit method.
The present values of these obligations and the rates used for the
calculations are: F-23




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##### Table of Contents



2003
    
    2002Accumulated benefit obligation
    
    Ps.
    199,467
    
    
    Ps.
    166,112Projected benefit obligation
    
    Ps.
    179,061
    
    
    Ps.
    200,114Unrecognized items:Variances for assumptions and adjustments based
on experience
    
    
    10,624
    
    
    
    (23,148
    )Transition asset
    
    
    (91,276
    )
    
    
    (82,292
    )Net projected liability
    
    
    98,409
    
    
    
    94,674Additional liability related to seniority premiums
    
    
    101,058
    
    
    
    71,438Ps.
    199,467
    
    
    Ps.
    166,112
  The rates used in the actuarial calculations, net of effects of inflation,
were: 2003
    
    2002
    
    2001%
    
    %
    
    %Discount of the projected benefit
obligation at present value
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %Salary increase
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
  The amortization periods for the unamortized items are as follows: RemainingYearsTransition asset
    
    
    18Variances in assumptions
    
    
    18
  Net period cost is comprised as follows: 2003
    
    2002
    
    2001Service costs
    
    Ps.
    5,483
    
    
    Ps.
    8,825
    
    
    Ps.
    9,141Amortization of
transition asset,
variances for
assumptions and
adjustments based on experience
    
    
    8,417
    
    
    
    10,755
    
    
    
    9,170Interest cost
    
    
    8,929
    
    
    
    9,399
    
    
    
    10,407Net period cost
    
    Ps.
    22,829
    
    
    Ps.
    28,979
    
    
    Ps.
    28,718
  In connection with the reorganization process of the Companys operations,
there was a termination of administrative and operating personnel during
2003 that represented payments of Ps.59,262, which are included in other
expenses in the accompanying consolidated statements of operations.United States of America The subsidiaries in the United States of America
have established the following defined contribution plans: a 401(k)
retirement savings plan, health insurance plan, disability plan, and life
insurance plan, among others. For the years ended December 31, 2003, 2002
and 2001, total expenses related to these plans were Ps.34,498, Ps.47,637
and Ps.120,576, respectively. F-24




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##### Table of Contents



As of December 31, 2003 and 2002, the Company did not have any defined
benefits plans; therefore, during 2003 the additional liability of employee
retirement obligations, which was included within stockholders equity, was
transferred to retained earnings. The net cost for 2001 consisted of the
following: Service costs
    
    Ps.
    8,904Amortization of transition asset
    
    
    2,980Interest cost
    
    
    37,548Ps.
    49,432
  The expected return on plan assets was Ps.47,542 for 2001. The rates used
in the actuarial calculations were: Expected long-term rate of return on plan assets
    
    
    9.00
    %Discount rate
    
    
    7.25
    %
  13.
    
    Stockholders equity  a.
    
    Common stock shares at par value as of December 31 are comprised
as follows: 2003Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed capital
Series A
    
    
    46,610,100
    
    
    Ps.
    699,714
    
    
    Ps.
    1,707,265
    
    
    Ps.
    2,406,979Variable capital
Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,656,436
    
    
    
    2,335,309Total shares
    
    
    91,832,122
    
    
    Ps.
    1,378,587
    
    
    Ps.
    3,363,701
    
    
    Ps.
    4,742,288
 2002 and 2001Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed capital
Series A
    
    
    46,610,100
    
    
    Ps.
    699,714
    
    
    Ps.
    1,707,265
    
    
    Ps.
    2,406,979Variable capital
Series A
    
    
    47,462,022
    
    
    
    712,500
    
    
    
    1,738,484
    
    
    
    2,450,984Total shares
    
    
    94,072,122
    
    
    Ps.
    1,412,214
    
    
    Ps.
    3,445,749
    
    
    Ps.
    4,857,963
  Common stock consists of common nominative Series A shares without par
value. The variable portion of capital stock cannot exceed ten times
the aggregate amount of the fixed minimum portion without right to
withdraw.b.
    
    On June 30, 2003, the Board of Directors approved the
cancellation of 2,240,000 treasury shares. Consequently, the variable
portion of common stock was reduced by Ps.115,675 (Ps.33,627 at par
value).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 (historical pesos). 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, 2003 and 2002, the legal
reserve, in historical pesos, was Ps.238,870. F-25




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##### Table of Contents



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 2003, the rate was 34% and will be
reduced by one percentage point each year until reaching 32% in 2005.
Any tax paid on such distribution, may be credited against 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 stockholders equity tax accounts as of
December 31, are: 2003
    
    2002Contributed capital account
    
    Ps.
    3,357,271
    
    
    Ps.
    3,304,135Consolidated net tax income account
    
    
    1,606,671
    
    
    
    1,617,760Consolidated net reinvested tax income account
    
    
    871,769
    
    
    
    838,433Total
    
    Ps.
    5,835,711
    
    
    Ps.
    5,760,328
  As illustrated in the preceding table, the total amount of the
balances of the stockholders equity tax accounts exceeds
stockholders equity, according to the accompanying balance sheet.  14.
    
    Foreign currency balances and transactions  a.
    
    At December 31, the foreign currency monetary position is as
follows: 2003
    
    2002Thousands of U.S. dollars:Monetary assets
    
    
    39,219
    
    
    
    27,483Monetary liabilities
    
    
    (929,657
    )
    
    
    (872,633
    )Monetary asset (liability) position, net
    
    
    (890,438
    )
    
    
    (845,150
    )Equivalent in Mexican pesos
    
    Ps.
    (10,006,030
    )
    
    Ps.
    (8,822,774
    )Thousands of Euros:Monetary asset (liability) position, net
    
    
    (10,346
    )
    
    
    (10,710
    )Equivalent in Mexican pesos
    
    Ps.
    (146,282
    )
    
    Ps.
    (116,976
    )
  b.
    
    Nonmonetary assets of foreign origin at December 31, 2003 are as
follows: Foreign
    
    EquivalentCurrency
    
    in MexicanCurrency
    
    Balance
    
    PesosInventories
    
    U.S. dollar
    
    
    13,659
    
    
    Ps.
    153,397Industrial machinery and
equipmentUnited States of America
    
    U.S. dollar
    
    
    405,252
    
    
    
    4,553,903Brazil
    
    Real
    
    
    184,525
    

    
    
    717,489Japan
    
    Yen
    
    
    4,736,765
    
    
    
    496,412Germany
    
    Euro
    
    
    31,865
    
    
    
    451,317Canada
    
    Canadian dollar
    
    
    42,480
    
    
    
    369,731Other
    
    
    
    
    
    
    
    
    323,843
 F-26




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##### Table of Contents



c.
    
    The condensed financial information of the principal foreign
subsidiaries as of December 31, 2003 are as follows: 2003
    
    2002
    
    2001(In thousands ofU.S. dollars)United States of AmericaNet sales
    
    
    146,646
    
    
    
    291,700
    
    
    
    343,919Income from operations
    
    
    4,471
    
    
    
    (17,570
    )
    
    
    (4,413
    )Net income
    
    
    (54,559
    )
    
    
    (96,610
    )
    
    
    (37,131
    )Current assets
    
    
    30,216
    
    
    
    45,203
    
    
    
    96,028Total assets
    
    
    115,022
    
    
    
    132,544
    
    
    
    298,281Current liabilities
    
    
    18,960
    
    
    
    33,522
    
    
    
    95,772Total liabilities
    
    
    48,204
    
    
    
    65,183
    
    
    
    210,458
  d.
    
    Transactions denominated in foreign currency were as follows: 2003
    
    2002
    
    2001(In thousands ofU.S. dollars)Export sales
    
    
    166,230
    
    
    
    302,174
    
    
    
    433,802Interest expense
    
    
    (96,455
    )
    
    
    (81,441
    )
    
    
    (111,876
    )Interest income
    
    
    31
    
    
    
    613
    
    
    
    2,558Import purchases
    
    
    (167,303
    )
    
    
    (337,821
    )
    
    
    (456,771
    )Acquisition of machinery and
equipment
    
    
    (35,486
    )
    
    
    (20,978
    )
    
    
    (17,831
    )
  e.
    
    The exchange rates in effect at the dates of the consolidated
balance sheets and of issuance of the consolidated financial
statements were as follows: December 31
    
    April 30,2003
    
    2002
    
    2004U.S. dollar
    
    Ps.
    11.2372
    
    
    Ps.
    10.4393
    
    
    Ps.
    11.4068Euros
    
    
    14.1390
    
    
    
    10.9221
    
    
    
    13.6539
  15.
    
    Transaction and balances with related parties  a.
    
    Transactions with related parties, carried out in the ordinary
course of business, were as follows: 2003
    
    2002
    
    2001Interest income
    
    Ps.
    25,077
    
    
    Ps.
    20,954
    
    
    Ps.
    7,325Sale of paper
    
    
    12,131Sale of industrial machinery and
other equipment
    
    
    16,194Sale of shares
    
    
    
    
    
    
    543Sale of accounts receivable
    
    
    
    
    
    
    543Freight expenses
    
    
    42,321Flight services paid
    
    
    
    
    
    
    5,316Other income
    
    
    3,193
 F-27




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##### Table of Contents



b.
    
    Balances receivable and payable with related parties are as follows: 2003
    
    2002Due from related parties-Administradora Corporativa y Mercantil, S.A. de C.
V.
    
    Ps.
    175,317
    
    
    Ps.
    155,938Durango Georgia Receivables Company
    
    
    194,853
    
    
    
    35,361Durango Paper Company
    
    
    58,569Líneas Aéreas Ejecutivas de Durango, S. A. de C. V.
    
    
    13,992Other
    
    
    291
    
    
    
    8443,022
    
    
    
    191,307Allowance for doubtful accounts
    
    
    (428,739
    )Ps.
    14,283
    
    
    Ps.
    191,307Due to related parties-Líneas Aéreas Ejecutivas de Durango, S.A. de C. V.
    
    Ps.
    
    
    
    Ps.
    5,590
  During 2003 the Company recorded an allowance for the account
receivable due from Administradora Corporativa y Mercantil, S. A. de
C. V. Since the Companys shareholders own this company, this
adjustment was recorded as a debit to retained earnings.  16.
    
    Other expenses 2003
    
    2002
    
    2001Loss on sale of property,
plant and equipment
    
    Ps.
    (199,664
    )
    
    Ps.
    (29,540
    )
    
    Ps.
    (30,637
    )Severance payments due to
reorganization
    
    
    (59,262
    )Restructuring expenses
    
    
    (272,885
    )Impairment of long-lived assets
    
    
    (604,752
    )
    
    
    (1,569,532
    )Loss on operations of DPC
    
    
    (315,091
    )
    
    
    (1,509,053
    )Negative goodwill
    
    
    
    
    
    
    
    
    
    
    543,206Other income (expenses)
    
    
    (59,535
    )
    
    
    (18,837
    )
    
    
    (36,139
    )Ps.
    (1,511,189
    )
    
    Ps.
    (3,126,962
    )
    
    Ps.
    476,430
  On November 25, 2003, the Company sold a warehouse for US$11.5 million. As
part of the sale, the Company reserved the right to use a portion of the
warehouse representing approximately one third of the entire property for a
period of five years at no cost. This sale generated a loss of Ps.193,891,
which is presented in other expenses in the statement of operations.As mentioned in Note 1, the Company is committing significant resources to
the debt restructuring efforts, for this reason on December 2002 a group of
advisors was hired to support the Company in the restructuring of its debt
and in the sale of non-strategic assets. On April 7, 2003, the Company
entered into a forbearance agreement with a significant portion of its
creditors, and a payment of a forbearance fee of US$12 million was
required. The forbearance agreement expired on June 30, 2003. F-28




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##### Table of Contents



17.
    
    Income taxes, tax on assets and employee statutory profit sharing  In accordance with Mexican tax law, the Company is subject to income tax
(ISR) and tax on assets (IMPAC). ISR takes into consideration the
taxable and deductible effects of inflation.The ISR rate was 35% in 2002 and 2001 and 34% in 2003, and will be reduced
by one percentage point each year until reaching 32% in 2005. In 2002, the
deduction for employee statutory profit sharing (PTU) and the obligation
to withhold taxes on dividends paid to individuals or foreign residents
were eliminated.IMPAC is calculated by applying a rate of 1.8% on the net average of the
majority of restated assets less certain liabilities and is payable only to
the extent that it exceeds ISR payable for the same period. If in any year
IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be
reduced by the amount by which ISR exceeded IMPAC in the three preceding
years and any required payment of IMPAC is creditable against the excess of
ISR over IMPAC of the following ten years.The Company incurs consolidated ISR and IMPAC with its Mexican subsidiaries
in the proportion that the Company owns the voting stock of its
subsidiaries at the balance sheet date. Beginning on January 1, 2002, the
proportion is calculated based on the average daily equity percentage that
the Company owns of its subsidiaries during the year. The tax results of
the subsidiaries are consolidated at 60% of such proportion and the tax
results of the holding company are also consolidated at 60%. Estimated
payments of ISR and IMPAC of both the Company and its subsidiaries are made
as if the Company did not file a consolidated tax return. a.
    
    ISR consists of the following: 2003
    
    2002
    
    2001Current
    
    Ps.
    (72,108
    )
    
    Ps.
    (114,891
    )
    
    Ps.
    (243,352
    )Deferred
    
    
    71,892
    
    
    
    792,114
    
    
    
    194,795Ps.
    (216
    )
    
    Ps.
    677,223
    
    
    Ps.
    (48,557
    )
  b.
    
    The reconciliation of the statutory and effective ISR rates
expressed as a percentage of income (loss) from continuing operations
before ISR and PTU for the years ended December 31, 2003, 2002 and
2001 is: 2003
    
    2002
    
    2001Statutory rate
    
    
    34.00
    %
    
    
    35.00
    %
    
    
    35.00
    %Add (deduct) the effect of
permanent differences:Non deductible expenses
    
    
    (1.30
    %)
    
    
    (0.24
    %)
    
    
    1.91
    %Other
    
    
    (14.59
    %)
    
    
    (0.75
    %)
    
    
    (30.64
    %)Add (deduct) the effects of
inflation
    
    
    0.90
    %
    
    
    (0.61
    %)
    
    
    (1.77
    %)Effect of change in statutory
rate on deferred ISR
    
    
    0.49
    %
    
    
    4.70
    %Change in valuation allowance
for recoverable IMPAC and
benefit of tax loss
carryforwards
    
    
    (19.51
    %)
    
    
    (22.40
    %)Effective rate
    
    
    (0.01
    %)
    
    
    15.7
    %
    
    
    4.5
    %
 F-29




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##### Table of Contents



c.
    
    At December 31, 2003 and 2002 the main items comprising the
liability balance of deferred ISR are: 2003
    
    2002Deferred ISR asset (liability):Property, plant and equipment
    
    Ps.
    2,822,829
    
    
    Ps.
    2,892,265Inventories
    
    
    243,904
    
    
    
    (19,209
    )Allowance for doubtful accounts
    
    
    (127,578
    )
    
    
    (39,562
    )Accrued expenses
    
    
    (152,243
    )
    
    
    (55,624
    )Other assets
    
    
    58,458
    
    
    
    90,146Other, net
    
    
    (8,593
    )
    
    
    (155,853
    )Deferred ISR from temporary differences
    
    
    2,836,777
    
    
    
    2,712,163Effect of tax loss carryforwards
    
    
    (1,545,386
    )
    
    
    (1,092,446
    )Recoverable tax on assets
    
    
    (316,349
    )
    
    
    (263,348
    )975,042
    
    
    
    1,356,369Valuation allowance for the deferred ISR asset
and recoverable tax on assets
    
    
    943,805
    
    
    
    396,913Net long-term deferred ISR liability
    
    Ps.
    1,918,847
    
    
    Ps.
    1,753,282
  d.
    
    Due to a deterioration in the circumstances used to assess the
recovery of tax on assets paid and realization of the benefit of tax
loss carryforwards, in 2003 and 2002 the valuation allowance for
recoverable tax on assets and benefit of tax loss carryforwards was
increased by Ps.546,892 and Ps.965,793, respectively, and charged to
results of operations.e.
    
    At December 31, 2003 and 2002, the Company has taxable temporary
and permanent differences related to deferred PTU, mainly inventories
and property, plant and equipment, for which the deferred PTU
liabilities were not estimated nor recorded because the Company
believes that they will not reverse due to the recurring nature of the
related transactions.f.
    
    Tax loss carryforwards and recoverable IMPAC for which the
deferred ISR asset and prepaid ISR, respectively, have been partially
recognized may be recovered subject to certain conditions. Restated
amounts as of December 31, 2003 and expiration dates are: Year of
    
    Tax Loss
    
    RecoverableExpiration
    
    Carryforwards
    
    IMPAC2004
    
    Ps.
    484,136
    
    
    Ps.
    48,6732005
    
    
    221,360
    
    
    
    13,0732006
    
    
    169,449
    
    
    
    26,2742007
    
    
    99,771
    
    
    
    26,0912008
    
    
    147,317
    
    
    
    25,3082009
    
    
    100,769
    
    
    
    19,7692010
    
    
    112,249
    
    
    
    23,8572011
    
    
    127,997
    
    
    
    22,2112012
    
    
    1,950,845
    
    
    
    58,0922013
    
    
    1,415,437
    
    
    
    53,001Ps.
    4,829,330
    
    
    Ps.
    316,349
  g.
    
    For the years ended December 31, 2003, 2002 and 2001, the change
in excess (insufficiency) in restated stockholders equity, as shown
in the accompanying statements of changes in stockholders equity, is
presented net of the effect of the related deferred income tax of
Ps.200,679, Ps.151,170 and Ps.22,986, respectively. F-30




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##### Table of Contents



18.
    
    Discontinued operations  In connection with the Companys financial and operating restructuring,
during 2003 the discontinuation and/or sale of some subsidiaries or
significant assets was authorized. The related assets, liabilities and
operating results have been presented as discontinued operations in the
accompanying financial statements. Discontinued operations are as follows: a.
    
    On February 27, 2003, the Company sold the assets of its molded
pulp division for approximately US$53.7 million, resulting in a gain
of Ps.334,969, which is included in the net loss of discontinued
operations in the accompanying consolidated statements of operations
for the year ended December 31, 2003. Additionally, according to the
purchase agreement, the Company transferred to the buyer some accounts
receivable and trade accounts payable, in order to permit the buyer to
continue with production and sale of molded products.b.
    
    On November 14, 2003, the Company sold its investment in
Productora Nacional de Papel, S. A. de C. V. for US$28 million,
giving rise to a loss of Ps.447,466, which is included in the net loss
of discontinued operations in the accompanying consolidated statements
of operations for the year ended December 31, 2003.c.
    
    During 2003, the Companys management authorized a plan to sell a
plant located in Chihuahua, which is primarily engaged in the
manufacturing of particleboard. On September 24, 2003, the Company
signed a letter of intent with a potential buyer, who is in the
process of performing due diligence. Based on the ongoing negotiations
with the potential buyer, the Company reduced the book value of the
net assets that will be sold by Ps.351,291, which is included in the
net loss of discontinued operations in the accompanying consolidated
statements of operations for the year ended December 31, 2003.The recorded value of the net assets of discontinued operations
consist of the following: 2003
    
    2002Cash
    
    Ps.
    3,283
    
    
    Ps.
    33,320Accounts receivable Net
    
    
    56,825
    
    
    
    165,147Inventories Net
    
    
    23,795
    
    
    
    190,784Prepaid expenses
    
    
    287
    
    
    
    579Total current assets
    
    
    84,190
    
    
    
    389,830Property, plant and equipment Net
    
    
    252,847
    
    
    
    1,602,182Other assets Net
    
    
    
    
    
    
    100,811Total noncurrent assets
    
    
    252,847
    
    
    
    1,702,993Total assets
    
    Ps.
    337,037
    
    
    Ps.
    2,092,823Short-term debt and current portion of long-term debt
    
    Ps.
    30,126
    
    
    Ps.
    16,148Trade accounts payable
    
    
    39,202
    
    
    
    121,657Other accounts payable, taxes and accrued liabilities
    
    
    15,348
    
    
    
    74,253Total current liabilities
    
    
    84,676
    
    
    
    212,058
 F-31




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##### Table of Contents



2003
    
    2002Long-term debt
    
    
    111,239
    
    
    
    104,956Deferred income taxes
    
    
    78,297
    
    
    
    340,754Employee retirement obligations
    
    
    710
    
    
    
    20,784Total long-term liabilities
    
    
    190,246
    
    
    
    466,494Total liabilities
    
    Ps.
    274,922
    
    
    Ps.
    678,552Net assets of discontinued operations
    
    Ps.
    62,115
    
    
    Ps.
    1,414,271
  The statements of operations reflect discontinued operations, which are
comprised as follows: 2003
    
    2002
    
    2001Net sales
    
    Ps.
    692,722
    
    
    Ps.
    847,060
    
    
    Ps.
    391,024Costs of sales
    
    
    703,153
    
    
    
    612,732
    
    
    
    261,066Gross profit
    
    
    (10,431
    )
    
    
    234,328
    
    
    
    129,958Operating expensesNet
    
    
    41,805
    
    
    
    72,227
    
    
    
    76,620Income (loss) from operations
    
    
    (52,236
    )
    
    
    162,101
    
    
    
    53,338Net comprehensive financing cost
    
    
    (135,282
    )
    
    
    (159,294
    )
    
    
    (64,220
    )Other income (expenses) Net
    
    
    (25,117
    )
    
    
    86,799
    
    
    
    88,089Impairment of long-lived assets
    
    
    (351,291
    )
    
    
    (100,961
    )Income (loss) from discontinued
operations
    
    
    (563,926
    )
    
    
    (11,355
    )
    
    
    77,207Revenues from sales of discontinued
operations
    
    
    924,620Cost of sales of discontinued operations
    
    
    1,037,117Loss on sales of discontinued operations
    
    
    (112,497
    )ISR and PTU
    
    
    127,188
    
    
    
    (91,505
    )
    
    
    75,661Discontinued operations  Net
    
    Ps.
    (549,235
    )
    
    Ps.
    (102,860
    )
    
    Ps.
    152,868Depreciation and amortization
    
    Ps.
    37,675
    
    
    Ps.
    44,030
    
    
    Ps.
    42,165
  19.
    
    Extraordinary loss For the year ended December 31, 2001, this item is comprised as follows: Employee severances
    
    Ps.
    174,921Net loss on sale of certain non-strategic assets
    
    
    143,026Ps.
    317,947
 F-32




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##### Table of Contents



a.
    
    Early in 2001, the Company entered into negotiations with its
unions, with the objective of canceling labor contracts still in
effect after approximately 50 years, regarding the operations of
Compañía Papelera de Atenquique, S.A. de C.V. and Ponderosa Industrial
de México, S.A. de C.V. After a few months of negotiations, such
contracts were terminated and the number of workers was reduced.b.
    
    In April and May 2001, certain non-strategic assets of DPC were
sold, generating a loss since the carrying value of the assets was
higher than the price at which they were sold.  20.
    
    Commitments  a.
    
    Some of the Mexican subsidiaries lease certain equipment under
non-cancelable operating leases. The related rental Companys expense
was approximately Ps.50,544, Ps.59,719 and Ps.77,799 for the years
ended December 31, 2003, 2002 and 2001, respectively. As of December
31, 2003, estimated future minimum lease payments under non-cancelable
operating leases were as follows: Year
    
    Amount2004
    
    Ps.
    21,3222005
    
    
    18,6712006
    
    
    18,6712007
    
    
    18,671Thereafter
    
    
    76,764Ps.
    154,009
  b.
    
    Durango McKinley Paper Company leases certain equipment under
non-cancelable operating leases. Rental expense under these leases was
approximately Ps.4,624, Ps.3,885 and Ps.2,218 for the years ended
December 31, 2003, 2002 and 2001, respectively. Future minimum lease
commitments are Ps.2,252 due in 2004.  21.
    
    Contingencies  a.
    
    After the sale of DPC, Chapter 11 bankruptcy proceedings before
the United States Bankruptcy Court were initiated regarding Durango
Georgia Paper Company (DGPC), the main DPC subsidiary. Additionally,
although formal notice has not been served on the Company, it is known
that on April 2, 2004, the DGPC Official Committee of Unsecured
Creditors filed a complaint against the Company, which seeks, among
other things: (i) recovery of alleged fraudulent and preferential
transfers from DGPC to the Company; (ii) damages for alleged
fraudulent representations and breach of an alleged oral and written
guarantee of the DGPC debt; and (iii) equitable subordination of the
Companys claims against DGPC. The Companys management believes this
claim is without merit and will defend the action.b.
    
    Subsequent to the sale of Productora Nacional de Papel, S.A. de
C.V., as described in Note 18, the Mexican National Water Commission
billed the Company in the amount of Ps.157,140 related to several
differences in the payments of rights for extraction and use of
national water for the years 2001 and 2000. The Company filed an
appeal with the Federal Tax and Administrative Court and is currently
waiting for the courts ruling. The Companys management believes that
the outcome will be favorable to the Company, since the tax
authorities had not properly supported the differences assessed.c.
    
    On November 8, 2002, the Company initiated an arbitration
proceeding against HG Estate LLC for US$85 million due to
discrepancies in the calculation of the value of the fixed assets of
DPC. Also, on December 19, 2002, HG Estate LLC filed a claim for
US$50.2 million due to the failure of payment of capital and interest
related to the acquisition of DPC. As of the date of issuance of these
financial statements, the claim against the Company has been stayed
while the arbitration proceeds. F-33




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##### Table of Contents



d.
    
    The Company was sued on February 25, 2003 by Compass Income
Master Fund, Inc. due to the nonpayment of principal and interest of
US$3.5 million on the Euro Commercial Paper, which matured February
12, 2003. Companys management believes that payment of this liability
will be made under the same terms and conditions reached as a result
of its debt restructuring.e.
    
    The Company has initiated an injunction against the Mexican tax
authorities regarding the methodology used to determine its employee
statutory profit sharing. Management does not believe that any
liabilities relating to this injunction are likely to have a material
adverse effect on the Companys consolidated financial condition or
results of operations.f.
    
    The Company has initiated an injunction against the Mexican tax
authorities regarding the unconstitutionality of the Substitutive Tax
of the Wage Credit. Management believes that the outcome of this
process will be favorable to the Company, which represents a
contingent asset of Ps.12,196.g.
    
    Additional taxes payable could arise in transactions with
nonresident related parties if the tax authority, during a review,
believes that the prices and amounts used by the Company are not
similar to those used with or between independent parties in
comparable transactions.  22.
    
    Information by industry segment and geographical areaIn April 2003, the Mexican Institute of Public Accountants (MIPA) issued
Bulletin B-5, Financial Information by Segment, whose adoption is
mandatory as of April 2003. The information on operating segments is
presented based on a management focus. In addition, general information is
presented by product, geographical area and homogeneous client groups.  a.
    
    Analytical information by operating segment of continuing
operations: 2003Other
    
    Total
    
    
    
    
    
    TotalPaper
    
    Packaging
    
    Segments
    
    Segments
    
    Eliminations
    
    ConsolidatedSales to customers
    
    Ps.
    2,806,858
    
    
    Ps.
    3,942,603
    
    
    Ps.
    81,567
    
    
    Ps.
    6,831,028
    
    
    Ps.
    
    
    
    Ps.
    6,831,028Intersegment sales
    
    
    2,497,232
    
    
    
    133,334
    
    
    
    16,119
    
    
    
    2,646,685
    
    
    
    (2,646,685
    )Total sales
    
    
    5,304,090
    
    
    
    4,075,937
    
    
    
    97,686
    
    
    
    9,477,713
    
    
    
    (2,646,685
    )
    
    
    6,831,028Depreciation and amortization
    
    
    265,850
    
    
    
    119,590
    
    
    
    11,022
    
    
    
    396,462
    
    
    
    
    
    
    
    396,462Income from operations
    
    
    (109,553
    )
    
    
    430,439
    
    
    
    (14,506
    )
    
    
    306,380
    
    
    
    
    
    
    
    306,380Total assets
    
    
    18,475,951
    
    
    
    24,709,451
    
    
    
    933,989
    
    
    
    44,119,391
    
    
    
    (28,498,754
    )
    
    
    15,620,637Capital expenditures
    
    
    75,267
    
    
    
    30,917
    
    
    
    535
    
    
    
    106,719
    
    
    
    
    
    
    
    106,719
 2002Other
    
    Total
    
    
    
    
    
    TotalPaper
    
    Packaging
    
    Segment
    
    Segments
    
    Eliminations
    
    ConsolidatedSales to customers
    
    Ps.
    4,082,248
    
    
    Ps.
    3,948,581
    
    
    Ps.
    93,668
    
    
    Ps.
    8,124,497
    
    
    Ps.
    
    
    
    Ps.
    8,124,497Intersegment sales
    
    
    2,756,895
    
    
    
    93,505
    
    
    
    45,565
    
    
    
    2,895,965
    
    
    
    (2,895,965
    )Total sales
    
    
    6,839,143
    
    
    
    4,042,086
    
    
    
    139,233
    
    
    
    11,020,462
    
    
    
    (2,895,965
    )
    
    
    8,124,497Depreciation and amortization
    
    
    334,325
    
    
    
    113,408
    
    
    
    10,095
    
    
    
    457,828
    
    
    
    
    
    
    
    457,828Income from operations
    
    
    2,472
    
    
    
    495,062
    
    
    
    (908
    )
    
    
    496,626
    
    
    
    
    
    
    
    496,626Total assets
    
    
    17,008,990
    
    
    
    20,064,711
    
    
    
    1,082,256
    
    
    
    38,155,957
    
    
    
    (22,175,634
    )
    
    
    15,980,323Capital expenditures
    
    
    217,528
    
    
    
    147,298
    
    
    
    94,729
    
    
    
    459,555
    
    
    
    
    
    
    
    459,555
 F-34




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##### Table of Contents



2001Other
    
    Total
    
    
    
    
    
    TotalPaper
    
    Packaging
    
    Segment
    
    Segments
    
    Eliminations
    
    ConsolidatedSales to customers
    
    Ps.
    6,041,402
    
    
    Ps.
    4,590,438
    
    
    Ps.
    143,463
    
    
    Ps.
    10,775,303
    
    
    Ps.
    
    
    
    Ps.
    10,775,303Intersegment sales
    
    
    3,511,238
    
    
    
    95,135
    
    
    
    46,088
    
    
    
    3,652,461
    
    
    
    (3,652,461
    )Total sales
    
    
    9,552,640
    
    
    
    4,685,573
    
    
    
    189,551
    
    
    
    14,427,764
    
    
    
    (3,652,461
    )
    
    
    10,775,303Depreciation and amortization
    
    
    354,871
    
    
    
    114,543
    
    
    
    17,272
    
    
    
    486,686
    
    
    
    
    
    
    
    486,686Income from operations
    
    
    439,138
    
    
    
    485,189
    
    
    
    93,726
    
    
    
    1,018,053
    
    
    
    
    
    
    
    1,018,053Total assets
    
    
    22,729,620
    
    
    
    22,421,624
    
    
    
    1,173,014
    
    
    
    46,324,258
    
    
    
    (25,695,839
    )
    
    
    20,628,419Capital expenditures
    
    
    265,305
    
    
    
    428,608
    
    
    
    152,736
    
    
    
    846,649
    
    
    
    
    
    
    
    846,649
  b.
    
    General information of continuing operations by product: Net Revenues
    
    2003
    
    2002
    
    2001Packaging-Corrugated container
    
    Ps.
    3,645,682
    
    
    Ps.
    3,562,111
    
    
    Ps.
    4,058,485Paper sacks
    
    
    294,023
    
    
    
    379,359
    
    
    
    524,007Tubes
    
    
    2,898
    
    
    
    7,111
    
    
    
    7,946Paper-Paper for packaging
    
    
    1,545,344
    
    
    
    1,570,035
    
    
    
    1,583,424Newsprint
    
    
    646,461
    
    
    
    730,963
    
    
    
    1,721,023Uncoated free sheet
    
    
    615,053
    
    
    
    671,402
    
    
    
    833,990Kraft paper
    
    
    
    
    
    
    328,493
    
    
    
    415,070Coated bleached board
    
    
    
    
    
    
    781,355
    
    
    
    1,487,895Other segment
    
    
    81,567
    
    
    
    93,668
    
    
    
    143,463Total consolidated
    
    Ps.
    6,831,028
    
    
    Ps.
    8,124,497
    
    
    Ps.
    10,775,303
  c.
    
    General segment information of continuing operations by
geographical area: 2003CapitalRevenues
    
    Total Assets
    
    ExpendituresMexico
    
    Ps.
    7,426,589
    
    
    Ps.
    41,005,595
    
    
    Ps.
    90,235United States of America
    
    
    2,051,124
    
    
    
    3,113,796
    
    
    
    16,484Intersegment eliminations
    
    
    (2,646,685
    )
    
    
    (28,498,754
    )Consolidated
    
    Ps.
    6,831,028
    
    
    Ps.
    15,620,637
    
    
    Ps.
    106,719
 F-35




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##### Table of Contents



2002CapitalRevenues
    
    Total Assets
    
    ExpendituresMexico
    
    Ps.
    7,670,024
    
    
    Ps.
    34,253,436
    
    
    Ps.
    301,513United States of America
    
    
    3,350,438
    
    
    
    3,902,521
    
    
    
    158,042Intersegment eliminations
    
    
    (2,895,965
    )
    
    
    (22,175,634
    )Consolidated
    
    Ps.
    8,124,497
    
    
    Ps.
    15,980,323
    
    
    Ps.
    459,555
 2001CapitalRevenues
    
    Total Assets
    
    ExpendituresMexico
    
    Ps.
    9,879,093
    
    
    Ps.
    37,562,168
    
    
    Ps.
    678,508United States of America
    
    
    4,548,671
    
    
    
    8,762,090
    
    
    
    168,141Intersegment eliminations
    
    
    (3,652,461
    )
    
    
    (25,695,839
    )Consolidated
    
    Ps.
    10,775,303
    
    
    Ps.
    20,628,419
    
    
    Ps.
    846,649
  d.
    
    Homogeneous clients:Annual revenues from the following client groups to which the Company
sells are: 2003
    
    2002
    
    2001Food and beverage
    
    Ps.
    2,702,866
    
    
    Ps.
    3,418,340
    
    
    Ps.
    4,542,012Agribusiness
    
    
    495,813
    
    
    
    477,323
    
    
    
    511,369Aviculture
    
    
    244,261
    
    
    
    249,348
    
    
    
    292,211Maquila sector
    
    
    266,135
    
    
    
    267,158
    
    
    
    284,094Cement
    
    
    151,739
    
    
    
    237,553
    
    
    
    345,316Lime and plaster
    
    
    52,345
    
    
    
    51,177
    
    
    
    64,829Editorial
    
    
    1,530,000
    
    
    
    1,609,000
    
    
    
    1,794,000Scholastic
    
    
    228,000
    
    
    
    179,000
    
    
    
    207,000Furniture manufacturers
    
    
    81,567
    
    
    
    93,668
    
    
    
    143,463Other
    
    
    1,078,302
    
    
    
    1,541,930
    
    
    
    2,591,009Total
    
    Ps.
    6,831,028
    
    
    Ps.
    8,124,497
    
    
    Ps.
    10,775,303
 F-36




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##### Table of Contents



23.
    
    New accounting principlesIn March 2003, the Mexican Institute of Public Accountants (MIPA) issued
Bulletin C-15, Impairment of the Value of Long-Lived Assets and Their
Disposal (C-15), whose adoption is mandatory for fiscal years beginning
on or after January 1, 2004, although early adoption is encouraged. C-15
establishes, among other things, new rules for the calculation and
recognition of impairment losses for long-lived assets and their reversal.
It also provides guidance as to indicators of potential impairment in the
carrying amount of tangible and intangible long-lived assets in use,
including goodwill. Companies must test for impairment unless there is
conclusive evidence that the indicators of impairment are temporary. The
calculation of such loss requires the determination of the recoverable
value, which is now defined as the greater of the net selling price of a
cash-generating unit and its value in use, which is the net present value
of discounted future net cash flows. The accounting principles issued prior
to this new Bulletin used future net cash flows, without requiring the
discounting of such cash flows. During 2003 and 2002 indicators of
potential impairment were identified by the Company, and in conformity with
the accounting principles in effect until December 31, 2003, the Company
recorded the effects of this impairment, reducing the machinerys value by
approximately Ps.956,043 and Ps.1,670,493, respectively, and reducing the
deferred income tax liability by Ps.305,933 and Ps.534,558, respectively,
with a net charge to results of operations for those years of Ps.650,110
and Ps.1,135,935, respectively. However, since the present value of
estimated future net cash flows from the use of this machinery is less than
its book value as of December 31, 2003, the Company estimates that the
adoption of C-15 as of January 1, 2004, will result in additional
impairment of this machinery, reducing its value by approximately
Ps.914,146 and reducing the deferred income tax liability by Ps.292,527,
with a net charge to the statement of operations of Ps.621,619.In May 2003, the MIPA issued Bulletin C-12, Financial Instruments of a
Debt or Equity Nature or a Combination of Both (C-12), whose application
is mandatory for financial statements for periods beginning on or after
January 1, 2004, although early adoption is encouraged. C-12 is the
compilation of the standards issued by the MIPA with respect to the issue
of debt or equity financial instruments, or a combination of both, and
includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between
liabilities and stockholders equity and establishes the rules for
classifying and valuing the components of debt and equity of combined
financial instruments in the initial recognition. Subsequent recognition
and valuation of liabilities and stockholders equity of the financial
instruments is subject to the standards issued previously in the applicable
bulletins. Since the Company has not issued any financial instruments with
characteristics of both debt and equity, management believes this new
accounting principle will not have any effects on its financial situation
and results of operations.24.
    
    Differences Between Mexican GAAP and US GAAPThe consolidated financial statements of the Company are prepared in
accordance with Mexican GAAP, which differs in certain significant respects
from US GAAP. A reconciliation of the reported majority net income (loss),
majority stockholders equity (deficit) and majority comprehensive income
(loss) to US GAAP is presented in Note 25. It should be noted that this
reconciliation to US GAAP does not include the reversal of the restatement
of the financial statements for the effects of inflation as required by
Bulletin B-10, Recognition of the Effects of Inflation in the Financial
Information, of Mexican GAAP. The application of this bulletin represents
a comprehensive measure of the effects of price-level changes in the
Mexican economy and, as such, is considered a more meaningful presentation
than historical cost-based financial reporting in Mexican pesos for both
Mexican and US accounting purposes. F-37




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##### Table of Contents



The differences between Mexican GAAP and US GAAP included in the
reconciliation that affect the consolidated financial statements of the
Company are described below.  a.
    
    Restatement of prior year financial statements As explained in
Notes 3.b and 3.p, in accordance with Mexican GAAP, the financial
statements for Mexican subsidiaries for prior years have been restated
using Mexican inflation factors, and for foreign subsidiaries and
affiliated companies for prior years have been restated using the
inflation rate of the country in which the foreign subsidiary or
affiliated company is located, then translated to Mexican pesos at the
year-end exchange rate.Under US GAAP, the Company applies the regulations of the Securities
and Exchange Commission of the United States of America (SEC), which
require that prior year financial statements be restated in constant
units of the reporting currency, in this case the Mexican peso, which
requires the restatement of such prior year amounts using inflation
factors.Additionally, all other US GAAP adjustments for prior years have been
restated based upon the SEC methodology.b.
    
    Classification differences Certain items require a different
classification in the balance sheet or statement of operation under US
GAAP. These include:  
    
    As explained in Note 6, under Mexican GAAP, advances to
suppliers are recorded as inventories. Under US GAAP, advances to
suppliers are classified as prepaid expenses.
    
    The impairment of long-lived assets, the gain or loss
on the disposition of fixed assets, all severance indemnities,
and employee profit sharing must be included in operating
expenses under US GAAP.
    
    As explained in Note 18, under Mexican GAAP, the 2002
consolidated balance sheet has been reformulated to reflect the
discontinuation and/or sale of certain subsidiaries or
significant assets, which are presented as discontinued
operations. Under US GAAP, the 2002 condensed consolidated
balance sheet has not been reformulated for such discontinued
operations.  c.
    
    Deferred start-up and research and development costs In 2002,
under Mexican GAAP the Company deferred certain costs basically in
relation to the reconstruction of a manufacturing plant that suffered
a fire (Ponderosa Industrial de México, S.A. de C.V.) and the
development of a new paper manufacturing process. Under US GAAP, SFAS
No. 2, Accounting for Research and Development Costs and SOP 98-5,
Reporting on the Costs of Start-up Activities, require that the
Company expense the start-up and research and development costs as
incurred. As such, at December 31, 2003 and 2002, the start-up and
research and development costs have been included in the calculation
of net income (loss) under US GAAP.d.
    
    Restatement of imported fixed assets As explained in Note 3.e,
under Mexican GAAP, fixed assets of foreign origin have been restated
by applying the inflation rate of the country of origin and then
translated at the year-end exchange rate of the Mexican peso.Under US GAAP, the Company applies the SEC regulations, which require
that all machinery and equipment, both domestic and imported, be
restated using Mexican inflation factors.e.
    
    Capitalization of net comprehensive financing cost Under
Mexican GAAP, the capitalization of net comprehensive financing cost
(interest, exchange gain (loss) and monetary position gain) generated
by loan agreements is optional, and the Company has elected to
capitalize such cost only when there are specific borrowings obtained
to finance the investment projects. F-38




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##### Table of Contents



In accordance with US GAAP, if interest is incurred during the
construction of qualifying assets, capitalization is required as part
of the cost of such assets. Accordingly, a reconciling item for the
capitalization of a portion of the comprehensive financing cost is
included in the US GAAP reconciliation of the majority net income
(loss) and majority stockholders equity (deficit). If the borrowings
are denominated in US dollars, the weighted-average interest rate on
all such outstanding debt is applied to the balance of
construction-in-progress to determine the amount to be capitalized. If
the borrowings are denominated in Mexican pesos, the amount of
interest to be capitalized as noted above is reduced by the gain on
monetary position associated with the debt.f.
    
    Deferred income taxes and employee profit sharing The Company
follows SFAS No. 109, Accounting for Income Taxes, for US GAAP
purposes, which differs from Mexican GAAP as follows:  
    
    Under Mexican GAAP, deferred taxes are classified as
non-current, while under US GAAP deferred taxes are based on the
classification of the related asset or liability.
    
    Under Mexican GAAP, the effects of inflation on the
deferred tax balance generated by monetary items are recognized
in the result on monetary position. Under US GAAP, the deferred
tax balance is classified as a non-monetary item. As a result,
the consolidated statement of operations differs with respect to
the presentation of the gain (loss) on monetary position and
deferred income tax provision.
    
    Under Mexican GAAP, deferred employee profit sharing is
calculated considering only those temporary differences that
arise during the year and which are expected to turn around
within a defined period, while under US GAAP, the same liability
method as used for deferred income taxes is applied.
    
    The US GAAP adjustments to the accounting basis of
assets and liabilities generate a difference calculating the
deferred income tax under US GAAP compared to the one presented
under Mexican GAAP (see Note 17).
    
    Under US GAAP, in view of the going-concern
uncertainty, a full valuation allowance has been provided for all
deferred tax assets not assured of realization. Under Mexican
GAAP, an entity-by-entity analysis of the realizability of all
deferred tax assets has been performed to determine the required
valuation allowance.  The tax effects of temporary differences that generated deferred tax
liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred ISR (asset) liability:Property, plant and equipment
    
    Ps.
    2,523,731
    
    
    Ps.
    3,114,854Inventories
    
    
    (44,457

    )
    
    
    57,745Allowance for doubtful accounts
    
    
    (41,839
    )
    
    
    (41,315
    )Accrued expenses
    
    
    (104,082
    )
    
    
    (143,787
    )Other assets
    
    
    34,408
    
    
    
    52,740Other
    
    
    24,421
    
    
    
    13,155Deferred ISR from temporary differences
    
    
    2,392,182
    
    
    
    3,053,392Tax loss carryforwards
    
    
    (1,545,386
    )
    
    
    (1,705,994
    )Recoverable tax on assets
    
    
    (316,349
    )
    
    
    (404,099
    )530,447
    
    
    
    943,299Valuation allowance
    
    
    2,082,199
    
    
    
    2,110,093Net deferred ISR liability
    
    Ps.
    2,612,646
    
    
    Ps.
    3,053,392
 F-39




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##### Table of Contents



The changes in the balance of the deferred income taxes for the year
under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    3,053,392
    
    
    Ps.
    3,065,775Provision for the year
    
    
    (86,080
    )
    
    
    (19,847
    )Change in deferred income
tax liability of
discontinued operations
    
    
    (354,666
    )
    
    
    7,464Balance at end of the year
    
    Ps.
    2,612,646
    
    
    Ps.
    3,053,392
  The tax effects of temporary differences that generated deferred
profit sharing liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred employee profit sharing (asset) liability:Property, plant and equipment
    
    Ps.
    798,969
    
    
    Ps.
    1,048,306Inventories
    
    
    (13,893
    )
    
    
    17,498Allowance for doubtful accounts
    
    
    (13,075
    )
    
    
    (12,876
    )Accrued expenses
    
    
    (30,427
    )
    
    
    (46,576
    )Other assets
    
    
    (3,020
    )
    
    
    427Other
    
    
    (24,233
    )
    
    
    60,826714,321
    
    
    
    1,067,605Valuation allowance
    
    
    68,895Net deferred employee profit sharing
liability
    
    Ps.
    783,216
    
    
    Ps.
    1,067,605
  The changes in the balance of the deferred employee profit sharing
liability for the year under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    1,067,605
    
    
    Ps.
    1,019,336Provision for the year
    
    
    (183,994
    )
    
    
    113,940Change in the deferred
employee profit sharing
liability of discontinued
operations
    
    
    (100,395
    )
    
    
    (65,671
    )Balance at end of the year
    
    Ps.
    783,216
    
    
    Ps.
    1,067,605
  The deferred income tax and profit sharing classification in the
condensed consolidating balance sheet as of December 31, 2003 and 2002
is as follows: 2003EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred asset:Current
    
    Ps.
    (145,921
    )
    
    Ps.
    (67,735
    )
    
    Ps.
    (213,656
    )Long term
    
    
    (138,468
    )
    
    
    (46,291
    )
    
    
    (184,759
    )(284,389
    )
    
    
    (114,026
    )
    
    
    (398,415
    )Deferred liability:Current
    
    
    373,304
    
    
    
    98,273
    
    
    
    471,577Long term
    
    
    2,523,731
    
    
    
    798,969
    
    
    
    3,322,7002,897,035
    
    
    
    897,242
    
    
    
    3,794,277Deferred liability, net
    
    Ps.
    2,612,646
    
    
    Ps.
    783,216
    
    
    Ps.
    3,395,862
 F-40




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##### Table of Contents



2002EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred assets:Current
    
    Ps.
    (185,102
    )
    
    Ps.
    (59,452
    )
    
    Ps.
    (244,554
    )Long term
    
    
    (380,364
    )
    
    
    (118,864
    )
    
    
    (499,228
    )(565,466
    )
    
    
    (178,316
    )
    
    
    (743,782
    )Deferred liability:Current
    
    
    504,004
    
    
    
    197,188
    
    
    
    701,192Long term
    
    
    3,114,854
    
    
    
    1,048,733
    
    
    
    4,163,5873,618,858
    
    
    
    1,245,921
    
    
    
    4,864,779Deferred liability, net
    
    Ps.
    3,053,392
    
    
    Ps.
    1,067,605
    
    
    Ps.
    4,120,997
  g.
    
    Employee retirement obligations Under Mexican GAAP, the
liabilities for employee benefits are determined using actuarial
computations in accordance with Bulletin D-3, Labor Obligations,
which is substantially the same as US GAAP SFAS No. 87, Employers
Accounting for Pensions.Under Mexican GAAP and US GAAP, there is no difference in the
liabilities for seniority premiums and pension plans.The following sets forth the changes in benefit obligations, and the
funded status of such plans for 2003 and 2002 reconciled with the
amounts reported in the condensed consolidated balance sheets under US
GAAP. 2003
    
    2002Accumulated benefit obligation:Continued operations
    
    Ps.
    199,467
    
    
    Ps.
    166,112Discontinued operations
    
    
    710
    
    
    
    20,784Ps.
    200,177
    
    
    Ps.
    186,896Projected benefit obligation at beginning of year
    
    Ps.
    225,717
    
    
    Ps.
    222,452Less projected benefit obligation of
discontinued operations at beginning of year
    
    
    (25,603
    )200,114
    
    
    
    222,452Service costs
    
    
    5,483
    
    
    
    8,825Interest cost
    
    
    8,929
    
    
    
    9,399Actuarial loss
    
    
    (16,286
    )
    
    
    (2,123
    )Benefits paid
    
    
    (19,179
    )
    
    
    (14,905
    )Net change in benefit obligation of discontinued
operations
    
    
    
    
    
    
    2,069Projected benefit obligation at end of year
    
    Ps.
    179,061
    
    
    Ps.
    225,717
 F-41




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##### Table of Contents



2003
    
    2002Amounts recognized in the balance sheets consist of:Unfunded liability
    
    Ps.
    179,061
    
    
    Ps.
    225,717Less-Plan assetsUnrecognized transition obligation and other
    
    
    (80,652
    )
    
    
    (118,070
    )Net projected liability
    
    
    98,409
    
    
    
    107,647Intangible asset
    
    
    101,058
    
    
    
    79,249Liability recognized under US and Mexican GAAP
    
    Ps.
    199,467
    
    
    Ps.
    186,896
  h.
    
    Minority interest Under Mexican GAAP, the minority interest in
consolidated subsidiaries is presented as a separate component within
stockholders equity in the consolidated balance sheet.Under US GAAP, this item must be excluded from consolidated
stockholders equity in the consolidated balance sheet. Additionally,
the minority interest in the net earnings (losses) of consolidated
subsidiaries is excluded from consolidated net income (loss).The US GAAP adjustments shown in Note 25.a and 25.b are calculated on
a consolidated basis. Therefore, the minority interest effect is
presented as a separate line item, in order to obtain net income
(loss) and stockholders equity.i.
    
    Acquisitions As discussed in Note 3.k, under Mexican GAAP, the
Company recorded negative goodwill that arose from various
acquisitions realized in prior years, which represents the excess of
the book value of the net assets acquired over the purchase price.
Such negative goodwill was amortized into income over the period in
which the Company integrated these operations into the entity.Under US GAAP, the excess of the book value of the net assets acquired
over the purchase price was recorded as a reduction in the carrying
value of the long-term assets (primarily fixed assets).Additionally, US GAAP allows the recognition of termination costs and
the effect of conforming the accounting policies of the acquired
companies as liabilities assumed at the acquisition date. Such costs
are considered components of the net investments.j.
    
    Reversal of loss on sale of fixed assets As disclosed in Note
19.b, Extraordinary loss, during 2001 the Company sold certain
non-strategic assets. The US GAAP carrying value of the assets sold
differed from the carrying value recorded under Mexican GAAP due to
differences in the application of purchase accounting. As a result,
the Company reversed the additional loss recognized under Mexican
GAAP. Further, under Mexican GAAP, special items are presented as a
separate line item in the statement of operations, whereas for US GAAP
purposes such items are presented as a part of operating income.
Therefore, for US GAAP purposes, the Company reclassified special
items to operating income after giving effect to the reversal of the
loss on sale of fixed assets.k.
    
    Loss on extinguishment of Yankee Bonds In February 2001, the
Company prepaid its US$150 million Yankee Bonds maturing in 2001
(2001 Yankee Bonds). Under Mexican GAAP, the Company capitalized the
consent fee totaling Ps.33,516 paid to the bondholders of the 2001
Yankee Bonds and is amortizing such amount over the term of the new
US$180 million Yankee Bonds maturing in 2006 (2006 Yankee Bond),
which were issued simultaneously. Under Mexican GAAP, for the years
ended December 31, 2003, 2002 and 2001 amortization of the debt
issuance cost of the 2006 Yankee Bond totaled Ps.22,897, Ps.30,880 and
Ps.16,022, respectively. In addition, the Company wrote-off Ps.15,679
of unamortized debt issuance cost related to the 2001 Yankee Bonds.
Under US GAAP, this consent fee and the write-off of unamortized debt
issuance cost would be recognized in earnings immediately and
considered as part of the cost of extinguishing the 2001 Yankee Bonds.
Under US GAAP, the loss on extinguishment of the 2001 Yankee Bonds
(which includes the consent fee) would have totaled Ps.47,929. Under
US GAAP, for the years ended December 31, 2003, 2002 F-42




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##### Table of Contents



and 2001, amortization of the debt issuance cost of the 2006 Yankee
Bond totaled Ps.17,999, Ps.16,096 and Ps.14,753, respectively.l.
    
    Debt issuance costs In August 2001, the Company exchanged
US$138.7 million of its US$250 million Yankee Bonds maturing in 2003
(2003 Yankee Bonds) for an additional US$128.3 million 2006 Yankee
Bonds and US$10.4 million Yankee Bonds maturing in 2008 (2008 Yankee
Bonds). Under Mexican GAAP, the Company capitalized Ps.109,593 of
fees and expenses, excluding consent fees, incurred in connection with
the exchange offering as debt issuance costs. During 2003, 2002 and
2001, the Company amortized Ps.28,693, Ps.26,332 and Ps.7,455,
respectively, in relation to these costs. In addition, the Company
wrote-off Ps.21,657 representing the unamortized debt issuance cost of
the 2003 Yankee Bonds.Under US GAAP, debt issuance costs, excluding consent fees, relating
to the exchange offering would be expensed since the terms of the 2006
and 2008 Yankee Bonds are not considered substantially different from
the 2003 Yankee Bonds. Furthermore, the unamortized portion of
original 2003 Yankee bonds, which totaled Ps.7,102, Ps.4,261 and
Ps.1,420 for the years ended December 31, 2003, 2002 and 2001,
respectively, would be amortized over the new term of the 2006 and
2008 Yankee Bonds.In September 2002, the Company initiated the process to register the
2009 Senior Notes. Under Mexican GAAP, the Company capitalized
Ps.26,487 of fees and expenses. Under US GAAP those expenses were
charged to operations in the condensed statement of operations, as the
Company could not complete the registration process.m.
    
    Impairment of long-lived assets For US GAAP purposes, beginning
on January 1, 2002, the Company follows SFAS No.144, Accounting for
the Impairment or Disposal of Long-Lived Assets.For the year ended December 31, 2001, the Company followed SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS Nos. 144 and 121 provide
criteria for when and under what circumstances an impairment loss
(write-down) should be recorded and the manner in which the write-down
should be measured. An evaluation of impairment is undertaken whenever
events or circumstances indicate that the carrying amount of an asset
may not be recoverable. Under SFAS Nos. 144 and 121, the impairment
criteria are met when the carrying value of assets exceeds the sum of
expected future cash flows (undiscounted and without interest charges)
of the related assets. If it is determined that an asset is impaired,
it is written down to its fair value.The Company tested certain long-lived assets for recoverability in
2003 and 2002 in response to significant adverse changes in business
climate occurring during these years (see Note 1.d). Under US GAAP,
certain assets being evaluated for recoverability had lower book
values than under Mexican GAAP and negative goodwill resulting from
acquisitions has reduced the US GAAP carrying value of the assets. As
such, in 2003 and 2002 the impairment charge recorded under Mexican
GAAP was greater than the impairment charge calculated under US GAAP.
As a result, during 2003 and 2002, the Company recognized an
adjustment to US GAAP net income (loss) of Ps.256,525 and Ps.776,744,
respectively. Theses expenses relate primarily to machinery and
equipment.n.
    
    Adjustment to loss on sale of subsidiary and discontinued
operationsAs described in Note 1.c, in October 2002, the Company
sold its shares of DPC. Additionally, as disclosed in Note 18, during
2003 the Company sold its investment in Pronal and the assets of its
molded pulp division, and approved a plan to sell a particleboard
plant located in Chihuahua. F-43




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##### Table of Contents



Historically, under US GAAP the carrying value of such subsidiary and
discontinued operations differed from the carrying value recorded
under Mexican GAAP due to deferred income taxes, negative goodwill,
fixed asset impairment, and the reversal of loss on sale of fixed
assets. As such, the Company reversed the amount of the US GAAP
cumulative prior period adjustments relating to DPC, Pronal, the
molded pulp division and the particleboard plant. In accordance with
SFAS No. 144, the sales of these components of the Company have been
presented as discontinued operations in the condensed statement of
income for all periods presented.o.
    
    Equity swap agreements In prior years, the Company has entered
into Equity Share Swap Transactions (collectively, Equity Swaps)
with financial institutions, with respect to its American Depository
Receipts (ADRs) at prices ranging from US$10.4489 to US$14.2813. The
Equity Swaps had notional amounts of US$6.06 at December 31, 2001
bearing interest at LIBOR plus 2.95% payable semiannually and was due
in 2002. Under Mexican GAAP, the Company recorded the fair value of
the Equity Swaps on the balance sheet, with a corresponding adjustment
to stockholders equity through December 31, 2000.Upon adoption of Bulletin C-2 under Mexican GAAP effective January 1,
2001, the Company recorded the fair value of the Equity Swaps with a
corresponding adjustment to the income (loss) for the period. Under US
GAAP, the fair value of the Equity Swaps was recorded in income (loss)
for the period. The Equity Swaps matured in May 2002; therefore, the
Company had no outstanding swaps at December 31, 2003 or 2002.p.
    
    Statement of cash flows Under Mexican GAAP, the Company
presents a consolidated statement of changes in financial position in
accordance with Bulletin B-12, Statement of Changes in Financial
Position, which identifies the generation and application of
resources by the differences between beginning and ending financial
statement balances in constant Mexican pesos. Bulletin B-12 also
requires that monetary and foreign exchange gains and losses be
treated as cash items for the determination of resources generated by
operations.In accordance with US GAAP, the Company follows SFAS No. 95,
Statement of Cash Flows, which is presented below excluding the
effects of inflation.q.
    
    Summarized financial information under US GAAP The condensed
consolidated balance sheets as of December 31, 2003 and 2002, and the
condensed consolidated statements of operations, changes in
stockholders equity and cash flows for the three years ended December
31, 2003, 2002 and 2001, reflecting US GAAP adjustments, are presented
below.Condensed consolidated balance sheets: 2003
    
    2002Total current assets
    
    Ps.
    3,879,520
    
    
    Ps.
    4,418,151Property, plant and equipment  Net
    
    
    10,183,703
    
    
    
    12,610,456Other assets  Net
    
    
    1,066,362
    
    
    
    536,460Total assets
    
    Ps.
    15,129,585
    
    
    Ps.
    17,565,067Current liabilities
    
    Ps.
    12,050,369
    
    
    Ps.
    10,739,951Total long-term liabilities
    
    
    4,213,037
    
    
    
    5,675,969Total liabilities
    
    
    16,263,406
    
    
    
    16,415,920Minority interest in consolidated subsidiaries
    
    
    58,687
    
    
    
    58,811Stockholders equity
    
    
    (1,192,508
    )
    
    
    1,090,336Total liabilities and stockholders equity
    
    Ps.
    15,129,585
    
    
    Ps.
    17,565,067
 F-44




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##### Table of Contents



Condensed consolidated statements of operations: 2003
    
    2002
    
    2001Net sales
    
    Ps.
    6,831,028
    
    
    Ps.
    6,510,982
    
    
    Ps.
    7,600,882Cost of sales and operating
expenses
    
    
    6,936,659
    
    
    
    6,620,573
    
    
    
    6,484,643Income (loss) from operations
    
    
    (105,631
    )
    
    
    (109,591
    )
    
    
    1,116,239Net comprehensive financing
cost
    
    
    (1,636,309
    )
    
    
    (1,539,438
    )
    
    
    (657,144
    )Other income (expenses)  Net
    
    
    (401,129
    )
    
    
    58,888
    
    
    
    (109,980
    )Income tax benefit (expense)
    
    
    13,972
    
    
    
    (95,040
    )
    
    
    (77,988
    )Minority interest in results
of consolidated subsidiaries
    
    
    2,602
    
    
    
    (12,172
    )
    
    
    (5,469
    )Income (loss) from
continuing operations
    
    
    (2,126,495
    )
    
    
    (1,697,353
    )
    
    
    265,658Discontinued operations  Net
    
    
    (93,436
    )
    
    
    (509,737
    )
    
    
    (16,737
    )Net income (loss)
    
    Ps.
    (2,219,931
    )
    
    Ps.
    (2,207,090
    )
    
    Ps.
    248,921Basic and diluted net income
(loss) per share of:Continuing operations
    
    Ps.
    (22.88
    )
    
    Ps.
    (18.04
    )
    
    Ps.
    2.82Discontinued operations
    
    
    (1.01
    )
    
    
    (5.42
    )
    
    
    (0.18
    )Ps.
    (23.88
    )
    
    Ps.
    (23.46
    )
    
    Ps.
    2.64Net income (loss)
    
    Ps.
    (2,219,931
    )
    
    Ps.
    (2,207,090
    )
    
    Ps.
    248,921Excess (insufficiency) in
restated stockholders
equity
    
    
    (11,320
    ))
    
    
    (1,277,700
    )
    
    
    70,009Additional liability for
employee retirement
obligations
    
    
    
    
    
    
    
    
    
    
    (133,290
    )Cumulative translation
adjustment of foreign
subsidiaries
    
    
    123,724
    
    
    
    357,351
    
    
    
    (77,481
    )US GAAP comprehensive income
(loss)
    
    Ps.
    (2,107,527
    )
    
    Ps.
    (3,127,439
    )
    
    Ps.
    108,159
 F-45




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##### Table of Contents



Changes in stockholders equity: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    1,090,336
    
    
    Ps.
    4,217,775Net income (loss) under US GAAP
    
    
    (2,219,931
    )
    
    
    (2,207,090
    )Excess (insufficiency) in
restated stockholders equity
    
    
    (11,320
    )
    
    
    (1,277,700
    )Cumulative translation
adjustment of foreign
subsidiaries
    
    
    123,724
    
    
    
    357,351Allowance for accounts
receivable due from
shareholders
    
    
    (175,317
    )Balance at end of the year
    
    Ps.
    (1,192,508
    )
    
    Ps.
    1,090,336
 Condensed consolidated statements of cash flows: 2003
    
    2002
    
    2001Operating activities:Income (loss) from
continuing operations
    
    Ps.
    (2,126,495
    )
    
    Ps.
    (1,697,353
    )
    
    Ps.
    265,658Items that did not require
resources
    
    
    1,389,634
    
    
    
    2,114,226
    
    
    
    309,227Changes in operating assets
and liabilities
    
    
    614,166
    
    
    
    482,342
    
    
    
    686,782Discontinued operations
    
    
    (191,428
    )
    
    
    (509,737
    )
    
    
    (16,737
    )Net resources generated by
(used in) operating
activities
    
    
    (314,123
    )
    
    
    389,478
    
    
    
    1,244,930Financing activities:Short-term and long-term
debt  Net
    
    
    (405,978
    )
    
    
    1,422,414
    
    
    
    (792,526
    )Other financing activities
    
    
    
    
    
    
    (50,027
    )
    
    
    (234,650
    )Net resources generated by
(used in) financing
activities
    
    
    (405,978
    )
    
    
    1,372,387
    
    
    
    (1,027,176
    )Investing activities:Acquisition of machinery
and equipment
    
    
    (106,719
    )
    
    
    (468,764
    )
    
    
    (932,949
    )Sale of (investment in)
subsidiaries
    
    
    924,620
    
    
    
    (746,887
    )
    
    
    (6,920
    )Other investments activities
    
    
    92,171
    
    
    
    (232,656
    )
    
    
    413,993Net resources generated by
(used in) investing
activities
    
    
    910,072
    
    
    
    (1,448,307
    )
    
    
    (525,876
    )Effect of inflation and
exchange rate changes on
cash and temporary
investments
    
    
    194,121
    
    
    
    (563,596
    )
    
    
    (13,611
    )Increase (decrease) in cash
and temporary investments
    
    
    384,092
    
    
    
    (250,038
    )
    
    
    (321,733
    )Balance at beginning of year
    
    
    265,863
    
    
    
    515,901
    
    
    
    837,634Balance at end of year
    
    Ps.
    649,955
    
    
    Ps.
    265,863
    
    
    Ps.
    515,901Supplemental cash flow
information:Interest paid
    
    Ps.
    143,770
    
    
    Ps.
    803,755
    
    
    Ps.
    970,035Income tax and tax on asset
paid
    
    
    163,774
    
    
    
    195,809
    
    
    
    251,605Ps.
    307,544
    
    
    Ps.
    999,564
    
    
    Ps.
    1,221,640
 F-46




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##### Table of Contents



25.
    
    Reconciliation of Mexican GAAP to US GAAP  a.
    
    Reconciliation of net income (loss) for the year 2003
    
    2002
    
    2001Net income (loss)
corresponding to majority
interest under Mexican
GAAP
    
    Ps.
    (3,348,336
    )
    
    Ps.
    (3,742,169
    )
    
    Ps.
    861,314Deferred income taxes
    
    
    64,879
    
    
    
    (633,171
    )
    
    
    (300,463
    )Deferred employee
statutory profit sharing
expense
    
    
    253,268
    
    
    
    (48,269
    )
    
    
    15,389Purchase accounting
adjustments:Amortization of
negative goodwill
    
    
    
    
    
    
    
    
    
    
    (467,036
    )Depreciation
    
    
    156,926
    
    
    
    156,926
    
    
    
    173,348Reversal of loss on sale
of discontinued operations
    
    
    71,372Reversal of loss on sale
of fixed assets
    
    
    
    
    
    
    (128,108
    )
    
    
    128,108Effect of fifth amendment
to Bulletin B-10
    
    
    (67,358
    )
    
    
    (64,050
    )
    
    
    (64,525
    )Loss on extinguishment of
Yankee Bonds
    
    
    14,717
    
    
    
    14,717
    
    
    
    (32,250
    )Debt issuance costs
    
    
    29,962
    
    
    
    (2,734
    )
    
    
    (81,901
    )Capitalized financing costs
    
    
    11,910
    
    
    
    32,439
    
    
    
    26,939Effect of Bulletin B-15 on
prior years
    
    
    
    
    
    
    55,472
    
    
    
    (8,722
    )Adjustment to fixed asset
impairment
    
    
    256,525
    
    
    
    776,744Adjustment to loss on sale
of subsidiary
    
    
    246,380
    
    
    
    1,539,564Equity swaps
    
    
    
    
    
    
    (50,875
    )Deferred start up and
research and development
costs
    
    
    93,058
    
    
    
    (104,650
    )Effect of US GAAP
adjustments on minority
interest
    
    
    (3,234
    )
    
    
    (8,926
    )
    
    
    (1,280
    )US GAAP net income (loss)
    
    Ps.
    (2,219,931
    )
    
    Ps.
    (2,207,090
    )
    
    Ps.
    248,921
  Under US GAAP, the monetary position effect of the statement of
operations adjustments is included in each adjustment, except for the
capitalization of the comprehensive financing cost, intangible assets
and goodwill, which are non-monetary. F-47




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##### Table of Contents



b.
    
    Reconciliation of stockholders equity 2003
    
    2002Total stockholders equity corresponding to
majority interest under Mexican GAAP
    
    Ps.
    1,533,037
    
    
    Ps.
    4,568,035Deferred income taxes
    
    
    (693,794
    )
    
    
    (964,344
    )Deferred employee statutory profit sharing
    
    
    (814,337
    )
    
    
    (1,067,605
    )Purchase accounting adjustments:Accumulated negative goodwill
    
    
    (4,090,350
    )
    
    
    (4,809,394
    )Accumulated depreciation
    
    
    793,118
    
    
    
    751,958Effect of fifth amendment to Bulletin B-10:Fixed assets
    
    
    2,845,154
    
    
    
    3,687,143Fixed assets accumulated depreciation
    
    
    (1,711,026
    )
    
    
    (1,437,716
    )Repurchase of Yankee Bonds:Loss on extinguishment of Yankee Bonds
    
    
    (33,516
    )
    
    
    (33,516
    )Accumulated amortization
    
    
    30,701
    
    
    
    15,984Debt issuance costs:Reversal of capitalized debt issuance costs
    
    
    (114,704
    )
    
    
    (114,704
    )Accumulated amortization
    
    
    60,030
    
    
    
    30,068Capitalized financing costs:Capitalized financing costs
    
    
    72,690
    
    
    
    60,557Accumulated depreciation
    
    
    (1,402
    )
    
    
    (1,180
    )Effect of restatement of prior year amounts
per Bulletin B-15
    
    
    
    
    
    
    (32,987
    )Adjustment to fixed asset impairment
    
    
    934,393
    
    
    
    776,744Adjustment to loss on sale of subsidiary
    
    
    
    
    
    
    (246,380
    )Deferred start up and research and
development costs
    
    
    (11,592
    )
    
    
    (104,650
    )Effect of US GAAP adjustments on minority
interest
    
    
    9,089
    
    
    
    12,323Total US GAAP stockholders equity (deficit)
    
    Ps.
    (1,192,508
    )
    
    Ps.
    1,090,336
  c.
    
    Reconciliation of comprehensive income (loss) 2003
    
    2002
    
    2001Majority comprehensive
income (loss) under
Mexican GAAP
    
    Ps.
    (2,859,681
    )
    
    Ps.
    (3,672,724
    )
    
    Ps.
    (159,328
    )US GAAP adjustments:Net income (loss)
    
    
    1,128,405
    
    
    
    1,535,079
    
    
    
    (612,393
    )Translation adjustment
    
    
    32,987
    
    
    
    393,647
    
    
    
    1,079,237Result of holding
non-monetary assets
    
    
    (409,238
    )
    
    
    (1,383,441
    )
    
    
    (199,357
    )Comprehensive income (loss)
    
    Ps.
    (2,107,527
    )
    
    Ps.
    (3,127,439
    )
    
    Ps.
    108,159
 F-48




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##### Table of Contents



26.
    
    Future impact of recently issued accounting standards under US GAAP not yet in effect  a.
    
    SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities) In April 2003 the FASB issued
SFAS No. 149, which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133. The changes in this Statement improve financial
reporting by requiring that contracts with comparable characteristics
be accounted for similarly. The new standard will be effective for
contracts entered into or modified after September 30, 2003, except as
stated below and for hedging relationships designated after September
3, 2003. In addition, except as stated below, all provisions of this
Statement should be applied prospectively.The provisions of this Statement that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters
that began prior to September 15, 2003, should continue to be applied
in accordance with their respective effective dates. The Company does
not anticipate that this new standard will have a significant impact
on its financial position or results of operations.b.
    
    FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46) In January 2003, the FASB issued FIN 46. FIN 46
clarified the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 was effective immediately
for all variable interests held by the Company in a variable interest
entity created after January 31, 2003. For a variable interest held by
the Company in a variable interest entity created before February 1,
2003, the Company will be required to apply the provisions of FIN 46
as of December 31, 2004. The Company does not currently have any
variable interests in a variable interest entity.  27.
    
    Guarantor financial informationOn June 24, 2002, the Company issued US$175 million
in 133/4 Senior
Notes due 2009. These notes are guaranteed, jointly and severally, on an
unsecured basis by certain wholly owned and non-wholly owned subsidiaries
of the Company. Additionally, upon the issuance of the notes, the initial
subsidiary guarantors also equally and ratably guaranteed the 2006 and 2008
Notes.Presented below is condensed consolidating financial information as of
December 31, 2003 and 2002 and for the three years ended December 31, 2003,
2002 and 2001 for CODUSA; non-wholly owned combined guarantor subsidiaries;
wholly owned combined guarantor subsidiaries; the combined non-guarantor
subsidiaries; eliminations and; the Companys consolidated totals.Where applicable the equity method has been used by CODUSA and guarantors
with respect to their investment in certain subsidiaries for the respective
periods presented. The Company has not presented separate financial
statements for the wholly owned guarantor subsidiaries since management has
determined that such information is not material to investors. The Company
has presented separate financial statements of the non-wholly owned
subsidiaries. Other disclosures concerning the guarantor subsidiaries were
not included because management has determined that such information is not
material to investors. F-49




---



##### Table of Contents



Condensed consolidating balance sheet
As of December 31, 2003 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    Owned
    
    Owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedCash and temporary investments
    
    Ps.
    411
    
    
    Ps.
    1,751
    
    
    Ps.
    527,527
    
    
    Ps.
    120,266
    
    
    Ps.
    
    
    
    Ps.
    649,955Due from related parties
    
    
    6,569,031
    
    
    
    4,042,965
    
    
    
    4,854,618
    
    
    
    2,477,967
    
    
    
    (17,930,298
    )
    
    
    14,283Other current assets
    
    
    83,586
    
    
    
    363,127
    
    
    
    1,746,666
    
    
    
    1,125,780
    
    
    
    (317,533
    )
    
    
    3,001,626Investment in shares of
subsidiaries and/or affiliated
companies
    
    
    6,875,417
    
    
    
    
    
    
    
    246,028
    
    
    
    2,299,829
    
    
    
    (9,421,274
    )Property, plant and equipment  Net
    
    
    401,552
    
    
    
    3,422,988
    
    
    
    3,282,127
    
    
    
    4,234,459
    
    
    
    
    
    
    
    11,341,126Other assets
    
    
    889,726
    
    
    
    75,027
    
    
    
    383,230
    
    
    
    203,049
    
    
    
    (600,348
    )
    
    
    950,684Total assets
    
    Ps.
    14,819,723
    
    
    Ps.
    7,905,858
    
    
    Ps.
    11,040,196
    
    
    Ps.
    10,461,350
    
    
    Ps.
    (28,269,453
    )
    
    Ps.
    15,957,674Due to related parties
    
    Ps.
    3,864,966
    
    
    Ps.
    4,820,656
    
    
    Ps.
    8,252,532
    
    
    Ps.
    1,216,928
    
    
    Ps.
    (18,155,082
    )
    
    Ps.Other current liabilities
    
    
    9,379,240
    
    
    
    453,509
    
    
    
    473,571
    
    
    
    1,559,178
    
    
    
    (317,826
    )
    
    
    11,547,672Total long-term liabilities
    
    
    42,480
    
    
    
    933,352
    
    
    
    1,158,209
    
    
    
    1,275,496
    
    
    
    (600,348
    )
    
    
    2,809,189Total liabilities
    
    
    13,286,686
    
    
    
    6,207,517
    
    
    
    9,884,312
    
    
    
    4,051,602
    
    
    
    (19,073,256
    )
    
    
    14,356,861Capital stock
    
    
    4,742,288
    
    
    
    4,614,832
    
    
    
    3,811,539
    
    
    
    12,519,089
    
    
    
    (20,945,460
    )
    
    
    4,742,288Additional paid-in capital
    
    
    1,387,056
    
    
    
    
    
    
    
    664
    
    
    
    
    
    
    
    (664
    )
    
    
    1,387,056Other stockholders equity accounts
    
    
    (4,596,307
    )
    
    
    (2,916,491
    )
    
    
    (2,656,319
    )
    
    
    (6,109,341
    )
    
    
    11,682,151
    
    
    
    (4,596,307
    )Majority stockholder equity
    
    
    1,533,037
    
    
    
    1,698,341
    
    
    
    1,155,884
    
    
    
    6,409,748
    
    
    
    (9,263,973
    )
    
    
    1,533,037Minority stockholders equity in
consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,776
    
    
    
    67,776Total stockholders equity
    
    
    1,533,037
    
    
    
    1,698,341
    
    
    
    1,155,884
    
    
    
    6,409,748
    
    
    
    (9,196,197
    )
    
    
    1,600,813Total liabilities and
stockholders equity
    
    Ps.
    14,819,723
    
    
    Ps.
    7,905,858
    
    
    Ps.
    11,040,196
    
    
    Ps.
    10,461,350
    
    
    Ps.
    (28,269,453
    )
    
    Ps.
    15,957,674Majority stockholders equity under
Mexican GAAP
    
    Ps.
    1,533,037
    
    
    Ps.
    1,698,341
    
    
    Ps.
    1,155,884
    
    
    Ps.
    6,409,748
    
    
    Ps.
    (9,263,973
    )
    
    Ps.
    1,533,037US GAAP adjustments:Deferred income taxes
    
    
    (704,034
    )
    
    
    (267,420
    )
    
    
    66,294
    
    
    
    211,366
    
    
    
    
    
    
    
    (693,794
    )Deferred employee profit sharing
    
    
    
    
    
    
    (348,502
    )
    
    
    (289,522
    )
    
    
    (176,313
    )
    
    
    
    
    
    
    (814,337
    )Purchase accounting adjustments:Accumulated negative goodwill
    
    
    (1,787,416
    )
    
    
    (90,055
    )
    
    
    501,495
    
    
    
    (2,302,934
    )
    
    
    (411,440
    )
    
    
    (4,090,350
    )Accumulated depreciation
    
    
    367,863
    
    
    
    28,526
    
    
    
    (42,852
    )
    
    
    425,254
    
    
    
    14,327
    
    
    
    793,118Effect of fifth amendment of
Bulletin B-10:Fixed assets
    
    
    90,617
    
    
    
    400,866
    
    
    
    720,904
    
    
    
    1,632,767
    
    
    
    
    
    
    
    2,845,154Fixed assets accumulated
depreciation
    
    
    (12,913
    )
    
    
    93,930
    
    
    
    113,106
    
    
    
    (1,905,148
    )
    
    
    
    
    
    
    (1,711,025
    )Repurchase of Yankee Bonds:Loss on extinguishment of
Yankee Bonds
    
    
    (33,516
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,516
    )Accumulated amortization
    
    
    30,701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,701Debt issuance costs:Reversal of capitalized debt
issuance costs
    
    
    (114,704
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,704
    )Accumulated amortization
    
    
    60,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,030Capitalization of financing cost:Capitalization of financing cost
    
    
    12,133
    
    
    
    
    
    
    
    
    
    
    
    60,557
    
    
    
    
    
    
    
    72,690Accumulated amortization
    
    
    (222
    )
    
    
    
    
    
    
    
    
    
    
    (1,180
    )
    
    
    
    
    
    
    (1,402
    )Adjustment to fixed asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    934,393
    
    
    
    
    
    
    
    934,393Deferred start-up and research and
development costs
    
    
    
    
    
    
    (11,592
    )
    
    
    (68,618
    )
    
    
    68,618
    
    
    
    
    
    
    
    (11,592
    )Investment in subsidiaries
    
    
    (634,084
    )
    
    
    
    
    
    
    (92,890
    )
    
    
    
    
    
    
    726,974Effect of US GAAP adjustments on
minority interest
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    9,085
    
    
    
    
    
    
    
    9,089Total US GAAP stokholders
equity (deficit)
    
    Ps.
    (1,192,508
    )
    
    Ps.
    1,504,094
    
    
    Ps.
    2,063,805
    
    
    Ps.
    5,366,213
    
    

    Ps.
    (8,934,112
    )
    
    Ps.
    (1,192,508
    )
 F-50




---



##### Table of Contents



Condensed consolidating statement of operations
For the year ended December 31, 2003 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    Ps.
    
    
    
    Ps.
    1,742,112
    
    
    Ps.
    3,736,352
    
    
    Ps.
    3,919,583
    
    
    Ps.
    (2,567,019
    )
    
    Ps.
    6,831,028Cost of sales and operating expenses
    
    
    5,306
    
    
    
    1,744,040
    
    
    
    3,368,810
    
    
    
    4,061,826
    
    
    
    (2,655,334
    )
    
    
    6,524,648Income (loss) from operations
    
    
    (5,306
    )
    
    
    (1,928
    )
    
    
    367,542
    
    
    
    (142,243
    )
    
    
    88,315
    
    
    
    306,380Net comprehensive financing cost
    
    
    (517,496
    )
    
    
    (216,443
    )
    
    
    (650,896
    )
    
    
    (140,325
    )
    
    
    (73,019
    )
    
    
    (1,598,179
    )Other income (expenses) Net
    
    
    (124,079
    )
    
    
    (492,814
    )
    
    
    25,255
    
    
    
    (827,564
    )
    
    
    (91,987
    )
    
    
    (1,511,189
    )Income tax and employee statutory
profit sharing expense
    
    
    233,708
    
    
    
    163,785
    
    
    
    168,736
    
    
    
    (494,975
    )
    
    
    (73,203
    )
    
    
    (1,949
    )Equity in losses of subsidiaries
and/or affiliated companies
    
    
    (2,978,520
    )
    
    
    (1,756
    )
    
    
    (109,957
    )
    
    
    (912,723
    )
    
    
    4,002,956Loss from continuing operations
    
    
    (3,391,693
    )
    
    
    (549,156
    )
    
    
    (199,320
    )
    
    
    (2,517,830
    )
    
    
    3,853,062
    
    
    
    (2,804,937
    )Discontinued operations  Net
    
    
    43,357
    
    
    
    
    
    
    
    (188,577
    )
    
    
    (507,786
    )
    
    
    103,771
    
    
    
    (549,235
    )Consolidated net loss
    
    Ps.
    (3,348,336
    )
    
    Ps.
    (549,156
    )
    
    Ps.
    (387,897
    )
    
    Ps.
    (3,025,616
    )
    
    Ps.
    3,956,833
    
    
    Ps.
    (3,354,172
    )Net income (loss) corresponding to
majority interest under Mexican
GAAP
    
    Ps.
    (3,348,336
    )
    
    Ps.
    (549,156
    )
    
    Ps.
    (387,897
    )
    
    Ps.
    (3,024,297
    )
    
    Ps.
    3,961,350
    
    
    Ps.
    (3,348,336
    )US GAAP adjustments:Deferred income taxes
    
    
    227,681
    
    
    
    (81,296
    )
    
    
    58,978
    
    
    
    (140,484
    )
    
    
    
    
    
    
    64,879Deferred employee profit sharing
    
    
    
    
    
    
    77,727
    
    
    
    219,442
    
    
    
    (43,901
    )
    
    
    
    
    
    
    253,268Purchase accounting adjustments:Depreciation
    
    
    58,320
    
    
    
    2,900
    
    
    
    (16,325
    )
    
    
    98,605
    
    
    
    13,426
    
    
    
    156,926Reversal of loss on sales of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,372
    
    
    
    
    
    
    
    71,372Effect of fifth amendment to
Bulletin B-10
    
    
    (1,472
    )
    
    
    4,520
    
    
    
    (22,744
    )
    
    
    (47,662
    )
    
    
    
    
    
    
    (67,358
    )Loss on extinguishment of Yankee
Bonds
    
    
    14,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,717Debt issuance costs
    
    
    29,962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,962Capitalization of financing cost
    
    
    11,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,910Adjustment to fixed asset impairment
    
    
    
    
    
    
    25,624
    
    
    
    
    
    
    
    230,901
    
    
    
    
    
    
    
    256,525Adjustment to loss on sale of
subsidiary
    
    
    246,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246,380Deferred start-up and research and
development costs
    
    
    
    
    
    
    3,241
    
    
    
    
    
    
    
    89,817
    
    
    
    
    
    
    
    93,058Investments in subsidiaries
    
    
    540,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (540,907
    )Effect of US GAAP adjustments on
minority interest
    
    
    
    
    
    
    
    
    
    
    787
    
    
    
    (4,021
    )
    
    
    
    
    
    
    (3,234
    )Net loss for the year
under US GAAP
    
    Ps.
    (2,219,931
    )
    
    Ps.
    (516,440
    )
    
    Ps.
    (147,759
    )
    
    Ps.
    (2,769,670
    )
    
    Ps.
    3,433,869
    
    
    Ps.
    (2,219,931
    )
 F-51




---



##### Table of Contents



Condensed consolidating statement of changes in financial position
For the year ended December 31, 2003 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Loss from continuing operations
    
    Ps.
    (3,391,693
    )
    
    Ps.
    (549,156
    )
    
    Ps.
    (199,320
    )
    
    Ps.
    (2,517,830
    )
    
    Ps.
    3,853,062
    
    
    Ps.
    (2,804,937
    )Items that did not require
(generate) resources
    
    
    2,567,047
    
    
    
    431,343
    
    
    
    961,491
    
    
    
    2,216,980
    
    
    
    (4,617,452
    )
    
    
    1,559,409Changes in operating assets and
liabilities
    
    
    2,541,695
    
    
    
    81,930
    
    
    
    (1,251,476
    )
    
    
    (883,514
    )
    
    
    493,727
    
    
    
    982,362Discontinued operations and
extraordinary loss
    
    
    43,357
    
    
    
    
    
    
    
    (654,498
    )
    
    
    328,637
    
    
    
    103,772
    
    
    
    (178,732
    )Net resources used in (generated
by) operating activities
    
    
    1,760,406
    
    
    
    (35,883
    )
    
    
    (1,143,803
    )
    
    
    (855,727
    )
    
    
    (166,891
    )
    
    
    (441,898
    )Financing activities:Short-term and long-term debt  Net
    
    
    141,333
    
    
    
    (2,020
    )
    
    
    (14,001
    )
    
    
    (272,806
    )
    
    
    
    
    
    
    (146,570
    )Other financing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90,737
    
    
    
    
    
    
    
    90,737Net resources generated by (used
in) financing activities
    
    
    141,333
    
    
    
    (2,020
    )
    
    
    (14,001
    )
    
    
    (182,069
    )
    
    
    
    
    
    
    (55,833
    )Investing activities:Acquisition of machinery and
equipment
    
    
    
    
    
    
    39,836
    
    
    
    (30,810
    )
    
    
    (33,270
    )
    
    
    (82,475
    )
    
    
    (106,719
    )Sale of (investment in) subsidiaries
    
    
    (2,026,698
    )
    
    
    
    
    
    
    1,094,841
    
    
    
    719,986
    
    
    
    211,871Revenues from sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    612,582
    
    
    
    312,038
    
    
    
    
    
    
    
    924,620Other investing activities
    
    
    123,432
    
    
    
    (869
    )
    
    
    (498
    )
    
    
    (66,465
    )
    
    
    36,571
    
    
    
    92,171Net resources generated by (used
in) investing activities
    
    
    (1,903,266
    )
    
    
    38,967
    
    
    
    1,676,115
    
    
    
    932,289
    
    
    
    165,967
    
    
    
    910,072Increase (decrease) in cash and
temporary investments:
    
    
    (1,527
    )
    
    
    1,064
    
    
    
    518,311
    
    
    
    (105,507
    )
    
    
    
    
    
    
    412,341Balance at beginning of year
    
    
    1,938
    
    
    
    687
    
    
    
    9,216
    
    
    
    225,773
    
    
    
    
    
    
    
    237,614Balance at end of year
    
    Ps.
    411
    
    
    Ps.
    1,751
    
    
    Ps.
    527,527
    
    
    Ps.
    120,266
    
    
    Ps.
    
    
    
    Ps.
    649,955
 F-52




---



##### Table of Contents



Condensed consolidating statements of cash flow
For the year ended December 31, 2003 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    Owned
    
    Owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Income (loss) from continuing
operations
    
    Ps.
    (2,713,251
    )
    
    Ps.
    (516,440
    )
    
    Ps.
    40,818
    
    
    Ps.
    (2,263,203
    )
    
    Ps.
    3,325,581
    
    
    Ps.
    (2,126,495
    )Items that did not require
(generate) resources
    
    
    2,496,225
    
    
    
    403,411
    
    
    
    781,238
    
    
    
    2,353,907
    
    
    
    (4,645,147
    )
    
    
    1,389,634Changes in operating assets and
liabilities
    
    
    1,640,136
    
    
    
    74,253
    
    
    
    (1,344,681
    )
    
    
    (1,257,301
    )
    
    
    1,501,759
    
    
    
    614,166Discontinued operations and
extraordinary loss
    
    
    493,320
    
    
    
    
    
    
    
    (654,498
    )
    
    
    315,941
    
    
    
    (346,191
    )
    
    
    (191,428
    )Net resources generated by
(using in) operating
activities
    
    
    1,916,430
    
    
    
    (38,776
    )
    
    
    (1,177,123
    )
    
    
    (850,656
    )
    
    
    (163,998
    )
    
    
    (314,123
    )Financing activities:Short-term and logn-term debt  Net
    
    
    (118,075
    )
    
    
    (1,648
    )
    
    
    (13,449
    )
    
    
    (272,806
    )
    
    
    
    
    
    
    (405,978
    )Net resources generateb by
(used in) financing
activities
    
    
    (118,075
    )
    
    
    (1,648
    )
    
    
    (13,449
    )
    
    
    (272,806
    )
    
    
    
    
    
    
    (405,978
    )Investing activities:Acquisition of machinery and
equipment
    
    
    
    
    
    
    (31,295
    )
    
    
    (42,154
    )
    
    
    (33,270
    )
    
    
    
    
    
    
    (106,719
    )Sale of (investment in) subsidiaries
    
    
    (2,026,698
    )
    
    
    
    
    
    
    1,094,841
    
    
    
    719,986
    
    
    
    211,871Income for sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    612,582
    
    
    
    312,038
    
    
    
    
    
    
    
    924,620Other investing activities
    
    
    123,432
    
    
    
    72,783
    
    
    
    10,294
    
    
    
    (66,465
    )
    
    
    (47,873
    )
    
    
    92,171Net resources generate by
(used in) investing
activities
    
    
    (1,903,266
    )
    
    
    41,488
    
    
    
    1,675,563
    
    
    
    932,289
    
    
    
    163,998
    
    
    
    910,072Effect of inflation and exchange
rate changes on cash and cash
equivalents
    
    
    103,384
    
    
    
    
    
    
    
    
    
    
    
    90,737
    
    
    
    
    
    
    
    194,121Increase (decrease) in cash and
temporary investments
    
    
    (1,527
    )
    
    
    1,064
    
    
    
    484,991
    
    
    
    (100,436
    )
    
    
    
    
    
    
    384,092Balance at beginning of year
    
    
    1,938
    
    
    
    687
    
    
    
    42,536
    
    
    
    220,702
    
    
    
    
    
    
    
    265,863Balance end of year
    
    Ps.
    411
    
    
    Ps.
    1,751
    
    
    Ps.
    527,527
    
    
    Ps.
    120,266
    
    
    Ps.
    
    
    
    Ps.
    649,955
 F-53




---



##### Table of Contents



Condensed consolidating balance sheet
As of December 31, 2002 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    Owned
    
    Owned
    
    subsidiaries
    
    Eliminations
    
    
    ConsolidatedCash and temporary investments
    
    Ps.
    1,938
    
    
    Ps.
    687
    
    
    Ps.
    9,216
    
    
    Ps.
    225,773
    
    
    Ps.
    
    
    
    
    Ps.
    237,614Due from related parties
    
    
    6,052,389
    
    
    
    417,818
    
    
    
    1,132,011
    
    
    
    732,268
    
    
    
    (8,143,179
    )
    
    
    
    191,307Other current assets
    
    
    14,947
    
    
    
    389,643
    
    
    
    1,541,235
    
    
    
    1,444,715
    
    
    
    (119,826
    )
    
    
    
    3,270,714Investment in shares of subsidiaries
and/or affiliated companies
    
    
    6,894,009
    
    
    
    140,286
    
    
    
    350,484
    
    
    
    
    
    
    
    (7,384,779
    )Property, plant and equipment  Net
    
    
    450,476
    
    
    
    3,364,157
    
    
    
    3,592,495
    
    
    
    4,623,384
    
    
    
    
    
    
    
    
    12,030,512Other assets
    
    
    753,730
    
    
    
    85,239
    
    
    
    898,799
    
    
    
    953,670
    
    
    
    (348,439
    )
    
    
    
    2,342,999Total assets
    
    Ps.
    14,167,489
    
    
    Ps.
    4,397,830
    
    
    Ps.
    7,524,240
    
    
    Ps.
    7,979,810
    
    
    Ps.
    (15,996,223
    )
    
    
    Ps.
    18,073,146Due to related parties
    
    Ps.
    1,640,314
    
    
    Ps.
    1,221,948
    
    
    Ps.
    4,233,861
    
    
    Ps.
    158,879
    
    
    Ps.
    (7,239,412
    )
    
    
    Ps.
    5,590Other current liabilities
    
    
    7,855,482
    
    
    
    304,323
    
    
    
    1,212,886
    
    
    
    1,514,269
    
    
    
    (1,011,757
    )
    
    
    
    9,875,203Total long term-liabilities
    
    
    103,658
    
    
    
    921,491
    
    
    
    1,341,151
    
    
    
    1,535,327
    
    
    
    (348,442
    )
    
    
    
    3,553,185Total liabilities
    
    
    9,599,454
    
    
    
    2,447,762
    
    
    
    6,777,898
    
    
    
    3,208,475
    
    
    
    (8,599,611
    )
    
    
    
    13,433,978Capital stock
    
    
    4,857,963
    
    
    
    4,289,289
    
    
    
    1,717,076
    
    
    
    3,336,226
    
    
    
    (9,342,591
    )
    
    
    
    4,857,963Treasury stock
    
    
    (115,675
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (115,675
    )Additional paid-in capital
    
    
    1,387,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,387,056Other stockholders equity accounts
    
    
    (1,561,309
    )
    
    
    2,339,221
    
    
    
    (1,107,651
    )
    
    
    1,831,303
    
    
    
    1,615,569
    
    
    
    
    (1,561,309
    )Majority stockholders equity
    
    
    4,568,035
    
    
    
    1,950,068
    
    
    
    609,425
    
    
    
    5,167,529
    
    
    
    (7,727,022
    )
    
    
    
    4,568,035Minority stockholders equity in
consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    136,917
    
    
    
    (396,194
    )
    
    
    330,410
    
    
    
    
    71,133Total stockholders equity
    
    
    4,568,035
    
    
    
    1,950,068
    
    
    
    746,342
    
    
    
    4,771,335
    
    
    
    (7,396,612
    )
    
    
    
    4,639,168Total liabilities and
stockholders equity
    
    Ps.
    14,167,489
    
    
    Ps.
    4,397,830
    
    
    Ps.
    7,524,240
    
    
    Ps.
    7,979,810
    
    
    Ps.
    (15,996,223
    )
    
    
    Ps.
    18,073,146Majority stockholders equity under
Mexican GAAP
    
    Ps.
    4,568,035
    
    
    Ps.
    1,950,068
    
    
    Ps.
    609,425
    
    
    Ps.
    5,167,529
    
    
    Ps.
    (7,727,022
    )
    
    
    Ps.
    4,568,035US GAAP adjustments:Deferred income taxes
    
    
    (503,321
    )
    
    
    (286,499
    )
    
    
    (535,611
    )
    
    
    361,087
    
    
    
    
    
    
    
    
    (964,344
    )Deferred employee profit sharing
    
    
    
    
    
    
    (406,657
    )
    
    
    (531,423
    )
    
    
    (129,525
    )
    
    
    
    
    
    
    
    (1,067,605
    )Purchase accounting adjustments:Accumulated negative goodwill
    
    
    (1,787,417
    )
    
    
    
    
    
    
    411,440
    
    
    
    (3,021,978
    )
    
    
    (411,439
    )
    
    
    
    (4,809,394
    )Accumulated depreciation
    
    
    309,543
    
    
    
    
    
    
    
    (901
    )
    
    
    442,415
    
    
    
    901
    
    
    
    
    751,958Effect of fifth amendment of
Bulletin B-10:Fixed assets
    
    
    58,806
    
    
    
    587,662
    
    
    
    638,068
    
    
    
    2,402,607
    
    
    
    
    
    
    
    
    3,687,143Fixed assets accumulated
depreciation
    
    
    (5,013
    )
    
    
    92,502
    
    
    
    200,477
    
    
    
    (1,725,682
    )
    
    
    
    
    
    
    
    (1,437,716
    )Repurchase of Yankee Bonds:Loss on extinguishment of Yankee
Bonds
    
    
    (33,516
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,516
    )Accumulated amortization
    
    
    15,984
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    15,984Debt issuance costs:Reversal of capitalized debt
issuance costs
    
    
    (114,704
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,704
    )Accumulated amortization
    
    
    30,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,068Capitalization of financing cost:Capitalization of financing cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,557
    
    
    
    
    
    
    
    
    60,557Accumulated amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,180
    )
    
    
    
    
    
    
    
    (1,180
    )Effect of restatement of prior year
amounts per Bulletin B-15
    
    
    (32,987
    )
    
    
    
    
    
    
    
    
    
    
    (32,987
    )
    
    
    32,987
    
    
    
    
    (32,987
    )Adjustment to fixed asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    776,744
    
    
    
    
    
    
    
    
    776,744Adjustment to loss on sale of
subsidiary
    
    
    (246,380
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246,380
    )Deferred start-up and research and
development costs
    
    
    
    
    
    
    (14,833
    )
    
    
    (68,619
    )
    
    
    (21,198
    )
    
    
    
    
    
    
    
    (104,650
    )Investment in subsidiaries
    
    
    (1,168,762
    )
    
    
    
    
    
    
    (92,890
    )
    
    
    
    
    
    
    1,261,652Effect of US GAAP adjustments on
minority interest
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    12,319
    
    
    
    
    
    
    
    
    12,323Total US GAAP stockholders equity
    
    Ps.
    1,090,336
    
    
    Ps.
    1,922,243
    
    
    Ps.
    629,970
    
    
    Ps.
    4,290,708
    
    
    Ps.
    (6,842,921
    )
    
    
    Ps.
    1,090,336
 F-54




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##### Table of Contents



Condensed consolidating statement of operations
For the year ended December 31, 2002 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    Ps.
    
    
    
    Ps.
    1,564,591
    
    
    Ps.
    3,607,396
    
    
    Ps.
    4,986,348
    
    
    Ps.
    (2,033,838
    )
    
    Ps.
    8,124,497Cost of sales and operating expenses
    
    
    11,853
    
    
    
    1,380,580
    
    
    
    3,158,770
    
    
    
    3,138,069
    
    
    
    (61,401
    )
    
    
    7,627,871Income (loss) from operations
    
    
    (11,853
    )
    
    
    184,011
    
    
    
    448,626
    
    
    
    1,848,279
    
    
    
    (1,972,437
    )
    
    
    496,626Net comprehensive financing cost
    
    
    (199,383
    )
    
    
    (199,903
    )
    
    
    (850,277
    )
    
    
    (343,888
    )
    
    
    (88,418
    )
    
    
    (1,681,869
    )Other expenses Net
    
    
    (1,467,376
    )
    
    
    (429,245
    )
    
    
    (106,984
    )
    
    
    (1,080,787
    )
    
    
    (42,570
    )
    
    
    (3,126,962
    )Income tax and employee statutory
profit sharing expense
    
    
    406,905
    
    
    
    270,147
    
    
    
    239,568
    
    
    
    (240,479
    )
    
    
    
    
    
    
    676,141Equity in income (losses) of
subsidiaries and/or affiliated
companies
    
    
    (2,470,462
    )
    
    
    (48,092
    )
    
    
    (44,963
    )
    
    
    
    
    
    
    2,563,517Loss from continuing operations
    
    
    (3,742,169
    )
    
    
    (223,082
    )
    
    
    (314,030
    )
    
    
    183,125
    
    
    
    460,092
    
    
    
    (3,636,064
    )Discontinued operations  Net
    
    
    
    
    
    
    
    
    
    
    (29,695
    )
    
    
    (159,970
    )
    
    
    86,805
    
    
    
    (102,860
    )Consolidated net income (loss)
    
    Ps.
    (3,742,169
    )
    
    Ps.
    (223,082
    )
    
    Ps.
    (343,725
    )
    
    Ps.
    23,155
    
    
    Ps.
    546,897
    
    
    Ps.
    (3,738,924
    )Net income (loss) corresponding to
majority interest under Mexican
GAAP
    
    Ps.
    (3,742,169
    )
    
    Ps.
    (223,082
    )
    
    Ps.
    (343,725
    )
    
    Ps.
    23,155
    
    
    Ps.
    546,897
    
    
    Ps.
    (3,738,924
    )US GAAP adjustments:Deferred income taxes
    
    
    (520,932
    )
    
    
    (152,409
    )
    
    
    537,650
    
    
    
    (632,876
    )
    
    
    135,396
    
    
    
    (633,171
    )Deferred employee profit sharing
    
    
    
    
    
    
    (12,139
    )
    
    
    220,577
    
    
    
    (267,733
    )
    
    
    11,026
    
    
    
    (48,269
    )Purchase accounting adjustments:Depreciation
    
    
    46,371
    
    
    
    
    
    
    
    
    
    
    
    110,555
    
    
    
    
    
    
    
    156,926Effect of fifth amendment to
Bulletin B-10
    
    
    (1,381
    )
    
    
    26,663
    
    
    
    (4,522
    )
    
    
    (41,378
    )
    
    
    (43,432
    )
    
    
    (64,050
    )Reversal of loss on sale of fixed
assets
    
    
    (128,108
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128,108
    )Loss on extinguishment of Yankee
Bonds
    
    
    14,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,717Debt issuance costs
    
    
    (2,734
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,734
    )Capitalization of financing cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,439
    
    
    
    
    
    
    
    32,439Equity swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,875
    )
    
    
    
    
    
    
    (50,875
    )Adjustment to fixed asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    776,744
    
    
    
    
    
    
    
    776,744Adjustment to loss on sale of
subsidiary
    
    
    1,539,564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,539,564Adjustment to loss on sale of an
affiliated company
    
    
    
    
    
    
    88,027
    
    
    
    
    
    
    
    
    
    
    
    (88,027
    )Deferred start-up and research and
development costs
    
    
    
    
    
    
    (14,833
    )
    
    
    (68,618
    )
    
    
    (21,199
    )
    
    
    
    
    
    
    (104,650
    )Equity swaps
    
    
    (50,875
    )
    
    
    
    
    
    
    
    
    
    
    50,875Effect of restatement fo prior year
amounts per Bulletin B-15
    
    
    55,472
    
    
    
    
    
    
    
    (59,855
    )
    
    
    19,258
    
    
    
    40,597
    
    
    
    55,472Equity income of affiliated company
    
    
    582,985
    
    
    
    
    
    
    
    (33,428
    )
    
    
    
    
    
    
    (549,557
    )Effect of US GAAP adjustments on
minority interest
    
    
    
    
    
    
    
    
    
    
    (10,663
    )
    
    
    1,737
    
    
    
    (3,245
    )
    
    
    (12,171
    )Net income (loss) for the year
under US GAAP
    
    Ps.
    (2,207,090
    )
    
    Ps.
    (287,773
    )
    
    Ps.
    237,416
    
    
    Ps.
    702
    
    
    Ps.
    49,655
    
    
    Ps.
    (2,207,090
    )
 F-55




---



##### Table of Contents



Condensed consolidating statement of changes in financial position
For the year ended December 31, 2002 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Income (loss) from continuing
operations
    
    Ps.
    (3,742,169
    )
    
    Ps.
    (223,082
    )
    
    Ps.
    (314,030
    )
    
    Ps.
    183,125
    
    
    Ps.
    460,092
    
    
    Ps.
    (3,636,064
    )Items that did not require
(generate) resources
    
    
    3,585,529
    
    
    
    296,363
    
    
    
    119,105
    
    
    
    1,541,576
    
    
    
    (2,431,665
    )
    
    
    3,110,908Changes in operating assets and
liabilities
    
    
    131,797
    
    
    
    (51,460
    )
    
    
    (777,345
    )
    
    
    (917,932
    )
    
    
    1,852,915
    
    
    
    237,975Discontinued operations and
extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (37,717
    )
    
    
    50,804
    
    
    
    116,500
    
    
    
    129,587Net resources generated by (used
in) operating activities
    
    
    (24,843
    )
    
    
    21,821
    
    
    
    (1,009,987
    )
    
    
    857,573
    
    
    
    (2,158
    )
    
    
    (157,594
    )Financing activities:Short-term and long-term debt  Net
    
    
    1,338,626
    
    
    
    (1,217
    )
    
    
    25,704
    
    
    
    (478,163
    )
    
    
    
    
    
    
    884,950Other financing activities
    
    
    
    
    
    
    
    
    
    
    (963
    )
    
    
    (37,491
    )
    
    
    2,158
    
    
    
    (36,296
    )Net resources generated by (used
in) financing activities
    
    
    1,338,626
    
    
    
    (1,217
    )
    
    
    24,741
    
    
    
    (515,654
    )
    
    
    2,158
    
    
    
    848,654Investing activities:Acquisition of machinery and
equipment
    
    
    
    
    
    
    (11,512
    )
    
    
    71,629
    
    
    
    (519,672
    )
    
    
    
    
    
    
    (459,555
    )Sale of (investment in) subsidiaries
    
    
    (1,292,454
    )
    
    
    
    
    
    
    1,065,575
    
    
    
    13,980
    
    
    
    
    
    
    
    (212,899
    )Other investing activities
    
    
    (357,244
    )
    
    
    (11,888
    )
    
    
    (155,415
    )
    
    
    206,374
    
    
    
    

    
    
    
    (318,173
    )Net resources generated by (used
in) investing activities
    
    
    (1,649,698
    )
    
    
    (23,400
    )
    
    
    981,789
    
    
    
    (299,318
    )
    
    
    
    
    
    
    (990,627
    )Increase (decrease) in cash and
temporary investments:
    
    
    (335,915
    )
    
    
    (2,796
    )
    
    
    (3,457
    )
    
    
    42,601
    
    
    
    
    
    
    
    (299,567
    )Balance at beginning of year
    
    
    337,853
    
    
    
    3,483
    
    
    
    12,673
    
    
    
    183,172
    
    
    
    
    
    
    
    537,181Balance at end of year
    
    Ps.
    1,938
    
    
    Ps.
    687
    
    
    Ps.
    9,216
    
    
    Ps.
    225,773
    
    
    Ps.
    
    
    
    Ps.
    237,614
 F-56




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##### Table of Contents



Condensed consolidating statement of cash flow
For the year ended December 31, 2002 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    Owned
    
    Owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Income (loss) from continuing
operations
    
    Ps.
    (2,207,090
    )
    
    Ps.
    (287,773
    )
    
    Ps.
    273,280
    
    
    Ps.
    561,380
    
    
    Ps.
    (37,150
    )
    
    Ps.
    (1,697,353
    )Items that did not require
(generate) resources
    
    
    4,851,246
    
    
    
    463,912
    
    
    
    (748,420
    )
    
    
    (4,312,512
    )
    
    
    1,860,000
    
    
    
    2,114,226Changes in operating assets and
liabilities
    
    
    (953,206
    )
    
    
    (10,312
    )
    
    
    1,469,692
    
    
    
    1,883,665
    
    
    
    (1,907,497
    )
    
    
    482,342Discontinued operations and
extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (35,864
    )
    
    
    (560,678
    )
    
    
    86,805
    
    
    
    (509,737
    )Net resources generated
by (used in) operating
activities
    
    
    1,690,950
    
    
    
    165,827
    
    
    
    958,688
    
    
    
    (2,428,145
    )
    
    
    2,158
    
    
    
    389,478Financing activities:Short-term and long-term debt  Net
    
    
    349,215
    
    
    
    (1,124
    )
    
    
    26,970
    
    
    
    1,047,353
    
    
    
    
    
    
    
    1,422,414Other financing activities
    
    
    
    
    
    
    371
    
    
    
    (1,515,081
    )
    
    
    1,466,841
    
    
    
    (2,158
    )
    
    
    (50,027
    )Net resources generateb
by (used in) financing
activities
    
    
    349,215
    
    
    
    (753
    )
    
    
    (1,488,111
    )
    
    
    2,514,194
    
    
    
    (2,158
    )
    
    
    1,372,387Investing activities:Acquisition of machinery and
equipment
    
    
    
    
    
    
    (10,201
    )
    
    
    (245,745
    )
    
    
    (212,818
    )
    
    
    
    
    
    
    (468,764
    )Other investing activities
    
    
    (2,244,666
    )
    
    
    1,858
    
    
    
    687,009
    
    
    
    576,256
    
    
    
    
    
    
    
    (979,543
    )Net resources generated
by (used in) investing
activities
    
    
    (2,244,666
    )
    
    
    (8,343
    )
    
    
    441,264
    
    
    
    363,438
    
    
    
    
    
    
    
    (1,448,307
    )Effect of inflation and exchange
rate changes on cash and temporary
investment
    
    
    (132,351
    )
    
    
    (159,527
    )
    
    
    118,020
    
    
    
    (389,738
    )
    
    
    
    
    
    
    (563,596
    )Increase (decrease) in cash and
temporary investments
    
    
    (336,852
    )
    
    
    (2,796
    )
    
    
    29,861
    
    
    
    59,749
    
    
    
    
    
    
    
    (250,038
    )Balance at beginning of year
    
    
    338,790
    
    
    
    3,483
    
    
    
    12,675
    
    
    
    160,953
    
    
    
    
    
    
    
    515,901Balance end of year
    
    Ps.
    1,938
    
    
    Ps.
    687
    
    
    Ps.
    42,536
    
    
    Ps.
    220,702
    
    
    Ps.
    
    
    
    Ps.
    265,863
 F-57




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##### Table of Contents



Condensed consolidating statement of operations
For the year ended December 31, 2001 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    Ps.
    
    
    
    Ps.
    1,352,425
    
    
    Ps.
    3,745,950
    
    
    Ps.
    6,440,346
    
    
    Ps.
    (763,418
    )
    
    Ps.
    10,775,303Cost of sales and operating expenses
    
    
    (102,692
    )
    
    
    1,132,273
    
    
    
    3,244,838
    
    
    
    4,847,443
    
    
    
    635,388
    
    
    
    9,757,250Income from operations
    
    
    102,692
    
    
    
    220,152
    
    
    
    501,112
    
    
    
    1,592,903
    
    
    
    (1,398,806
    )
    
    
    1,018,053Net comprehensive financing cost
    
    
    643,648
    
    
    
    30,521
    
    
    
    (677,479
    )
    
    
    (320,636
    )
    
    
    (86,490
    )
    
    
    (410,436
    )Other expenses Net
    
    
    72,812
    
    
    
    (27,620
    )
    
    
    (23,536
    )
    
    
    503,079
    
    
    
    (48,305
    )
    
    
    476,430Income tax and employee statutory
profit sharing expense
    
    
    (216,340
    )
    
    
    71,497
    
    
    
    74,184
    
    
    
    17,194
    
    
    
    
    
    
    
    (53,465
    )Equity in income (losses) of
subsidiaries and/or affiliated
companies
    
    
    258,502
    
    
    
    38,213
    
    
    
    151,851
    
    
    
    (496,300
    )
    
    
    47,734Income from continuing operations
    
    
    861,314
    
    
    
    332,763
    
    
    
    26,132
    
    
    
    1,296,240
    
    
    
    (1,485,867
    )
    
    
    1,030,582Discontinued operations  Net
    
    
    
    
    
    
    
    
    
    
    52,738
    
    
    
    36,408
    
    
    
    63,722
    
    
    
    152,868Extraordinary loss
    
    
    
    
    
    
    (164,203
    )
    
    
    
    
    
    
    (153,744
    )
    
    
    
    
    
    
    (317,947
    )Consolidated net income
    
    Ps.
    861,314
    
    
    Ps.
    168,560
    
    
    Ps.
    78,870
    
    
    Ps.
    1,178,904
    
    
    Ps.
    (1,422,145
    )
    
    Ps.
    865,503Net income (loss) corresponding to
majority interest under US GAAP
    
    Ps.
    861,314
    
    
    Ps.
    168,560
    
    
    Ps.
    78,870
    
    
    Ps.
    1,178,904
    
    
    Ps.
    (1,422,145
    )
    
    Ps.
    865,503US GAAP adjustments:Deferred income taxes
    
    
    (19,085
    )
    
    
    19,237
    
    
    
    (51,358
    )
    
    
    (219,472
    )
    
    
    (29,785
    )
    
    
    (300,463
    )Deferred employee profit sharing
    
    
    
    
    
    
    49,314
    
    
    
    48,536
    
    
    
    (55,544
    )
    
    
    (26,917
    )
    
    
    15,389Purchase accounting adjustments:Amortization of negative
goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (467,036
    )
    
    
    
    
    
    
    (467,036
    )Depreciation
    
    
    46,370
    
    
    
    
    
    
    
    
    
    
    
    126,978
    
    
    
    
    
    
    
    173,348Reversal of loss on fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,108
    
    
    
    
    
    
    
    128,108Effect of fifth amendment to
Bulletin B-10
    
    
    (1,864
    )
    
    
    2,243
    
    
    
    3,075
    
    
    
    (54,659
    )
    
    
    (13,320
    )
    
    
    (64,525
    )Loss on extinguishment of Yankee
Bonds
    
    
    (32,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,250
    )Debt issuance costs
    
    
    (81,901
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,901
    )Capitalization of financing cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,939
    
    
    
    
    
    
    
    26,939Effect of restatement of prior year
amounts per Bulletin B-15
    
    
    942
    
    
    
    
    
    
    
    19,265
    
    
    
    (34,404
    )
    
    
    5,475
    
    
    
    (8,722
    )Investment in subsidiaries
    
    
    (524,605
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    524,605Equity income of affiliated company
    
    
    
    
    
    
    21,707
    
    
    
    
    
    
    
    
    
    
    
    (21,707
    )Effect of US GAAP adjustments on
minority interest
    
    
    
    
    
    
    
    
    
    
    (1,134
    )
    
    
    (146
    )
    
    
    (4,189
    )
    
    
    (5,469
    )US GAAP net income (loss)
    
    Ps.
    248,921
    
    
    Ps.
    261,061
    
    
    Ps.
    97,254
    
    
    Ps.
    629,668
    
    
    Ps.
    (987,983
    )
    
    Ps.
    248,921
 F-58




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##### Table of Contents



Condensed consolidating statements of changes in financial position
For the year ended December 31, 2001 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    owned
    
    owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Income from continuing operations
    
    Ps.
    861,314
    
    
    Ps.
    332,763
    
    
    Ps.
    26,132
    
    
    Ps.
    1,296,240
    
    
    Ps.
    (1,485,867
    )
    
    Ps.
    1,030,582Items that did not require
(generate) resources
    
    
    (80,329
    )
    
    
    (49,394
    )
    
    
    (45,626
    )
    
    
    (196,494
    )
    
    
    207,651
    
    
    
    (164,192
    )Changes in operating assets and
liabilities
    
    
    (458,043
    )
    
    
    (79,812
    )
    
    
    285,892
    
    
    
    693,122
    
    
    
    (75,345
    )
    
    
    365,814Discontinued operations and
extraordinary loss
    
    
    
    
    
    
    (164,203
    )
    
    
    52,737
    
    
    
    (155,349
    )
    
    
    63,722
    
    
    
    (203,093
    )Net resources generated by
operating activities
    
    
    322,942
    
    
    
    39,354
    
    
    
    319,135
    
    
    
    1,637,519
    
    
    
    (1,289,839
    )
    
    
    1,029,111Financing activities:Short-term and long-term debt  Net
    
    
    119,085
    
    
    
    (133,996
    )
    
    
    88,870
    
    
    
    (745,797
    )
    
    
    
    
    
    
    (671,838
    )Other financing activities
    
    
    
    
    
    
    (1,264
    )
    
    
    
    
    
    
    121,874
    
    
    
    1,264
    
    
    
    121,874Net resources generated by (used
in) financing activities
    
    
    119,085
    
    
    
    (135,260
    )
    
    
    88,870
    
    
    
    (623,923
    )
    
    
    1,264
    
    
    
    (549,964
    )Investing activities:Acquisition of machinery and
equipment
    
    
    (114,204
    )
    
    
    97,616
    
    
    
    (328,225
    )
    
    
    (501,836
    )
    
    
    
    
    
    
    (846,649
    )Sale of (investment in) subsidiaries
    
    
    1,136,247
    
    
    
    
    
    
    
    (88,377
    )
    
    
    
    
    
    
    (1,047,870
    )Other investing activities
    
    
    (1,175,242
    )
    
    
    
    
    
    
    
    
    
    
    (1,112,111
    )
    
    
    2,336,445
    
    
    
    49,092Net resources generated by (used
in) investing activities
    
    
    (153,199
    )
    
    
    97,616
    
    
    
    (416,602
    )
    
    
    (1,613,947
    )
    
    
    1,288,575
    
    
    
    (797,557
    )Increase (decrease) in cash and
temporary investments:
    
    
    288,828
    
    
    
    1,710
    
    
    
    (8,597
    )
    
    
    (600,351
    )
    
    
    
    
    
    
    (318,410
    )Balance at beginning of year
    
    
    49,025
    
    
    
    1,773
    
    
    
    21,270
    
    
    
    783,523
    
    
    
    
    
    
    
    855,591Balance at end of year
    
    Ps.
    337,853
    
    
    Ps.
    3,483
    
    
    Ps.
    12,673
    
    
    Ps.
    183,172
    
    
    Ps.
    
    
    
    Ps.
    537,181
 F-59




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##### Table of Contents



Condensed consolidating statement of cash flow
For the year ended December 31, 2001 Guarantor subsidiariesNon-wholly
    
    Wholly
    
    Non-guarantorCODUSA
    
    Owned
    
    Owned
    
    subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Income (loss) from continuing
operations
    
    Ps.
    248,921
    
    
    Ps.
    261,061
    
    
    Ps.
    97,253
    
    
    Ps.
    646,406
    
    
    Ps.
    (987,983
    )
    
    Ps.
    265,658Items that did not require
(generate) resources
    
    
    192,525
    
    
    
    (168,849
    )
    
    
    (156,493
    )
    
    
    714,750
    
    
    
    (272,706
    )
    
    
    309,227Changes in operating assets and
liabilities
    
    
    (489,291
    )
    
    
    16,756
    
    
    
    636,608
    
    
    
    1,071,317
    
    
    
    (548,608
    )
    
    
    686,782Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,737
    )
    
    
    
    
    
    
    (16,737
    )Net resources generated
by (used in) operating
activities
    
    
    (47,845
    )
    
    
    108,968
    
    
    
    577,368
    
    
    
    2,415,736
    
    
    
    (1,809,297
    )
    
    
    1,244,930Financing activities:Short-term and long-term debt  Net
    
    
    (32,719
    )
    
    
    123,921
    
    
    
    (115,133
    )
    
    
    (768,595
    )
    
    
    
    
    
    
    (792,526
    )Other financing activities
    
    
    
    
    
    
    (254,853
    )
    
    
    253,589
    
    
    
    (234,650
    )
    
    
    1,264
    
    
    
    (234,650
    )Net resources generated
by (used in) financing
activities
    
    
    (32,719
    )
    
    
    (130,932
    )
    
    
    138,456
    
    
    
    (1,003,245
    )
    
    
    1,264
    
    
    
    (1,027,176
    )Investing activities:Acquisition of machinery and
equipment
    
    
    (114,204
    )
    
    
    (58,731
    )
    
    
    (390,513
    )
    
    
    (369,501
    )
    
    
    
    
    
    
    (932,949
    )Other investing activities
    
    
    68,043
    
    
    
    176,287
    
    
    
    (1,936
    )
    
    
    (1,643,354
    )
    
    
    1,808,033
    
    
    
    407,073Net resources generated
by (used in) investing
activities
    
    
    (46,161
    )
    
    
    117,556
    
    
    
    (392,449
    )
    
    
    (2,012,855
    )
    
    
    1,808,033
    
    
    
    (525,876
    )Effect of inflation and exchange
rate changes on cash and temporary
investments
    
    
    416,490
    
    
    
    (93,882
    )
    
    
    (331,970
    )
    
    
    (4,249
    )
    
    
    
    
    
    
    (13,611
    )Increase (decrease) in cash and
temporary investments
    
    
    289,765
    
    
    
    1,710
    
    
    
    (8,595
    )
    
    
    (604,613
    )
    
    
    
    
    
    
    (321,733
    )Balance at beginning of year
    
    
    49,025
    
    
    
    1,773
    
    
    
    21,270
    
    
    
    765,566
    
    
    
    
    
    
    
    837,634Balance at end of year
    
    Ps.
    338,790
    
    
    Ps.
    3,483
    
    
    Ps.
    12,675
    
    
    Ps.
    160,953
    
    
    Ps.
    
    
    
    Ps.
    515,901
 * * * * * * F-60




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##### Table of Contents



Report of Independent Registered Public
Accounting firm to the Board of Directors and
Stockholders of Compañía Papelera de
Atenquique, S. A. de C. V. We have audited the accompanying balance sheet of Compañía Papelera de
Atenquique, S. A. de C. V., formerly Compañía Industrial de Atenquique, S. A.
de C. V. (the Company), a 98% owned subsidiary of Corporación Durango, S.
A. de C. V. (CODUSA), as of December 31, 2003, and the related statements of
operations, changes in stockholders equity and changes in financial position
for the year then ended, all expressed in thousands of Mexican pesos of
purchasing power of December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in Mexico and with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion. In our opinion, the 2003 financial statements present fairly, in all material
respects, the financial position of Compañía Papelera de Atenquique, S. A. de
C. V. as of December 31, 2003, and the results of its operations, changes in
its stockholders equity and changes in its financial position for the year
then ended in conformity with accounting principles generally accepted in
Mexico. Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination
of stockholders equity and net loss as of and for the year ended December 31,
2003 to the extent summarized in Note 20. The accompanying financial statements as of December 31, 2003 and for the year
then ended have been prepared assuming that the Company will continue as a
going concern. As described in Note 2.c to the financial statements, during
2003, 2002 and 2001 the Company incurred significant net losses, and during
2003 had an operating loss. As of December 31, 2003 and 2002, the Company had
negative working capital and, like CODUSA, is experiencing severe liquidity
problems. Additionally, as mentioned in Note 16.a to the financial statements,
the Company is guarantor of several financing agreements granted to CODUSA
totaling US$599.5 million. Since November 2002 CODUSA has failed to comply
with the payments of interest and principal related to such financing
agreements and, as described in Note 1 to the financial statements, is
currently in a debt restructuring process with its creditors. These factors,
among others, raise substantial doubt about the Companys ability to continue
as a going concern. Managements plans related to these matters and the
description of CODUSAs plan of restructuring are described in Note 1; however,
this plan has not been completed. The Companys ability to continue as a going
concern is dependent upon its ability to generate profits and the restructuring
of CODUSAs debt. The accompanying financial statements do not include any
adjustments related to the valuation and presentation of assets or the
presentation and amount of liabilities that might result if the Company is
unable to continue as a going concern. F-61




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##### Table of Contents



The accompanying financial statements have been translated into English for the
convenience of readers in the United States of America. Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu C.P.C. Claudia Leticia Rizo Navarro April 30, 2004
(June 28, 2004 as to Notes 1.f, 19, 20 and 21) F-62




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Guadalajara, Jal., March 8, 2003, except with respect to the restatement to
constant pesos as of December 31, 2003 as to which the date is July 13, 2004. To the Board of Directors and Shareholders of
Compañía Papelera de Atenquique, S. A. de C. V.
(formerly Compañía Industrial de Atenquique, S. A. de C. V.) We have audited the accompanying combined balance sheet of Compañía Papelera de
Atenquique, S. A. de C. V. and subsidiary (formerly Compañía Industrial de
Atenquique, S. A. de C. V. and subsidiaries) and Papelera Heda, S.A. de C.V.
(HEDA), (collectively, the Company) as of December 31, 2002 and the related
combined statements of income, of changes in shareholders equity and of
changes in financial position for each of the two years in the period ended
December 31, 2002, which, as described in Note 2, have been prepared on the
basis of accounting principles generally accepted in Mexico. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) as well as generally
accepted auditing standards in Mexico. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Company as of December 31, 2002 and the combined results of their operations,
the changes in their combined shareholders equity and the changes in their
combined financial position for each of the two years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in Mexico. Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the Unites States of
America. The application of the latter would have affected the determination of
stockholders equity as of December 31, 2002 and net loss for the two years in
the period ended December 31, 2002 to the extent summarized in Note 20. As mentioned in Note 1b, from April to September 2001, the Atenquique plant
suspended its operations due to a labor conflict. All related expenses
consisting of severance payments F-63




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paid to employees, as well as the costs of suspending and restarting the
operations are presented as an extraordinary item in the accompanying income
statements. As a result of the operational shutdown, all personnel was
liquidated, and during September, 2001 the Company rehired part of the
personnel, and restarted the operations. Severance expense amounted $107,763,
net of $32,801 related to seniority premiums liability cancellation, and the
cost of suspending and restarting operations amounted $56,441. Consequently,
during 2001, the Atentiquique plant operated for only seven months. As mentioned in Note 1, in 2003, the Company has experienced significant
operating losses and its current liabilities have exceeded in current assets.
Further, as explained in Note 16, the Company is a guarantor of several
financing arrangements granted to its parent Corporacion Durango, S.A. de C.V.
(CODUSA) which as further explained in Note 1, CODUSA is currently in default
on such obligations. Since November 2002, CODUSA has failed to comply with the
payments of interest and principal related to such financing agreements and, is
currently in a debt restructuring process with its creditors. These factors,
amongst others, raise substantial doubt regarding the Companys ability to
continue as a going concern. The Companys ability to continue as a going
concern is dependent on managements ability to generate profits as well as the
successful debt restructuring of CODUSA. The accompanying financial statements
include no adjustment pertaining to the recoverability and classification of
the amounts recorded as assets and the amounts and classification of
liabilities that may become necessary in the event that the Company is unable
to continue in operation as a going concern. Managements plans in this regard
are mentioned in Note 1. As mentioned in Note 1, on July 1, 2003, HEDA, was merged into Compañía
Papelera de Atenquique, S. A. de C. V. The merger of HEDA into Compañía
Papelera de Atenquique, S. A. de C. V was accounted for as a transaction
between entities under common control and consequently, has been reflected on a
historical cost basis retroactive to the January 1, 2001. PricewaterhouseCoopers /s/ José Luis Franco Murayama C.P.C. José Luis Franco Murayama
Public Accountant F-64




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Balance sheets
 As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
 Assets 2003
    
    2002Current assets:Cash
    
    Ps.
    1,337
    
    
    Ps.
    142Accounts receivable  Net
    
    
    61,285
    
    
    
    53,145Due from related parties
    
    
    176,946
    
    
    
    101,646Inventories  Net
    
    
    52,661
    
    
    
    50,513Prepaid expenses
    
    
    2,296
    
    
    
    601Total current assets
    
    
    294,525
    
    
    
    206,047Investment in associated company
    
    
    
    
    
    
    140,286Property, plant and equipment  Net
    
    
    1,446,323
    
    
    
    1,274,488Intangible asset of employee retirement obligations
    
    
    42,938
    
    
    
    45,084Other assets Net
    
    
    17,333
    
    
    
    25,483Total
    
    Ps.
    1,801,119
    
    
    Ps.
    1,691,388
 See accompanying notes to financial statements. F-65




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)
Balance sheets
As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of December 31, 2003) Liabilities and stockholders equity 2003
    
    2002Current liabilities:Current portion of long-term debt
    
    Ps.
    1,228
    
    
    Ps.
    1,182Notes payable
    
    
    1,829
    
    
    
    264Trade accounts payable
    
    
    99,162
    
    
    
    90,614Due to related parties
    
    
    447,131
    
    
    
    255,564Accrued expenses and taxes, other than income taxes
    
    
    144,165
    
    
    
    134,662Total current liabilities
    
    
    693,515
    
    
    
    482,286Long-term liabilities:Long-term debt
    
    
    1,299
    
    
    
    2,441Long-term notes payable
    
    
    5,672Deferred income taxes
    
    
    375,409
    
    
    
    303,031Employee retirement obligations
    
    
    43,711
    
    
    
    45,897Total long-term liabilities
    
    
    426,091
    
    
    
    351,369Total liabilities
    
    
    1,119,606
    
    
    
    833,655Commitments and contingenciesStockholders equity:Common stock
    
    
    2,098,765
    
    
    
    2,098,358Accumulated deficit
    
    
    (199,951
    )
    
    
    (147,560
    )Insufficiency in restated stockholders equity
    
    
    (564,831
    )
    
    
    (668,710
    )Cumulative initial effect of deferred income taxes
    
    
    (424,355
    )
    
    
    (424,355
    )Receivable from sale of shares to CODUSA
    
    
    (228,115
    )Total stockholders equity
    
    
    681,513
    
    
    
    857,733Total
    
    Ps.
    1,801,119
    
    
    Ps.
    1,691,388
 See accompanying notes to financial statements. F-66




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Statements of operations
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
 2003
    
    2002
    
    2001Net sales
    
    Ps.
    628,769
    
    
    Ps.
    617,879
    
    
    Ps.
    317,076Cost of sales
    
    
    606,079
    
    
    
    516,032
    
    
    
    289,740Gross profit
    
    
    22,690
    
    
    
    101,847
    
    
    
    27,336Selling, general and administrative expenses
    
    
    37,390
    
    
    
    33,595
    
    
    
    20,539Income (loss) from operations
    
    
    (14,700
    )
    
    
    68,252
    
    
    
    6,797Net comprehensive financing cost:Interest expense
    
    
    (79,522
    )
    
    
    (76,499
    )
    
    
    (50,327
    )Interest income
    
    
    10,885
    
    
    
    16,574
    
    
    
    14,508Exchange gain (loss)
    
    
    57
    
    
    
    (42,285
    )
    
    
    1,364Monetary position gain
    
    
    10,465
    
    
    
    17,983
    
    
    
    11,225(58,115
    )
    
    
    (84,227
    )
    
    
    (23,230
    )Other expenses  Net
    
    
    (39,225
    )
    
    
    (58,581
    )
    
    
    (6,105
    )Loss before deferred income tax, equity in
income (loss) of associated company and
extraordinary item
    
    
    (112,040
    )
    
    
    (74,556
    )
    
    
    (22,538
    )Deferred income tax benefit (expense)
    
    
    (14,744
    )
    
    
    69,224
    
    
    
    99,109Income (loss) before equity in income (loss)
of associated company
    
    
    (126,784
    )
    
    
    (5,332
    )
    
    
    76,571Equity in income (loss) of associated company
    
    
    (1,756
    )
    
    
    (48,092
    )
    
    
    38,213Income (loss) before extraordinary item
    
    
    (128,540
    )
    
    
    (53,424
    )
    
    
    114,784Extraordinary item
    
    
    
    
    
    
    
    
    
    
    (164,203
    )Net loss
    
    Ps.
    (128,540
    )
    
    Ps.
    (53,424
    )
    
    Ps.
    (49,419
    )
 See accompanying notes to financial statements. F-67




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% Subsidiary of Corporación Durango, S. A. de C. V.)




Statements of changes in
stockholders equity
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003) Receivable fromInsufficiency
    
    Cumulative Initial
    
    Sale of
    
    Totalin Restated
    
    Effect of Deferred
    
    Shares to
    
    StockholdersCommon Stock
    
    Accumulated Deficit
    
    Stockholders Equity
    
    Income Taxes
    
    CODUSA
    
    EquityBalances as of January 1, 2001
    
    Ps.
    2,101,961
    
    
    Ps.
    (44,443
    )
    
    Ps.
    (546,972
    )
    
    Ps.
    (424,967
    )
    
    Ps.
    
    
    
    Ps.
    1,085,579Reimbursement of paid-in capital
    
    
    (3,603
    )
    
    
    (274
    )
    
    
    2,001
    
    
    
    612
    
    
    
    
    
    
    
    (1,264
    )Comprehensive income
    
    
    
    
    
    
    (49,419
    )
    
    
    220,706
    
    
    
    
    
    
    
    
    
    
    
    171,287Balances as of December 31, 2001
    
    
    2,098,358
    
    
    
    (94,136
    )
    
    
    (324,265
    )
    
    
    (424,355
    )
    
    
    
    
    
    
    1,255,602Comprehensive loss
    
    
    
    
    
    
    (53,424
    )
    
    
    (344,445
    )
    
    
    
    
    
    
    
    
    
    
    (397,869
    )Balances as of December 31, 2002
    
    
    2,098,358
    
    
    
    (147,560
    )
    
    
    (668,710
    )
    
    
    (424,355
    )
    
    
    
    
    
    
    857,733Gain on holding and sale of
investment in associated
company
    
    
    
    
    
    
    76,149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,149Net loss
    
    
    
    
    
    
    (128,540
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128,540
    )Excess in restated
stockholders equity
    
    
    
    
    
    
    
    
    
    
    56,997
    
    
    
    
    
    
    
    
    
    
    
    56,997Comprehensive income
    
    
    
    
    
    
    (52,391
    )
    
    
    56,997
    
    
    
    
    
    
    
    
    
    
    
    4,606Increase due to merger
    
    
    407
    
    
    
    
    
    
    
    46,882
    
    
    
    
    
    
    
    
    
    
    
    47,289Receivable from sale of shares
to CODUSA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (228,115
    )
    
    
    (228,115
    )Balances as of December 31, 2003
    
    Ps.
    2,098,765
    
    
    Ps.
    (199,951
    )
    
    Ps.
    (564,831
    )
    
    Ps.
    (424,355
    )
    
    Ps.
    (228,115
    )
    
    Ps.
    681,513
 See accompanying notes to financial statements. F-68




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% subsidiary of Corporación Durango, S. A. de C. V.) 
 Statements of changes in financial position
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)
 2003
    
    2002
    
    2001Operating activities:Income (loss) before extraordinary item
    
    Ps.
    (128,540
    )
    
    Ps.
    (53,424
    )
    
    Ps.
    114,784Items that did not require (generate) resources:Depreciation and amortization
    
    
    49,327
    
    
    
    45,059
    
    
    
    34,855(Income) loss on sale of property, plant and
equipment
    
    
    (2,521
    )
    
    
    924
    
    
    
    1,167Employee retirement obligations
    
    
    265
    
    
    
    300
    
    
    
    184Impairment of long-lived assets
    
    
    64,131
    
    
    
    51,462Deferred income taxes
    
    
    14,744
    
    
    
    (69,224
    )
    
    
    (99,109
    )Equity in loss (income) of associated company
    
    
    1,756
    
    
    
    48,092
    
    
    
    (38,213
    )(838
    )
    
    
    23,189
    
    
    
    13,668Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    18,850
    
    
    
    (41,444
    )
    
    
    63,340Related parties
    
    
    5,196
    
    
    
    (9,332
    )
    
    
    7,993Inventories Net
    
    
    (1,682
    )
    
    
    2,401
    
    
    
    26,770Prepaid expenses
    
    
    (780
    )
    
    
    136
    
    
    
    226Increase (decrease) in:Trade accounts payable
    
    
    (2,887
    )
    
    
    40,812
    
    
    
    (51,897
    )Accrued expenses and taxes, other than
income taxes
    
    
    5,072
    
    
    
    3,305
    
    
    
    105,138Other  Net
    
    
    (208
    )
    
    
    (8,695
    )
    
    
    (21,496
    )Net resources generated by (used
in) operating activities before
extraordinary item
    
    
    22,723
    
    
    
    10,372
    
    
    
    143,742Extraordinary item
    
    
    
    
    
    
    
    
    
    
    (164,203
    )Net resources generated by (used
in) operating activities
    
    
    22,723
    
    
    
    10,372
    
    
    
    (20,461
    )
 (Continued) F-69




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2003
    
    2002
    
    2001Financing activities:Payments of long-term debt and notes payable
    
    
    (2,020
    )
    
    
    (1,217
    )
    
    
    (1,685
    )Reimbursement of paid-in capital
    
    
    
    
    
    
    
    
    
    
    (1,264
    )Net resources used in
financing activities
    
    
    (2,020
    )
    
    
    (1,217
    )
    
    
    (2,949
    )Investing activities:Acquisition of machinery and equipment
    
    
    (23,725
    )
    
    
    (9,680
    )
    
    
    (13,925
    )Sale of property, plant and equipment
    
    
    4,792
    
    
    
    73
    
    
    
    37,384Other assets
    
    
    (869
    )Net resources generated by
(used in) investing activities
    
    
    (19,802
    )
    
    
    (9,607
    )
    
    
    23,459Cash:Net increase (decrease)
    
    
    901
    
    
    
    (452
    )
    
    
    49Cash increase due to merger
    
    
    294Balance at beginning of year
    
    
    142
    
    
    
    594
    
    
    
    545Balance at end of year
    
    Ps.
    1,337
    
    
    Ps.
    142
    
    
    Ps.
    594
 (Concluded) See accompanying notes to financial statements. F-70




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Compañía Papelera de Atenquique, S. A. de C. V.
(Formerly Compañía Industrial de Atenquique, S. A. de C. V.)
(A 98% subsidiary of Corporación Durango, S. A. de C. V.)




Notes to financial statements
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of December 31, 2003)  1.
    
    Activities, significant developments and subsequent event  a.
    
    Activities Compañía Papelera de Atenquique, S. A. de C. V. (the
Company) is subsidiary of Corporación Durango, S. A. de C. V.
(CODUSA). The Companys main activity is the manufacture and sale of
containerboard to be used in the manufacturing of corrugated boxes.b.
    
    Termination of unionized employees Early in 2001, the Company
entered into negotiations with its employees labor union with the
objective of canceling the labor contract that had been in effect for
approximately 50 years. After a few months of negotiations, such
contract was terminated, and the Company was forced to suspend
operations from April to September 2001. The total number of employees
was significantly reduced, and severance payments and other fixed
costs of Ps.164,203 were incurred. These costs were recorded as an
extraordinary item in the results of 2001.c.
    
    Change of legal name At the General Extraordinary Shareholders
Meeting held on September 28, 2001, the shareholders of the Company
approved the change of legal name from Compañía Industrial de
Atenquique, S.A. de C.V. to Compañía Papelera de Atenquique, S.A. de
C.V.d.
    
    Merger At the General Extraordinary Shareholders Meeting held
on July 1, 2003, the merger of Papelera Heda, S. A. de C. V. (HEDA),
Papeles Guadalajara, S. A. de C. V. (PAPELES Guadalajara) and
Forestal de Jalisco, S. A. de C. V. (FOJASA), into the Company was
approved. HEDA and PAPELES Guadalajara were engaged in the manufacture
and sale of containerboard to be used in the manufacturing of
corrugated boxes, and FOJASA was engaged in the forest products
industry (it was dormant at the date of the merger).Prior to the merger, FOJASA was a subsidiary of the Company, and
therefore up to December 31, 2002 the Company prepared consolidated
financial statements. PAPELES Guadalajara was incorporated on July 1,
2003, as a result of a spin-off of the assets and liabilities of a
containerboard production plant of Empaques de Cartón Titán, S. A. de
C. V. (TITAN), a subsidiary of CODUSA, and on the same date of its
incorporation it was merged into the Company.e.
    
    Sale of investment in associated company The Company held
 shares representing 41.97% of the common stock of Envases y Empaques
de Mexico, S. A. de C. V. (EYEMSA). At the General Ordinary
Shareholders Meeting held on April 1, 2003, an increase in the common
stock of EYEMSA of Ps. 860,000 was approved, which TITAN fully
subscribed and paid, resulting in a reduction of the Companys
participation to 16.19%. This transaction resulted in a gain for the
Company in the amount of Ps. 56,443. On July 1, 2003, the Company sold
the shares representing its 16.19% participation in EYEMSA to CODUSA
for US$20.3 million, which resulted in a gain of Ps. 19,706. As this is
a transaction among enterprises under common control that did not
represent a change in the entity, the aggregate gain on this
transaction of Ps. 76,149 was recorded directly in retained earnings,
and the selling price, which has not yet been collected, was
reclassified from accounts receivable from related parties to a
reduction of stockholders equity. F-71




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f.
    
    Significant developments and subsequent event In order to expand its
production facilities, CODUSA and its subsidiaries (CODUSA Group)
have contracted significant financing from banks in Mexico and abroad,
mainly in the U.S. Additionally, on different dates it sold bonds on
the New York securities market. However, since 2002 CODUSA Group has
been severely affected by a combination of economic factors, such as
the slowdown of the U.S. and the international economies, a
significant drop in the world price of paper, a drastic reduction in
the demand for manufactured products requiring the goods supplied by
CODUSAs subsidiaries, an increase in the cost of raw materials,
electric power, gas and labor, and the entry of imported products into
the Mexican market.The above-mentioned negative economic events led to a significant
reduction in the generation of cash flow for CODUSA Group during the
last quarter of 2002, and as a result since November 2002 CODUSA has
been unable to cover the payment of interest and principal on certain
debt and has not complied with certain obligations and restrictions
imposed by the banks and bondholders to maintain the original
maturities of the debt. As a result, a portion of the debt has been
reclassified as short term, resulting in negative working capital and
uncertainty as to its ability to continue as a going concern.In November 2002, CODUSA Group initiated negotiations with the banks
and bondholders in an effort to restructure its debt and consider the
sale of non-strategic assets. In April 2003, CODUSA Group signed a
Forbearance Agreement with a significant portion of its creditors,
under which they agreed to continue productive financial discussions
regarding the terms of the debt restructuring. This agreement expired
on June 30, 2003.On April 30, 2004, CODUSA Group and a significant portion of its bank
lenders and bondholders signed a Plan Support Agreement regarding its
proposed debt restructuring. Under the proposed restructuring,
CODUSAs unsecured creditors would exchange their existing financial
debt for one or more tranches of new debt instruments, denominated the
Series A, Series B, Series C and Series D Notes, to be issued in an
aggregate principal amount of approximately US$715 million. In
addition, participating creditors would receive an aggregate of 17% of
CODUSAs share equity, on a fully diluted basis. Also, CODUSA would
make available US$43.5 million to acquire a portion of its outstanding
debt at purchase prices of no more than US$650 per US$1,000 of
principal.Under the terms of this agreement in principle, the creditors would
support CODUSA Groups overall financial restructuring through an
exchange offer; in the event the exchange offer is not consummated but
CODUSA Group obtains the necessary approvals from its creditors to
support a consensual plan of reorganization, such plan could be filed
under the United States of Americas bankruptcy rules.On May 20, 2004 CODUSA announced that it has filed for concurso
mercantil before a Mexican court, which main objective is to achieve
a financial restructuring through the reorganization process based on
the Mexican Business Reorganization Law. This process will take place
at the CODUSAs legal entity level, as a result, the operations of its
subsidiaries will continue running as usual. The reorganization
process allows that with the support of 51% of the creditors, the
restructuring plan described above, be binding on all of CODUSAs
creditors. CODUSA anticipates that it will have the support of a
sufficient percentage of votes to accomplish this goal in an
expeditious manner.  2.
    
    Basis of presentation  a.
    
    Explanation for translation into English The accompanying
financial statements have been translated from Spanish into English
for use outside of Mexico. These financial statements are presented
on the basis of accounting principles generally accepted in Mexico
(Mexican GAAP). Certain accounting practices applied by the Company
that conform with Mexican GAAP may not conform with accounting
principles generally accepted in the country of use.b.
    
    Merger The merger with FOJASA and HEDA was accounted for in a
manner similar to a pooling-of-interests, and accordingly it has been
reflected retroactively in the financial statements for all periods.
The assets and liabilities of PAPELES Guadalajara as of the date of
the merger, and the statement of operations for the six-month period
ended on December 31, 2003, are as follows: F-72




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June 30,2003Current assets
    
    Ps.
    113,501Industrial machinery and equipment
    
    
    184,609Current liabilities
    
    
    (199,726
    )Long-term liabilities
    
    
    (51,095
    )Net assets
    
    Ps.
    47,289
 July 1 toDecember 31,2003Net sales
    
    Ps.
    79,598Cost of sales, selling, general and administrative
expenses
    
    
    (90,867
    )Net comprehensive financing cost
    
    
    (1,526
    )Other income
    
    
    147Net loss
    
    Ps.
    (12,648
    )
  c.
    
    Going-concern The accompanying financial statements have been
prepared on the assumption that the Company will continue as a going
concern. As indicated in the accompanying financial statements, during
the years ended December 31, 2003, 2002 and 2001, the Company has
incurred significant net losses and during 2003 had an operating loss.
As of December 31, 2003, 2002 and 2001 the Company has negative
working capital and as CODUSA, is experiencing severe liquidity
problems. The Company is guarantor of a portion of CODUSAs debt.
These factors, among others, raise substantial doubt about the
Companys ability to continue as a going concern.The accompanying financial statements do not include any adjustments
related to the valuation and presentation of assets or the
presentation and amount of liabilities that might result if the
Company is unable to continue as a going concern. The Companys
ability to continue as a going concern is dependent upon its ability
to generate profits and the restructuring of CODUSA Group debt. As
mentioned in Note 1, CODUSA is committing significant resources to the
debt restructuring efforts and has reached an agreement in principle
with a significant portion of its creditors, who will support a
comprehensive financial restructuring; however, there can be no
assurance that CODUSA will be successful in its efforts.d.
    
    Comprehensive income (loss) Comprehensive income (loss)
presented in the accompanying statements of changes in stockholders
equity represents all changes in stockholders equity during each year
except those resulting from investments by and distributions to
owners, and is comprised of the net income (loss) of the year, plus
other comprehensive income (loss) items of the same period which, in
accordance with Mexican GAAP, are presented directly in stockholders
equity without affecting the statements of operations. In 2003, 2002
and 2001, the other comprehensive loss items consist of the excess
(insufficiency) in restated stockholders equity and for the gain on
holding and sale of investment in associated company.e.
    
    Reclassifications Certain amounts in the financial statements
as of and for the years ended December 31, 2002 and 2001 have been
reclassified in order to conform to the presentation of the financial
statements as of and for the year ended December 31, 2003. F-73




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3.
    
    Summary of significant accounting policiesThe accounting policies followed by the Company are in conformity with
Mexican GAAP, which require that management make certain estimates and use
certain assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Although these estimates are based
on managements best knowledge of current events, actual results may
differ. The significant accounting policies of the Company are as follows:  a.
    
    New accounting policies Beginning January 1, 2003, the Company
adopted the provisions of new Bulletin C-8, Intangible Assets, which
establishes that project development costs should be capitalized if
they fulfill the criteria established for recognition as assets;
preoperating costs that are not considered development costs should be
recorded as a period expense; and intangible assets considered to have
indefinite useful lives are not amortized, but instead are subject to
impairment tests. The unamortized balance of capitalized preoperating
costs up to December 31, 2002, will continue to be amortized according
to the provisions of the former Bulletin C-8.Beginning January 1, 2003, the Company also adopted the provisions of
new Bulletin C-9, Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments, which establishes additional guidelines
clarifying the accounting for provisions, accruals and contingent
liabilities, and establishes new standards for the use of present
value techniques to measure liabilities and accounting for the early
settlement or substitution of obligations.The adoption of these new bulletins did not have significant effects
on the Companys financial position or results of operations.b.
    
    Recognition of the effects of inflation The Company restates
its financial statements to Mexican peso purchasing power of the most
recent balance sheet date presented. Accordingly, the financial
statements of the prior years have been restated to Mexican pesos of
purchasing power of December 31, 2003 and, therefore, differ from
those originally reported in the prior years.c.
    
    Inventories and cost of sales Inventories are stated at the
lower of net realizable value or average cost, which is similar to the
most recent purchase price or production cost. Cost of sales is stated
at estimated replacement cost at the time of sale.d.
    
    Investment in associated company Until its sale in 2003, the
investment in associated company was valued using the equity method.e.
    
    Property, plant and equipment Property, plant and equipment are
initially recorded at acquisition cost and restated using the National
Consumer Price Index (NCPI). For fixed assets of foreign origin,
restated acquisition cost expressed in the currency of the country of
origin is converted into Mexican pesos at the market exchange rate in
effect at the balance sheet date. Depreciation is calculated based on
units produced in the period in relation to the total estimated
production of the assets over their service lives. YearsBuildings
    
    
    25-50Industrial machinery and equipment
    
    
    23-40Vehicles
    
    
    1-5Computers
    
    
    1-3Office furniture and equipment
    
    
    5-10
  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. F-74




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Comprehensive financing cost incurred during the period of
construction and installation of property, plant and equipment is
capitalized and restated using the NCPI.f.
    
    Impairment of long-lived assets in use The Company evaluates
potential impairment losses to long-lived assets by assessing whether
the unamortized carrying amount can be recovered over the remaining
life of the assets through undiscounted future expected cash flows
generated by the assets and without interest charges. If the sum of
the expected future undiscounted cash flows is less than the carrying
amount of the assets, a loss is recognized for the difference between
the fair value and carrying value of the assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Long-lived
assets for which management has committed to a plan of disposal are
recorded at the lower of the unamortized carrying amount or fair value
less disposal cost.g.
    
    Other assets Costs incurred in the development phase that meet
certain requirements and that the Company has determined will have
future economic benefits are capitalized and amortized based on the
straight-line method over their estimated useful life. Those
disbursements that do not meet such requirements are recorded in
results of the period in which they are incurred. Intangible assets
with indefinite lives are not amortized; however, their value is
subject to impairment tests. Preoperating costs incurred after January
1, 2003, are recorded directly in results of the period in which they
are incurred. Preoperating expenses incurred and capitalized up to
December 31, 2002 are amortized using the straight-line method over
four years.h.
    
    Financial instruments Financial assets and liabilities
resulting from any type of financial instrument, except for
investments in financial instruments held to maturity, are presented
in the balance sheet at fair value. The effects of the valuation of a
financial asset or liability are recognized in results of operations
of the respective period. Investments in financial instruments held to
maturity are valued at acquisition cost. The costs and yields of
financial instruments are recognized in results of the period in which
they occur. Dividends from equity financial instruments are recognized
in results of operations of the same period in which the fair value of
the financial instrument is adjusted by such dividends.i.
    
    Employee retirement obligations Seniority premiums and pension
plans are recognized as costs over employee years of service and are
calculated by independent actuaries using the projected unit credit
method at net discount rates. Severance is charged to results when
the liability is determined to be payable.j.
    
    Provisions Provisions are recognized for obligations that
result from a past event, that are likely to result in the use of
economic resources and that can be reasonably estimated. Such
provisions are recorded at net present values when the effect of the
discount is significant.k.
    
    Income tax, tax on assets and employee statutory profit sharing
Income tax (ISR) and employee statutory profit sharing (PTU) are
recorded in results of the year in which they are incurred. Deferred
income tax assets and liabilities are recognized for temporary
differences resulting from comparing the book and tax values of assets
and liabilities plus any future benefits from tax loss carryforwards.
Deferred ISR assets are reduced by any benefits about which there is
uncertainty as to their realizability. Deferred PTU is derived from
temporary differences between the accounting result and income for PTU
purposes and is recognized only when it can be reasonably assumed that
they will generate a liability or benefit, and there is no indication
that circumstances will change in such a way that the liabilities will
not be paid or benefits will not be realized.The tax on assets paid that is expected to be recoverable is recorded
as an advance payment of ISR and is presented in the balance sheet
decreasing the deferred ISR liability. F-75




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##### Table of Contents



l.
    
    Foreign currency balances and transactions Foreign currency
transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable
exchange rate in effect at the balance sheet date. Exchange
fluctuations are recorded as a component of net comprehensive
financing cost in the statements of operations, except those amounts
capitalized as a component of construction cost.m.
    
    Insufficiency in restated stockholders equity Excess
(insufficiency) in restated stockholders equity represents the
accumulated monetary position result through the initial restatement
of the financial statements and the increase in the restated value of
machinery and equipment and inventories above (below) inflation.n.
    
    Revenue recognition Revenues are recognized in the period in
which the risks and rewards of ownership of the inventories are
transferred to the customers, which generally coincides with the
delivery of products to customers in satisfaction of orders.o.
    
    Monetary position gain Monetary position gain, which represents
the erosion of purchasing power of monetary items caused by inflation,
is calculated by applying NCPI factors to monthly net monetary
position. Gains result from maintaining a net monetary liability
position.  4.
    
    Accounts receivable 2003
    
    2002Trade accounts receivable
    
    Ps.
    61,587
    
    
    Ps.
    45,386Recoverable taxes
    
    
    10
    
    
    
    6,895Other
    
    
    6,611
    
    
    
    3,18068,208
    
    
    
    55,461Allowance for doubtful accounts
    
    
    (6,923
    )
    
    
    (2,316
    )Ps.
    61,285
    
    
    Ps.
    53,145
  5.
    
    Inventories 2003
    
    2002Finished goods
    
    Ps.
    8,276
    
    
    Ps.
    5,961Production-in-process
    
    
    48
    
    
    
    223Raw materials
    
    
    13,249
    
    
    
    16,887Spare parts and materials for immediate consumption
    
    
    14,192
    
    
    
    16,970Other
    
    
    1,49137,256
    
    
    
    40,041Allowance for obsolete inventories
    
    
    (1,680
    )
    
    
    (30
    )35,576
    
    
    
    40,011Advances to suppliers
    
    
    5,819
    
    
    
    5,061Merchandise-in-transit
    
    
    11,266
    
    
    
    5,441Ps.
    52,661
    
    
    Ps.
    50,513
  6.
    
    Investment in associated companyAs described in Note 1, in 2003 the Company sold its participation in
EYEMSA, an associated company, which at the date of the sale was 16.19% and
as of December 31, 2002 was 41.97%. The condensed balance sheet as of
December 31, 2002 and the condensed statement of operations for the period
from January 1 to June 30, 2003, and the years ended December 31, 2002 and
2001, of the associated company are as follows: F-76




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##### Table of Contents



2002Balance sheet:Total assets
    
    Ps.
    2,075,666Total liabilities
    
    
    (1,741,414
    )Stockholders equity
    
    Ps.
    334,252Companys participation
    
    Ps.
    140,286
 2003
    
    2002
    
    2001Statements of operations:Income
    
    Ps.
    745,785
    
    
    Ps.
    1,649,099
    
    
    Ps.
    1,654,167Gross profit
    
    
    103,493
    
    
    
    413,050
    
    
    
    222,281Net (loss) income
    
    
    (10,846
    )
    
    
    (142,526
    )
    
    
    91,407Companys participation
    
    Ps.
    (1,756
    )
    
    Ps.
    (48,092
    )
    
    Ps.
    38,213
  7.
    
    Property, plant and equipment 2003
    
    2002Buildings
    
    Ps.
    656,676
    
    
    Ps.
    656,584Industrial machinery and equipment
    
    
    2,780,490
    
    
    
    2,133,526Vehicles, computers, office furniture and equipment
    
    
    185,139
    
    
    
    180,9323,622,305
    
    
    
    2,971,042Accumulated depreciation and amortization
    
    
    (2,317,303
    )
    
    
    (1,899,339
    )Accumulated impairment loss
    
    
    (113,629
    )
    
    
    (51,462
    )1,191,373
    
    
    
    1,020,241Land
    
    
    253,227
    
    
    
    249,936Construction-in-progress
    
    
    1,723
    
    
    
    4,311Ps.
    1,446,323
    
    
    Ps.
    1,274,488
  Depreciation expense for the years ended December 31, 2003, 2002 and 2001
was Ps. 41,659, Ps. 41,869 and Ps. 22,444, respectively.During 2003 and 2002, the Company reviewed the recoverable value of its
long-lived assets, which was determined by the future cash flow generated
over the useful lives of the corresponding assets, which extends to 22
years after 2003. As a result, the Company recorded Ps. 64,131
and Ps. 51,462
during 2003 and 2002, respectively, as an impairment loss for its
long-lived assets. The deferred income tax effect for this reserve resulted
in a benefit of Ps. 20,522 and Ps. 16,468 during 2003 and 2002, respectively.As of December 31, 2003 and 2002 the Company has assets temporarily out of
use for a net amount of Ps. 17,136 and Ps. 55,008, respectively.In 2001, the Company sold its secondary fiber treatment plant to
Arrendadora Bank of America, S. A. in Ps. 37,043. The proceeds and the cost
of the sale were recorded in the statement of operations of 2001, resulting
in a loss of Ps. 1,265, such loss was recorded in other expenses.
Subsequently, CODUSA acquired the plant through a financing lease and
subleased it to the Company. F-77




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##### Table of Contents



8.
    
    Long-term debtLong-term debt relates to a loan denominated in U.S. dollars from Nacional
Financiera, S. A., which bears interest based on LIBOR plus a margin in a
range from 0.825% to 1.25%, to be amortized in 52 quarterly installments
from January 1995 to 2006. The outstanding balance on this loan as of
December 31, 2003 and 2002 is US$224 (Ps. 2,527) and US$334
(Ps. 3,623),
respectively. This loan is secured with the machinery and equipment
acquired with its proceeds and is guaranteed by CODUSA.As of December 31, 2003, long-term debt matures as follows: 2005
    
    Ps.
    6502006
    
    
    649Ps.
    1,299
  9.
    
    Financial instruments and derivative 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 use of different market
assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.The carrying amounts of the Companys accounts receivable, accounts
payable and current notes payable approximate fair value because they
have relatively short-term maturities and bear interest at rates tied
to market indicators, as appropriate. The Companys long-term debt
consists of debt instruments that bear interest at variable rates tied
to market indicators.b.
    
    Concentration of credit risk The financial instruments that
potentially are subject to a concentration of credit risk is
principally trade accounts receivable. 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. There were no
customers exceeding 10% of net sales for any of the periods presented.  10.
    
    Employee retirement obligations  The Company maintains a pension plan for certain employees. In addition,
in accordance with the Mexican Labor Law, the Company provides seniority
premium benefits to employees under certain circumstances. These benefits
consist of a lump sum payment of 12 days wages for each year worked,
calculated using the most recent salary, not to exceed twice the legal
minimum wage established by law. The related liability and annual cost of
such benefits are calculated by an independent actuary on the basis of
formulas defined in the plans using the projected unit credit method. The
present values of these obligations and the rates used for the calculations
are: F-78




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##### Table of Contents



2003
    
    2002Accumulated benefit obligation
    
    Ps.
    43,711
    
    
    Ps.
    45,897Projected benefit obligation
    
    Ps.
    938
    
    
    Ps.
    796Unrecognized items:Variances for assumptions and adjustments
based on experience
    
    
    (123
    )
    
    
    168Transition asset
    
    
    (42
    )
    
    
    (151
    )Net projected liability
    
    
    773
    
    
    
    813Additional liability related to seniority premiums
    
    
    42,938
    
    
    
    45,084Ps.
    43,711
    
    
    Ps.
    45,897
  The rates used in the actuarial calculations, net of effects of inflation,
were: 2003
    
    2002
    
    2001%
    
    %
    
    %Discount of the projected benefit
obligation to present value
    
    
    5
    
    
    
    5
    
    
    
    5Salary increase
    
    
    2
    
    
    
    5
    
    
    
    5
  The amortization periods for the unamortized items are as follows: RemainingYearsTransition asset
    
    
    18Variances in assumptions
    
    
    18
  Net period cost is comprised as follows: 2003
    
    2002
    
    2001Service costs
    
    Ps.
    239
    
    
    Ps.
    292
    
    
    Ps.
    180Amortization of
transition asset,
variances for
assumptions and
adjustments based
on experience
    
    
    2
    
    
    
    4
    
    
    
    1Interest cost
    
    
    24
    
    
    
    4
    
    
    
    3Net period cost
    
    Ps.
    265
    
    
    Ps.
    300
    
    
    Ps.
    184
  In connection with the reorganization process of the Companys operations,
there was a termination of administrative and operating personnel during
2003 that represented payments of Ps.1,114, which are included in other
expenses in the accompanying statements of operations.  11.
    
    Stockholders equity  a.
    
    Common stock shares at par value as of December 31 are comprised
as follows: F-79




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##### Table of Contents



2003Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed
capital   Series A
    
    
    100,000
    
    
    Ps.
    100
    
    
    Ps.
    115,786
    
    
    Ps.
    115,886Variable
capital  
Series B
    
    
    2,117,642
    
    
    
    2,118
    
    
    
    1,980,761
    
    
    
    1,982,879Total shares
    
    
    2,217,642
    
    
    Ps.
    2,218
    
    
    Ps.
    2,096,547
    
    
    Ps.
    2,098,765
 2002Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed
capital  Series A
    
    
    100,000
    
    
    Ps.
    100
    
    
    Ps.
    115,786
    
    
    Ps.
    115,886Variable
capital  
Series B
    
    
    1,710,711
    
    
    
    1,711
    
    
    
    1,980,761
    
    
    
    1,982,472Total shares
    
    
    1,810,711
    
    
    Ps.
    1,811
    
    
    Ps.
    2,096,547
    
    
    Ps.
    2,098,358
  Common stock consists of nominative shares with a par value of one
peso each. Variable capital is unlimited.b.
    
    On August 2001, a reimbursement of paid-in capital resulted in a
reduction of shareholders equity in the amount of Ps..1,264.c.
    
    At the General Extraordinary Shareholders Meeting held on July 1,
2003, the issuance of 406,931 shares in the amount of Ps..407 was
approved, increasing the variable portion of the common stock. All the
aforementioned shares were distributed among the shareholders of the
merged companies, ratably based on the shareholders equity of the
merged companies as of June 30, 2003.d.
    
    Retained earnings include the statutory legal reserve. 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 (historical pesos). 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, 2003 and 2002, the legal reserve, in
historical pesos, was Ps.30,579.e.
    
    Stockholders equity, except restated paid-in capital and tax
retained earnings, will be subject to a tax at the rate in effect when
a dividend is distributed. In 2003, the rate was 34% and will be
reduced by one percentage point each year until reaching 32% in 2005.
Any tax paid on such distribution, may be credited against the income
tax payable of the year in which the tax on the dividend is paid and
the two fiscal years following such payment.f.
    
    The balances of the stockholders equity tax accounts as of
December 31, are: 2003
    
    2002Contributed capital account
    
    Ps.
    789,864
    
    
    Ps.
    517,595Net tax income account
    
    
    862,386
    
    
    
    729,837Total
    
    Ps.
    1,652,250
    
    
    Ps.
    1,247,432
 F-80




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##### Table of Contents



As illustrated in the preceding table, the total amount of the
balances of the stockholders equity tax accounts exceeds
stockholders equity, according to the accompanying balance sheet.  12.
    
    Foreign currency balances and transactions  a.
    
    At December 31, the foreign currency monetary position is as
follows: 2003
    
    2002Thousands of U.S. dollars:Monetary assets
    
    
    27,762
    
    
    
    2,915Monetary liabilities
    
    
    (32,683
    )
    
    
    (33,781
    )Monetary liability position, net
    
    
    (4,921
    )
    
    
    (30,866
    )Equivalent in Mexican pesos
    
    Ps.
    (55,298
    )
    
    Ps.
    (322,219
    )
  b.
    
    Nonmonetary assets of foreign origin at December 31, 2003 are as
follows: Foreign
    
    EquivalentCurrency
    
    in MexicanCurrency
    
    Balance
    
    PesosInventories
    
    U.S. dollar
    
    
    311
    
    
    Ps.
    3,497Industrial machinery and
equipment-United States of America
    
    U.S. dollar
    
    
    34,003
    
    
    
    382,097Canada
    
    Canadian dollar
    
    
    29,124
    
    
    
    253,484Germany
    
    Euro
    
    
    1,257
    
    
    
    17,805
  c.
    
    Transactions denominated in foreign currency were as follows: 2003
    
    2002
    
    2001(In thousands ofU.S. dollars)Export sales
    
    
    1,150
    
    
    
    2,867
    
    
    
    206Interest income
    
    
    330
    
    
    
    279
    
    
    
    209Interest expense
    
    
    3,244
    
    
    
    4,163
    
    
    
    36Import purchases
    
    
    1,389
    
    
    
    12,531
    
    
    
    370Acquisition of machinery and
equipment
    
    
    572
    
    
    
    
    
    
    
    691Acquisition of spare parts and
services
    
    
    2,618Other
    
    
    109
    
    
    
    134
    
    
    
    253
  d.
    
    The exchange rates in effect at the dates of the balance sheets
and of issuance of the financial statements were as follows: December 31
    
    April 30,2003
    
    2002
    
    2004U.S. dollar
    
    Ps.
    11.2372
    
    
    Ps.
    10.4393
    
    
    Ps.
    11.4068
 F-81




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##### Table of Contents



13.
    
    Transaction and balances with related parties  a.
    
    Transactions with related parties, carried out in the ordinary
course of business, were as follows: 2003
    
    2002
    
    2001Revenues:Sales
    
    Ps.
    524,264
    
    
    Ps.
    507,621
    
    
    Ps.
    278,216Leases
    
    
    1,265
    
    
    
    13,380
    
    
    
    13,903Interest income
    
    
    9,163
    
    
    
    3,938
    
    
    
    2,159Sale of industrial machinery and other
equipment
    
    
    2,066Sale of investment in
associated company
    
    
    228,115Other
    
    
    1,566
    
    
    
    28,704
    
    
    
    8,574Expenses:Purchases
    
    Ps.
    41,855
    
    
    Ps.
    160,366
    
    
    Ps.
    34,318Interest expense
    
    
    71,741
    
    
    
    73,564
    
    
    
    48,871Acquisition of machinery
and equipment
    
    
    11Administrative services
    
    
    9,792
    
    
    
    9,083
    
    
    
    17,702Leases of
machinery and equipment
    
    
    7,476
    
    
    
    4,447Other expenses
    
    
    6,608
    
    
    
    2,506
    
    
    
    7,406
  b.
    
    Balances receivable and payable with related parties are as
follows: 2003
    
    2002Due from related parties-Administración Corporativa de Durango, S. A. de
C. V.
    
    Ps.
    52,893
    
    
    Ps.
    1,560Envases y Empaques de México, S. A. de C. V.
    
    
    44,011
    
    
    
    33,036Empaques de Cartón Titán, S. A. de C. V.
    
    
    3,593
    
    
    
    24,164Administradora Corporativa y Mercantil, S. A. de C. V.
    
    
    10,557CODUSA, mainly for sale of shares
    
    
    267,244Fábrica de Papel Tuxtepec, S. A. de C. V.
    
    
    9,518
    
    
    
    1,704Fábrica Mexicana de Papel, S. A. de C. V.
    
    
    10,320
    
    
    
    11,867Grupo Pipsamex, S. A. de C. V.
    
    
    3,877
    
    
    
    4,172Papeles Formatodo, S. A. de C. V.
    
    
    294Ponderosa Industrial de México, S. A. de C. V.
    
    
    984
    
    
    
    713Productora Nacional de Papel, S. A. de C. V.
    
    
    
    
    
    
    3,151Tubos y Especialidades de México, S. A. de C. V.
    
    
    1,571
    
    
    
    17,825Cartonpack, S. A. de C. V.
    
    
    
    
    
    
    2,914Cajas y Corrugados de Chihuahua, S. A. de C. V.
    
    
    
    
    
    
    495Other
    
    
    199
    
    
    
    45405,061
    
    
    
    101,646Effect of sale of shares to CODUSA
    
    
    (228,115
    )Ps.
    176,946
    
    
    Ps.
    101,646
 F-82




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##### Table of Contents



2003
    
    2002Due to related parties-Porteadores de Durango, S. A. de C. V.
    
    Ps.
    3
    
    
    Ps.
    435Durango McKinley Paper Company
    
    
    1,484
    
    
    
    6,635Industrias Centauro, S. A. de C. V.
    
    
    445,594
    
    
    
    104,222Corporación Durango, S. A. de C. V.
    
    
    
    
    
    
    144,075Other
    
    
    50
    
    
    
    197Ps.
    447,131
    
    
    Ps.
    255,564
  The Company has current account agreements with CODUSA, Administración
Corporativa de Durango, S. A. de C. V. and Industrias Centauro, S. A.
de C. V. (Centauro). According to these agreements, the debt or
credit balances bear interest at 8% and 15% on Mexican peso balances
and at 3% and 13.8% on the U.S. dollar denominated balances.On July 1, 2003, the Company and TITAN entered into a lease agreement
for the building where PAPELES Guadalajara is located. The contract
is for undefined time period and establishes that the rent payment
will be calculated by adding 1% to the expenses incurred by TITAN
related to the building. 14. Other expenses 2003
    
    2002
    
    2001Impairment of long-lived assets
    
    Ps.
    (64,131
    )
    
    Ps.
    (51,462
    )
    
    Ps.Recovery of federal rights
    
    
    26,654Other expenses
    
    
    (1,748
    )
    
    
    (7,119
    )
    
    
    (6,105
    )Ps.
    (39,225
    )
    
    Ps.
    (58,581
    )
    
    Ps.
    (6,105
    )
  In May 2000, the Company initiated an injunction against a change in the
Federal Law of Water Extraction Rights published in December 1999, related
to the extraction an use of national water. During April 2003, the Company
received a favorable ruling and recovered the federal rights paid related
to these proceedings.15.
    
    Income taxes, tax on assets and employee statutory profit sharingIn accordance with Mexican tax law, the Company is subject to income tax
(ISR) and tax on assets (IMPAC). ISR takes into consideration the
taxable and deductible effects of inflation.The ISR rate was 35% in 2002 and 2001 and 34% in 2003, and will be reduced
by one percentage point each year until reaching 32% in 2005. In 2002, the
deduction for employee statutory profit sharing (PTU) and the obligation
to withhold taxes on dividends paid to individuals or foreign residents
were eliminated.IMPAC is calculated by applying a rate of 1.8% on the net average of the
majority of restated assets less certain liabilities and is payable only to
the extent that it exceeds ISR payable for the same period. If in any year
IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be
reduced by the amount by which ISR exceeded IMPAC in the three preceding
years and any required payment of IMPAC is creditable against the excess of
ISR over IMPAC of the following ten years. F-83




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##### Table of Contents



The Company incurs ISR and IMPAC with CODUSA in the proportion that CODUSA
owns the voting stock of its subsidiaries at the balance sheet date.
Beginning on January 1, 2002, the proportion is calculated based on the
average daily equity percentage that CODUSA owns of its subsidiaries during
the year. The tax results of the subsidiaries are at 60% of such proportion
and the tax results of the holding company are also at 60%. Estimated
payments of ISR and IMPAC of both CODUSA and its subsidiaries are made as
if CODUSA did not file a consolidated tax return.  a.
    
    The reconciliation of the statutory and effective ISR rates
expressed as a percentage of loss before ISR, equity in income (loss)
of associated company and extraordinary item for the years ended
December 31, 2003, 2002 and 2001 is: 2003
    
    2002
    
    2001Statutory rate
    
    
    34.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Add (deduct) the
effect of
permanent
differences other
than inflation
    
    
    (36.6
    %)
    
    
    36.7
    %
    
    
    386.5
    %Add (deduct) the
effects of
inflation
    
    
    (4.0
    %)
    
    
    (14.7
    %)
    
    
    (18.2
    %)Effect of change
in statutory rate
on deferred ISR
    
    
    4.2
    %
    
    
    35.8
    %Change in
valuation
allowance for
recoverable IMPAC
and benefit of tax
loss carryforwards
    
    
    (10.8
    %)Effective rate
    
    
    (13.2
    %)
    
    
    92.8
    %
    
    
    439.7
    %
  b.
    
    At December 31, 2003 and 2002 the main items comprising the
liability balance of deferred ISR are: 2003
    
    2002Deferred ISR (asset) liability:Property, plant and equipment
    
    Ps.
    408,194
    
    
    Ps.
    346,355Inventories
    
    
    12,978
    
    
    
    7,488Allowance for doubtful accounts
    
    
    (2,215
    )
    
    
    (741
    )Accrued expenses
    
    
    (38,421
    )
    
    
    (37,327
    )Deferred assets
    
    
    5,682
    
    
    
    8,109Other  net
    
    
    1,336
    
    
    
    1,425Deferred ISR from temporary differences
    
    
    387,554
    
    
    
    325,309Effect of tax loss carryforwards
    
    
    (11,721
    )
    
    
    (18,348
    )Recoverable tax on assets
    
    
    (2,343
    )
    
    
    (3,930
    )373,490
    
    
    
    303,031Valuation allowance for the recoverable tax on assets
    
    
    1,919Net long-term deferred ISR liability
    
    Ps.
    375,409
    
    
    Ps.
    303,031
  c.
    
    Due to deterioration in the circumstances used to assess the
recovery of tax on assets paid in 2003 the valuation allowance for
recoverable tax on assets was increased by Ps.1,919.d.
    
    At December 31, 2003 and 2002, the Company has taxable temporary
and permanent differences related to deferred PTU, mainly inventories
and property, plant and equipment, for which the deferred PTU
liabilities were neither estimated nor recorded because the Company
believes that they will not reverse due to the recurring nature of the
related transactions. F-84




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##### Table of Contents



e.
    
    Tax loss carryforwards and recoverable IMPAC for which the
deferred ISR asset and prepaid ISR, respectively, have been partially
recognized may be recovered subject to certain conditions. Restated
amounts as of December 31, 2003 and expiration dates are: Year of
    
    Tax Loss
    
    RecoverableExpiration
    
    Carryforwards
    
    IMPAC2009
    
    Ps.
    1,057
    
    
    Ps.
    402010
    
    
    
    
    
    
    342011
    
    
    
    
    
    
    1752012
    
    
    29,780
    
    
    
    1752013
    
    
    5,793
    
    
    
    1,919Ps.
    36,630
    
    
    Ps.
    2,343
  f.
    
    For the years ended December 31, 2003, 2002 and 2001, the change
in excess (insufficiency) in restated stockholders equity, as shown
in the accompanying statements of changes in stockholders equity, is
presented net of the effect of the related deferred income tax of
Ps.12,415, Ps.13,664 and Ps.1,201, respectively.  16.
    
    Commitments  a.
    
    On June 24, 2002, CODUSA issued US$175 million in 13 3/4 Senior
Notes due 2009. These notes are jointly and severally guaranteed on an
unsecured basis by the Company. Additionally, upon the issuance of the
notes, the Company also equally and ratably guaranteed the 2006 and
2008 Notes. The total amount guaranteed by the Company is US$487.1
million. Further, the Company is guarantor of other financing
agreements for CODUSA in the amount of US$112.4 million. Since the
last months of 2002, CODUSA is in default of interest and principal
payments related to these financing agreements, and as described in
Note 1, is currently in a restructuring process with it creditors.b.
    
    The Company entered into a 74-month non-cancelable machinery and
equipment operating lease agreement with CODUSA starting on June 1,
2001. The related lease expense for 2003, 2002 and 2001 amounted to
Ps.6,079, Ps.3,914 and Ps.1,034, respectively. Minimum lease payments
under this contract as a December 31, 2003 were as follows: Year
    

Amount(Thousands
of U.S.dollars)2004
    
    
    5952005
    
    
    5952006
    
    
    5952007
    
    
    3972,182
  17.
    
    Contingencies  a.
    
    The Company has initiated an injunction against the Mexican tax
authorities regarding the unconstitutionality of the Substitutive Tax
of the Wage Credit. Management believes that the outcome of this
process will be favorable to the Company, which represents a
contingent asset of Ps.1,190. F-85




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##### Table of Contents



b.
    
    As of December 31, 2003 labor suits existed derived from the
liquidation of personnel in September 2001. These suits are in
process, and the contingent liability is estimated to be approximately
Ps.7,000. Management believes the outcome of these labor suits will
be favorable to the Company therefore, no liability has been recorded.c.
    
    Additional taxes payable could arise in transactions with
nonresident related parties if the tax authority, during a review,
believes that the prices and amounts used by the Company are not
similar to those used with or between independent parties in
comparable transactions.  18.
    
    New accounting principlesIn March 2003, the Mexican Institute of Public Accountants (MIPA) issued
Bulletin C-15, Impairment of the Value of Long-Lived Assets and Their
Disposal (C-15), whose adoption is mandatory for fiscal years beginning
on or after January 1, 2004, although early adoption is encouraged. C-15
establishes, among other things, new rules for the calculation and
recognition of impairment losses for long-lived assets and their reversal.
It also provides guidance as to indicators of potential impairment in the
carrying amount of tangible and intangible long-lived assets in use,
including goodwill. Companies must test for impairment unless there is
conclusive evidence that the indicators of impairment are temporary. The
calculation of such loss requires the determination of the recoverable
value, which is now defined as the greater of the net selling price of a
cash-generating unit and its value in use, which is the net present value
of discounted future net cash flows. The accounting principles issued prior
to this new bulletin used future net cash flows, without requiring the
discounting of such cash flows. However, since the present value of
estimated future net cash flows from the use of this machinery is greater
than its book value as of December 31, 2003, the Company estimates that the
adoption of C-15 as of January 1, 2004, will not have any effects on its
financial situation and results of operations.In May 2003, the MIPA issued Bulletin C-12, Financial Instruments of a
Debt or Equity Nature or a Combination of Both (C-12), whose application
is mandatory for financial statements for periods beginning on or after
January 1, 2004, although early adoption is encouraged. C-12 is the
compilation of the standards issued by the MIPA with respect to the issue
of debt or equity financial instruments, or a combination of both, and
includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between
liabilities and stockholders equity and establishes the rules for
classifying and valuing the components of debt and equity of combined
financial instruments in the initial recognition. Subsequent recognition
and valuation of liabilities and stockholders equity of the financial
instruments is subject to the standards issued previously in the applicable
bulletins. Since the Company has not issued any financial instruments with
characteristics of both debt and equity, management believes this new
accounting principle will not have any effects on its financial situation
and results of operations.19.
    
    Differences Between Mexican GAAP and US GAAPThe financial statements of the Company are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from US GAAP. A
reconciliation of the reported net loss, stockholders equity and
comprehensive income (loss) to US GAAP is presented in Note 20. It should
be noted that this reconciliation to US GAAP does not include the reversal
of the restatement of the financial statements for the effects of inflation
as required by Bulletin B-10, Recognition of the Effects of Inflation in
the Financial Information, of Mexican GAAP. The application of this
bulletin represents a comprehensive measure of the effects of price-level
changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting in
Mexican pesos for both Mexican and US accounting purposes. F-86




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##### Table of Contents



The differences between Mexican GAAP and US GAAP included in the
reconciliation that affect the financial statements of the Company are
described below.  a.
    
    Classification differences Certain items require a different
classification in the balance sheet or statement of operation under US
GAAP. These include:  
    
    As explained in Note 5, under Mexican GAAP, advances to
suppliers are recorded as inventories. Under US GAAP, advances to
suppliers are classified as prepaid expenses.
    
    The impairment of long-lived assets, the gain or loss
on the disposition of fixed assets, all severance indemnities,
plant fixed cost, and employee profit sharing must be included in operating
expenses under US GAAP.  b.
    
    Deferred start-up and research and development costs In 2002,
under Mexican GAAP the Company deferred certain costs basically in
relation to the development of a new paper manufacturing process.
Under US GAAP, SFAS No. 2, Accounting for Research and Development
Costs and SOP 98-5, Reporting on the Costs of Start-up Activities,
require that the Company expense the start-up and research and
development costs as incurred. As such, at December 31, 2003 and 2002,
the start-up and research and development costs have been included in
the calculation of net income (loss) under US GAAP.c.
    
    Restatement of imported fixed assets As explained in Note 3.e,
under Mexican GAAP, fixed assets of foreign origin have been restated
by applying the inflation rate of the country of origin and then
translated at the year-end exchange rate of the Mexican peso.Under US GAAP, the Company applies the regulations of the Securities
and Exchange Commission (SEC), which require that all machinery and
equipment, both domestic and imported, be restated using Mexican
inflation factors.d.
    
    Deferred income taxes and employee profit sharing The Company
follows SFAS No. 109, Accounting for Income Taxes, for US GAAP
purposes, which differs from Mexican GAAP as follows:  
    
    Under Mexican GAAP, deferred taxes are classified as
non-current, while under US GAAP deferred taxes are based on the
classification of the related asset or liability.
    
    Under Mexican GAAP, the effects of inflation on the
deferred tax balance generated by monetary items are recognized
in the result on monetary position. Under US GAAP, the deferred
tax balance is classified as a non-monetary item. As a result,
the statement of operations differs with respect to the
presentation of the gain (loss) on monetary position and deferred
income tax provision.
    
    Under Mexican GAAP, deferred employee profit sharing is
calculated considering only those temporary differences that
arise during the year and which are expected to turn around
within a defined period, while under US GAAP, the same liability
method as used for deferred income taxes is applied.
    
    The US GAAP adjustments to the accounting basis of
assets and liabilities generate a difference calculating the
deferred income tax under US GAAP compared to the one presented
under Mexican GAAP (see Note 15).
    
    Under US GAAP, in view of the going-concern
uncertainty, a full valuation allowance has been provided for all
deferred tax assets not assured of realization. F-87




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##### Table of Contents



The tax effects of temporary differences that generated deferred tax
liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred ISR (asset) liability:Property, plant and equipment
    
    Ps.
    640,869
    
    
    Ps.
    609,358Inventories
    
    
    9,659
    
    
    
    10,038Allowance for doubtful accounts
    
    
    (2,215
    )Accrued expenses
    
    
    (33,955
    )
    
    
    (39,381
    )Other assets
    
    
    5,513
    
    
    
    9,242Other
    
    
    (2,766
    )Deferred ISR from temporary differences
    
    
    617,105
    
    
    
    589,257Tax loss carryforwards
    
    
    (11,722
    )
    
    
    (18,348
    )Recoverable tax on assets
    
    
    (424
    )
    
    
    (3,930
    )604,959
    
    
    
    566,979Valuation allowance
    
    
    12,146
    
    
    
    22,278Net deferred ISR liability
    
    Ps.
    617,105
    
    
    Ps.
    589,257
  The changes in the balance of the deferred income taxes for the year
under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    589,257
    
    
    Ps.
    644,682Provision for the year
    
    
    29,782
    
    
    
    (55,425
    )Decrease due to merger
    
    
    (1,934
    )Balance at end of the year
    
    Ps.
    617,105
    
    
    Ps.
    589,257
  The tax effects of temporary differences that generated deferred
profit sharing liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred employee profit sharing (asset) liability:Property, plant and equipment
    
    Ps.
    207,237
    
    
    Ps.
    197,241Inventories
    
    
    3,018
    
    
    
    3,043Allowance for doubtful accounts
    
    
    (692
    )Accrued expenses
    
    
    (10,611
    )
    
    
    (15,486
    )Other assets
    
    
    1,723
    
    
    
    2,800Other
    
    
    (225
    )
    
    
    4,137Net deferred employee profit sharing liability
    
    Ps.
    200,450
    
    
    Ps.
    191,735
  The changes in the balance of the deferred employee profit sharing
liability for the year under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    191,735
    
    
    Ps.
    190,622Provision for the year
    
    
    8,715
    
    
    
    1,113Balance at end of the year
    
    Ps.
    200,450
    
    
    Ps.
    191,735
 F-88




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##### Table of Contents



The deferred income tax and profit sharing classification in the
condensed balance sheet as of December 31, 2003 and 2002 is as
follows: 2003EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred assets:Current
    
    Ps.
    (38,936
    )
    
    Ps.
    (11,528
    )
    
    Ps.
    (50,464
    )Long term
    
    
    (7,193
    )
    
    
    (2,248
    )
    
    
    (9,441
    )(46,129
    )
    
    
    (13,776
    )
    
    
    (59,905
    )Deferred liability:Current
    
    
    16,852
    
    
    
    5,266
    
    
    
    22,118Long term
    
    
    646,382
    
    
    
    208,960
    
    
    
    855,342663,234
    
    
    
    214,226
    
    
    
    877,460Deferred liability, net
    
    Ps.
    617,105
    
    
    Ps.
    200,450
    
    
    Ps.
    817,555
 2002EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred asset:Current
    
    Ps.
    (39,381
    )
    
    Ps.
    (15,486
    )
    
    Ps.
    (54,867
    )Long term
    
    
    (7,193
    )
    
    
    (2,249
    )
    
    
    (9,442
    )(46,574
    )
    
    
    (17,735
    )
    
    
    (64,309
    )Deferred liability:Current
    
    
    17,231
    
    
    
    9,428
    
    
    
    26,659Long term
    
    
    618,600
    
    
    
    200,042
    
    
    
    818,642635,831
    
    
    
    209,470
    
    
    
    845,301Deferred liability, net
    
    Ps.
    589,257
    
    
    Ps.
    191,735
    
    
    Ps.
    780,992
  e.
    
    Employee retirement obligations Under Mexican GAAP, the
liabilities for employee benefits are determined using actuarial
computations in accordance with Bulletin D-3, Labor Obligations,
which is substantially the same as US GAAP SFAS No. 87, Employers
Accounting for Pensions.Under Mexican GAAP and US GAAP, there is no difference in the
liabilities for seniority premiums and pension plans.The following sets forth the changes in benefit obligations, and the
funded status of such plans for 2003 and 2002 reconciled with the
amounts reported in the condensed balance sheets under US GAAP. 2003
    
    2002Accumulated benefit obligation
    
    Ps.
    43,711
    
    
    Ps.
    45,897Projected benefit obligation at beginning of year
    
    Ps.
    796
    
    
    Ps.
    510Service costs
    
    
    239
    
    
    
    292Interest cost
    
    
    24
    
    
    
    4Actuarial loss
    
    
    56
    
    
    
    (10
    )Benefits paid
    
    
    (177
    )Projected benefit obligation at end of year
    
    Ps.
    938
    
    
    Ps.
    796
 F-89




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##### Table of Contents



2003
    
    2002Amounts recognized in the balance sheets consist of:Unfunded liability
    
    Ps.
    938
    
    
    Ps.
    796Less-
Unrecognized transition obligation and other
    
    
    (165
    )
    
    
    17Net projected liability
    
    
    773
    
    
    
    813Intangible asset
    
    
    42,938
    
    
    
    45,084Liability recognized under US and Mexican GAAP
    
    Ps.
    43,711
    
    
    Ps.
    45,897
  f.
    
    Equity in earnings of associated company The Companys net
investment in EYEMSA under US GAAP differed from that recorded under
Mexican GAAP due to the restatement of imported fixed assets and the
deferred income taxes of its interest in Centauro.During 2002, EYEMSA sold its investment in Centauro. The US GAAP
carrying value of such investment was different to the carrying value
recorded under Mexican GAAP due to the difference mentioned in the
preceding paragraph. As a result the Company recognized a gain due to
the reversal of the US GAAP adjustments.g.
    
    Negative goodwill Under Mexican GAAP, CODUSA recorded negative
goodwill that arose from the acquisition of TITAN realized in prior
years, which represents the excess of the book value of the net assets
acquired over the purchase price. Such negative goodwill was
amortized into income over the period in wich CODUSA integrated these
operations into the entity.Under US GAAP, such excess of the book value was recorded as a
reduction in the carrying value of the long-term assets (primarily
fixed assets) of TITAN.As described in Note 1.b, PAPELES Guadalajara was incorporated as a
result of a spin-off of TITAN and subsequently was merged into the
Company; consequently, the carrying value of its long-term assets
recorded under Mexican GAAP differs from the US GAAP carrying values.h.
    
    Statement of cash flows Under Mexican GAAP, the Company
presents a statement of changes in financial position in accordance
with Bulletin B-12, Statement of Changes in Financial Position,
which identifies the generation and application of resources by the
differences between beginning and ending financial statement balances
in constant Mexican pesos. Bulletin B-12 also requires that monetary
and foreign exchange gains and losses be treated as cash items for the
determination of resources generated by operations.In accordance with US GAAP, the Company follows SFAS No. 95,
Statement of Cash Flows, which is presented below excluding the
effects of inflation.i.
    
    Summarized financial information under US GAAP The condensed
balance sheets as of December 31, 2003 and 2002, and the condensed
statements of operations, changes in stockholders equity and cash
flows for the three years ended December 31, 2003, 2002 and 2001,
reflecting US GAAP adjustments, are presented below. F-90




---



##### Table of Contents



Condensed balance sheets: 2003
    
    2002Total current assets
    
    Ps.
    344,989
    
    
    Ps.
    260,915Property, plant and equipment  Net
    
    
    2,171,073
    
    
    
    2,062,140Other assets  Net
    
    
    58,120
    
    
    
    205,461Total assets
    
    Ps.
    2,574,182
    
    
    Ps.
    2,528,516Current liabilities
    
    Ps.
    715,633
    
    
    Ps.
    508,945Total long-term liabilities
    
    
    906,023
    
    
    
    866,980Total liabilities
    
    
    1,621,656
    
    
    
    1,375,925Stockholders equity
    
    
    952,526
    
    
    
    1,152,591Total liabilities and stockholders equity
    
    Ps.
    2,574,182
    
    
    Ps.
    2,528,516
  Condensed statements of operations: 2003
    
    2002
    
    2001Net sales
    
    Ps.
    628,769
    
    
    Ps.
    617,879
    
    
    Ps.
    317,076Cost of sales and operating
expenses
    
    
    (661,167
    )
    
    
    (582,341
    )
    
    
    (463,159
    )Income (loss) from operations
    
    
    (32,398
    )
    
    
    35,538
    
    
    
    (146,083
    )Net comprehensive financing
cost
    
    
    (55,518
    )
    
    
    (83,442
    )
    
    
    (23,230
    )Other income (expenses)  Net
    
    
    (40,981
    )
    
    
    (18,646
    )
    
    
    53,814Income tax benefit (expense)
    
    
    (29,782
    )
    
    
    55,425
    
    
    
    88,560Net loss
    
    Ps.
    (158,679
    )
    
    Ps.
    (11,125
    )
    
    Ps.
    (26,939
    )Net loss
    
    Ps.
    (158,679
    )
    
    Ps.
    (11,125
    )
    
    Ps.
    (26,939
    )Excess (insufficiency) in
restated stockholders
equity
    
    
    55,308
    
    
    
    (355,988
    )
    
    
    (57,309
    )Gain on holding and sale of
investment in associated
company
    
    
    76,149US GAAP comprehensive loss
    
    Ps.
    (27,222
    )
    
    Ps.
    (367,113
    )
    
    Ps.
    (84,248
    )
 F-91




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##### Table of Contents



Changes in stockholders equity: 2003
    
    2002Balance at beginning of the year
    
    Ps.
    1,152,591
    
    
    Ps.
    1,519,704Net loss under US GAAP
    
    
    (158,679
    )
    
    
    (11,125
    )Excess (insufficiency) in restated
stockholders equity
    
    
    55,308
    
    
    
    (355,988
    )Gain on holding and sale of investment
in associated company
    
    
    76,149Increase due to merger
    
    
    55,272Receivable from sale of shares to CODUSA
    
    
    (228,115
    )Balance at end of the year
    
    Ps.
    952,526
    
    
    Ps.
    1,152,591
  Condensed statements of cash flows: 2003
    
    2002
    
    2001Operating activities:Net loss
    
    Ps.
    (158,679
    )
    
    Ps.
    (11,125
    )
    
    Ps.
    (26,939
    )Items that did not require
(generate) resources
    
    
    154,980
    
    
    
    11,699
    
    
    
    (128,012
    )Changes in operating assets
and liabilities
    
    
    23,529
    
    
    
    29,403
    
    
    
    159,118Net resources generated by
operating activities
    
    
    19,830
    
    
    
    29,977
    
    
    
    4,167Financing activities:Short-term and long-term
debt  Net
    
    
    (1,648
    )
    
    
    (1,124
    )
    
    
    (1,251
    )Other financing activities
    
    
    
    
    
    
    371
    
    
    
    (1,264
    )Net resources used in
financing activities
    
    
    (1,648
    )
    
    
    (753
    )
    
    
    (2,515
    )Investing activities:Acquisition of machinery
and equipment
    
    
    (23,725
    )
    
    
    (8,226
    )
    
    
    (13,925
    )Other investing activities
    
    
    6,444
    
    
    
    13,983
    
    
    
    36,262Net resources generated by
(used in) investing
activities
    
    
    (17,281
    )
    
    
    5,757
    
    
    
    22,337Effect of inflation and
exchange rate changes on
cash
    
    
    
    
    
    
    (35,433
    )
    
    
    (23,940
    )Increase (decrease) in cash
    
    
    1,195
    
    
    
    (452
    )
    
    
    49Cash increase due to merger
    
    
    294Balance at beginning of year
    
    
    142
    
    
    
    594
    
    
    
    545Balance at end of year
    
    Ps.
    1,337
    
    
    Ps.
    142
    
    
    Ps.
    594Supplemental cash flow
information:Interest paid
    
    Ps.
    85
    
    
    Ps.
    179
    
    
    Ps.
    369Income tax and tax on asset
paid
    
    
    400
    
    
    
    913
    
    
    
    612Ps.
    485
    
    
    Ps.
    1,092
    
    
    Ps.
    981
 F-92




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##### Table of Contents



20
    
    Reconciliation of Mexican GAAP to US GAAP  a.
    
    Reconciliation of net loss for the year 2003
    
    2002
    
    2001Net loss under Mexican GAAP
    
    Ps.
    (128,540
    )
    
    Ps.
    (53,424
    )
    
    Ps.
    (49,419
    )Deferred income taxes
    
    
    (12,441
    )
    
    
    (13,014
    )
    
    
    (10,549
    )Deferred employee
statutory profit sharing
expense
    
    
    (8,715
    )
    
    
    (1,113
    )
    
    
    22,398Purchase accounting
adjustments:Depreciation
    
    
    1,360Effect of fifth amendment
to Bulletin B-10
    
    
    (13,584
    )
    
    
    (16,768
    )
    
    
    (11,076
    )Equity in earnings of
associated company
    
    
    
    
    
    
    88,027
    
    
    
    21,707Deferred start-up and
research and development
costs
    
    
    3,241
    
    
    
    (14,833
    )Ps.
    (158,679
    )
    
    Ps.
    (11,125
    )
    
    Ps.
    (26,939
    )
  Under US GAAP, the monetary position effect of the statement of
operations adjustments is included in each adjustment, except for
intangible assets and goodwill, which are non-monetary.  b.
    
    Reconciliation of stockholders equity 2003
    
    2002Total stockholders equity under Mexican GAAP
    
    Ps.
    681,513
    
    
    Ps.
    857,733Deferred income taxes
    
    
    (241,695
    )
    
    
    (286,226
    )Deferred employee statutory profit sharing
    
    
    (200,450
    )
    
    
    (191,735
    )Purchase accounting adjustments:Accumulated negative goodwill
    
    
    (42,223
    )Accumulated depreciation
    
    
    13,375Effect of fifth amendment to Bulletin B-10:Fixed assets
    
    
    1,399,164
    
    
    
    1,379,075Fixed assets accumulated depreciation
    
    
    (645,566
    )
    
    
    (591,423
    )Deferred start-up and research and
development costs
    
    
    (11,592
    )
    
    
    (14,833
    )Total US GAAP stockholders equity
    
    Ps.
    952,526
    
    
    Ps.
    1,152,591
  c.
    
    Reconciliation of comprehensive income (loss) 2003
    
    2002
    
    2001Comprehensive
income (loss) under
Mexican GAAP
    
    Ps.
    4,606
    
    
    Ps.
    (397,869
    )
    
    Ps.
    171,287US GAAP adjustments:Net income (loss)
    
    
    (30,139
    )
    
    
    42,299
    
    
    
    22,480Result of
holding
non-monetary
assets
    
    
    (1,689
    )
    
    
    (11,543
    )
    
    
    (278,015
    )Comprehensive loss
    
    Ps.
    (27,222
    )
    
    Ps.
    (367,113
    )
    
    Ps.
    (84,248
    )
 F-93




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##### Table of Contents



21.
    
    Future impact of recently issued accounting standards under US GAAP not yet
in effect  a.
    
    SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities In April 2003 the FASB issued
SFAS No. 149, which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133. The changes in this Statement improve financial
reporting by requiring that contracts with comparable characteristics
be accounted for similarly. The new standard will be effective for
contracts entered into or modified after September 30, 2003, except as
stated below and for hedging relationships designated after September
3, 2003. In addition, except as stated below, all provisions of this
Statement should be applied prospectively.The provisions of this Statement that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters
that began prior to September 15, 2003, should continue to be applied
in accordance with their respective effective dates. The Company does
not anticipate that this new standard will have a significant impact
on its financial position or results of operations.b.
    
    FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46) In January 2003, the FASB issued FIN 46. FIN 46
clarified the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 was effective immediately
for all variable interests held by the Company in a variable interest
entity created after January 31, 2003. For a variable interest held by
the Company in a variable interest entity created before February 1,
2003, the Company will be required to apply the provisions of FIN 46
as of December 31, 2004. The Company does not currently have any
variable interests in a variable interest entity. * * * * * * F-94




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##### Table of Contents



Report of Independent Registered Public
Accounting Firm to the Board of Directors and
Stockholders of
Industrias Centauro, S. A. de C. V. We have audited the accompanying balance sheet of Industrias Centauro, S. A. de
C. V. (the Company), a 99% owned subsidiary of Corporación Durango, S. A. de
C. V. (CODUSA), as of December 31, 2003, and the related statements of
operations, changes in stockholders equity and changes in financial position
for the year then ended, all expressed in thousands of Mexican pesos of
purchasing power of December 31, 2003. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in Mexico and with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion. In our opinion, the 2003 financial statements present fairly, in all material
respects, the financial position of Industrias Centauro, S. A. de C. V. as of
December 31, 2003, and the results of its operations, changes in its
stockholders equity and changes in its financial position for the year then
ended in conformity with accounting principles generally accepted in Mexico. Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination
of stockholders equity and net loss as of and for the year ended December 31,
2003 to the extent summarized in Note 18. The accompanying financial statements as of December 31, 2003 and for the year
then ended have been prepared assuming that the Company will continue as a
going concern. As described in Note 2.c to the financial statements, during
2003 and 2002 the Company incurred significant net losses, and since 2001 its
operating margin has declined substantially. As of December 31, 2003 and 2002,
the Company had negative working capital and, like CODUSA, is experiencing
severe liquidity problems. Additionally, as mentioned in Note 14.b to the
financial statements, the Company is guarantor of several financing agreements
granted to CODUSA totaling US$623.7 million. Since November 2002 CODUSA has
failed to comply with the payments of interest and principal related to such
financing agreements and, as described in Note 1 to the financial statements,
is currently in a debt restructuring process with its creditors. These factors,
among others, raise substantial doubt about the Companys ability to continue
as a going concern. Managements plans related to these matters and the
description of CODUSAs plan of restructuring are described in Note 1; however,
this plan has not been completed. The Companys ability to continue as a going
concern is dependent upon its ability to generate profits and the restructuring
of CODUSAs debt. The accompanying financial statements do not include any
adjustments related to the valuation and presentation of assets or the
presentation and amount of liabilities that might result if the Company is
unable to continue as a going concern. F-95




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##### Table of Contents



The accompanying financial statements have been translated into English for the
convenience of readers in the United States of America. Galaz, Yamazaki, Ruiz Urquiza, S. C.
A member firm of Deloitte Touche Tohmatsu C.P.C. Claudia Leticia Rizo Navarro April 30, 2004
(June 28, 2004 as to Notes 1.d, 17, 18 and 19) F-96




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Mexico City, April 8, 2003, except with respect to restatement to constant
pesos as December 31, 2003 as to which the date is July 13, 2004. To the Board of Directors and Shareholders of
Industrias Centauro, S. A. de C. V.: We have audited the accompanying balance sheet of Industrias Centauro, S. A. de
C. V. (the Company), as of December 31, 2002 and the related statements of
income, of changes in shareholders equity and of changes in financial position
for each of the two years in the period ended December 31, 2002, which, as
described in Note 2, have been prepared on the basis of accounting principles
generally accepted in Mexico. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) as well as generally
accepted auditing standards in Mexico. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Industrias Centauro, S. A. de
C. V., as of December 31, 2002 and the results of its operations, the changes
in its shareholders equity and the changes in its financial position for each
of the two years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in Mexico. F-97




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##### Table of Contents



Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the Unites States of
America. The application of accounting principles generally accepted in the
United States of America would have affected the determination of the net
income for each of the two years in the period ended December 31, 2002 and the
determination of the shareholders equity as of December 31, 2002, to the
extent summarized in Note 18 to the financial statements. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which assumes that assets will be
realized and liabilities will be settled in the normal course of business
operations. As mentioned in Note 2, the Company has incurred significant net
losses, and its operating margin has declined substantially. As of December 31,
2002, the Company had negative working capital and similar to its parent,
Corporacion Durango, S.A. de C.V. (CODUSA), is experiencing severe liquidity
problems. Additionally, as mentioned in Note 14.b to the financial statements,
the Company is guarantor of several financing agreements granted to CODUSA.
Since November 2002, CODUSA has failed to comply with the payments of interest
and principal related to such financing agreements and, as described in Note 1,
is currently in a debt restructuring process with its creditors. These factors,
among others, raise substantial doubt about the Companys ability to continue
as a going concern. The accompanying financial statements include no adjustment
pertaining to the recoverability and classification of the amounts recorded as
assets and the amounts and classification of the liabilities that may become
necessary in the event that the Company is unable to continue in operation as a
going concern. Managements plans in this regard are mentioned in Note 1. PricewaterhouseCoopers /s/ PricewaterhouseCoopers F-98




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##### Table of Contents



Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Balance sheets
As of December 31, 2003 and 2002
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
 2003
    
    2002AssetsCurrent assets:Cash
    
    Ps.
    414
    
    
    Ps.
    545Accounts receivable  Net
    
    
    104,161
    
    
    
    70,498Due from related parties
    
    
    3,866,019
    
    
    
    316,172Inventories  Net
    
    
    142,080
    
    
    
    214,709Prepaid expenses
    
    
    644
    
    
    
    177Total current assets
    
    
    4,113,318
    
    
    
    602,101Investment in shares
    
    
    2,494
    
    
    
    2,593Property, plant and equipment  Net
    
    
    1,976,662
    
    
    
    2,089,669Intangible asset of employee retirement obligations
    
    
    350
    
    
    
    191Other assets  Net
    
    
    11,911
    
    
    
    11,888Total
    
    Ps.
    6,104,735
    
    
    Ps.
    2,706,442Liabilities and stockholders equityCurrent liabilities:Trade accounts payable
    
    Ps.
    100,728
    
    
    Ps.
    57,649Due to related parties
    
    
    4,373,524
    
    
    
    966,384Accrued expenses and taxes, other than income taxes
    
    
    106,395
    
    
    
    18,021Income tax payable
    
    
    
    
    
    
    991Employee statutory profit sharing
    
    
    
    
    
    
    940Total current liabilities
    
    
    4,580,647
    
    
    
    1,043,985Long-term liabilities:Deferred income taxes
    
    
    505,021
    
    
    
    568,572Employee retirement obligations
    
    
    2,239
    
    
    
    1,550Total long-term liabilities
    
    
    507,260
    
    
    
    570,122Total liabilities
    
    
    5,087,907
    
    
    
    1,614,107Commitments and contingenciesStockholders equity:Common stock
    
    
    2,516,067
    
    
    
    2,190,931Retained earnings (accumulated deficit)
    
    
    (245,368
    )
    
    
    175,248Insufficiency in restated stockholders equity
    
    
    (603,355
    )
    
    
    (623,328
    )Cumulative initial effect of deferred income taxes
    
    
    (650,516
    )
    
    
    (650,516
    )Total stockholders equity
    
    
    1,016,828
    
    
    
    1,092,335Total
    
    Ps.
    6,104,735
    
    
    Ps.
    2,706,442
 See accompanying notes to financial statements. F-99




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##### Table of Contents



Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Statements of operations
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
 2003
    
    2002
    
    2001Net sales
    
    Ps.
    1,113,343
    
    
    Ps.
    946,712
    
    
    Ps.
    1,035,344Cost of sales
    
    
    1,050,178
    
    
    
    787,437
    
    
    
    774,705Gross profit
    
    
    63,165
    
    
    
    159,275
    
    
    
    260,639Selling, general and administrative expenses
    
    
    50,393
    
    
    
    43,516
    
    
    
    47,289Income from operations
    
    
    12,772
    
    
    
    115,759
    
    
    
    213,355Net comprehensive financing (cost) income:Interest expense
    
    
    (475,451
    )
    
    
    (70,582
    )
    
    
    (55,307
    )Interest income
    
    
    379,618
    
    
    
    35,996
    
    
    
    21,211Exchange (loss) gain
    
    
    (91,123
    )
    
    
    (116,671
    )
    
    
    50,825Monetary position gain
    
    
    28,628
    
    
    
    35,581
    
    
    
    37,022(158,328
    )
    
    
    (115,676
    )
    
    
    53,751Other expenses  Net
    
    
    (453,589
    )
    
    
    (370,664
    )
    
    
    (21,515
    )Income (loss) before income taxes and
employee statutory profit sharing
    
    
    (599,145
    )
    
    
    (370,581
    )
    
    
    245,591Income tax benefit (expense)
    
    
    178,529
    
    
    
    201,917
    
    
    
    (26,660
    )Employee statutory profit sharing expense
    
    
    
    
    
    
    (994
    )
    
    
    (952
    )Net income (loss)
    
    Ps.
    (420,616
    )
    
    Ps.
    (169,658
    )
    
    Ps.
    217,979
 See accompanying notes to financial statements. F-100




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##### Table of Contents



Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Statements of changes in stockholders equity
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
 Insufficiency
    
    Cumulative initialRetained earnings
    
    in restated
    
    effect of deferred
    
    Total stockholdersCommon stock
    
    (accumulated deficit)
    
    stockholders equity
    
    income taxes
    
    equityBalances as of January 1, 2001
    
    Ps.
    2,190,931
    
    
    Ps.
    126,927
    
    
    Ps.
    (326,293
    )
    
    Ps.
    (650,516
    )
    
    Ps.
    1,341,049Comprehensive loss
    
    
    
    
    
    
    217,979
    
    
    
    (218,966
    )
    
    
    
    
    
    
    (987
    )Balances as of December 31, 2001
    
    
    2,190,931
    
    
    
    344,906
    
    
    
    (545,259
    )
    
    
    (650,516
    )
    
    
    1,340,062Comprehensive loss
    
    
    
    
    
    
    (169,658
    )
    
    
    (78,069
    )
    
    
    
    
    
    
    (247,727
    )Balances as of December 31, 2002
    
    
    2,190,931
    
    
    
    175,248
    
    
    
    (623,328
    )
    
    
    (650,516
    )
    
    
    1,092,335Increase due to merger (see Note 1.b)
    
    
    325,136
    
    
    
    
    
    
    
    (63,448
    )
    
    
    
    
    
    
    261,688Comprehensive loss
    
    
    
    
    
    
    (420,616
    )
    
    
    83,421
    
    
    
    
    
    
    
    (337,195
    )Balances as of December 31, 2003
    
    Ps.
    2,516,067
    
    
    Ps.
    (245,368
    )
    
    Ps.
    (603,355
    )
    
    Ps.
    (650,516
    )
    
    Ps.
    1,016,828
 See accompanying notes to financial statements. F-101




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##### Table of Contents



Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Statements of changes in financial position
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
 2003
    
    2002
    
    2001Operating activities:Net income (loss)
    
    Ps.
    (420,616
    )
    
    Ps.
    (169,658
    )
    
    Ps.
    217,979Items that did not require (generate) resources:Depreciation and amortization
    
    
    60,708
    
    
    
    69,849
    
    
    
    62,290Loss on sale of industrial machinery and
equipment
    
    
    366
    
    
    
    20
    
    
    
    7,682Employee retirement obligations
    
    
    128
    
    
    
    369
    
    
    
    376Deferred income taxes
    
    
    (178,529
    )
    
    
    (201,917
    )
    
    
    (18,626
    )Impairment of long-lived assets
    
    
    420,968
    
    
    
    351,429(116,975
    )
    
    
    50,092
    
    
    
    269,701Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable  Net
    
    
    (13,360
    )
    
    
    22,623
    
    
    
    15,462Inventories Net
    
    
    (75,294
    )
    
    
    22
    
    
    
    37,451Prepaid expenses
    
    
    (277
    )
    
    
    6,847
    
    
    
    (6,734
    )Increase (decrease) in:Trade accounts payable
    
    
    60,074
    
    
    
    (24,769
    )
    
    
    (98,980
    )Due to related parties  Net
    
    
    20,514
    
    
    
    (32,789
    )
    
    
    (169,605
    )Accrued expenses and taxes, other than
income taxes
    
    
    79,142
    
    
    
    (10,552
    )
    
    
    12,399Other  Net
    
    
    (12,724
    )
    
    
    (25
    )
    
    
    121Net resources generated by (used
in) operating activities
    
    
    (58,900
    )
    
    
    11,449
    
    
    
    59,815Financing activities:Net resources used in payments of debt
    
    
    
    
    
    
    
    
    
    
    (132,311
    )Investing activities:Acquisition of industrial machinery and
equipment
    
    
    (7,570
    )
    
    
    (1,975
    )Sale of industrial machinery and equipment
    
    
    66,339
    
    
    
    70
    
    
    
    74,157Other assets
    
    
    
    
    
    
    (11,888
    )Net resources generated by (used
in) investing activities
    
    
    58,769
    
    
    
    (13,793
    )
    
    
    74,157Cash:Net increase (decrease)
    
    
    (131
    )
    
    
    (2,344
    )
    
    
    1,661Balance at beginning of year
    
    
    545
    
    
    
    2,889
    
    
    
    1,228Balance at end of year
    
    Ps.
    414
    
    
    Ps.
    545
    
    
    Ps.
    2,889
 See accompanying notes to financial statements. F-102




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Industrias Centauro, S. A. de C. V.
(A 99% Subsidiary of Corporación Durango, S. A. de C. V.) 
 Notes to financial statements
For the years ended December 31, 2003, 2002 and 2001
(In thousands of Mexican pesos of purchasing power of
December 31, 2003)
  1.
    
    Activities, significant developments and subsequent event  a.
    
    ActivitiesIndustrias Centauro, S. A. de C. V. (the Company)
is subsidiary of Corporación Durango, S. A. de C. V. (CODUSA). The
Companys main activity is the manufacture and sale of paper to be
used in the manufacturing of corrugated boxes.b.
    
    Merger On July 1, 2003, the Companys shareholders approved the
merger of Papeles Monterrey, S. A. de C. V. (PAPELES Monterrey) into
the Company, with the Company assuming all rights and obligations of
PAPELES Monterrey. PAPELES Monterrey was incorporated on July 1, 2003
as a result of a spin-off of the assets and liabilities of a
containerboard production plant of Empaques de Cartón Titán,
S. A. de C. V. (TITAN), a subsidiary of CODUSA, and on the same date
of its incorporation it was merged into the Company.c.
    
    Change of parent company  In January 2002 TITAN, sold its 71.49%
participation in the Company to CODUSA. As a result, the Company
became a subsidiary of CODUSA effective that date.d.
    
    Significant developments and subsequent event  In order to
expand its production facilities, CODUSA and its subsidiaries (CODUSA
Group) have contracted significant financing from banks in Mexico and
abroad, mainly in the U.S. Additionally, on different dates it sold
bonds on the New York securities market. However, since 2002 the
CODUSA Group has been severely affected by a combination of economic
factors, such as the slowdown of the U.S. and the international
economies, a significant drop in the world price of paper, a drastic
reduction in the demand for manufactured products requiring the goods
supplied by CODUSAs subsidiaries, an increase in the cost of raw
materials, electric power, gas and labor, and the entry of imported
products into the Mexican market.The above-mentioned negative economic events led to a significant
reduction in the generation of cash flow for CODUSA Group during the
last quarter of 2002, and as a result since November 2002 CODUSA has
been unable to cover the payment of interest and principal on certain
debt and has not complied with certain obligations and restrictions
imposed by the banks and bondholders to maintain the original
maturities of the debt. As a result, a portion of the debt has been
reclassified as short term, resulting in negative working capital and
uncertainty as to its ability to continue as a going concern.In November 2002, the CODUSA Group initiated negotiations with the
banks and bondholders in an effort to restructure its debt and
consider the sale of non-strategic assets. In April 2003, CODUSA Group
signed a Forbearance Agreement with a significant portion of its
creditors, under which they agreed to continue productive financial
discussions regarding the terms of the debt restructuring. This
agreement expired on June 30, 2003.On April 30, 2004, CODUSA Group and a significant portion of its bank
lenders and bondholders signed a Plan Support Agreement regarding its
proposed debt restructuring. Under the proposed restructuring,
CODUSAs unsecured creditors would exchange their existing financial
debt for one or more tranches of new debt instruments, denominated the
Series A, Series B, Series C and Series D Notes, to be issued in an
aggregate principal amount of approximately US$715 million. In
addition, participating creditors would receive an aggregate of 17% of
CODUSAs share equity, on a fully diluted basis. Also, CODUSA would
make available US$43.5 million to acquire a portion of its outstanding
debt at purchase prices of no more than US$650 per US$1,000 of
principal. F-103




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Under the terms of this agreement in principle, the creditors would
support CODUSAs overall financial restructuring through an exchange
offer; in the event the exchange offer is not consummated but CODUSA
obtains the necessary approvals from its creditors to support a
consensual plan of reorganization, such plan could be filed under the
United States of Americas bankruptcy rules.On May 20, 2004 CODUSA announced that it has filed for concurso
mercantil before a Mexican court, which main objective is to achieve
a financial restructuring through the reorganization process based on
the Mexican Business Reorganization Law. This process will take place
at the CODUSAs legal entity level, as a result, the operations of its
subsidiaries will continue running as usual. The reorganization
process allows that with the support of 51% of the creditors, the
restructuring plan described above, be binding on all of CODUSAs
creditors. CODUSA anticipates that it will have the support of a
sufficient percentage of votes to accomplish this goal in an
expeditious manner.  2.
    
    Basis of presentation  a.
    
    Explanation for translation into English The accompanying
financial statements have been translated from Spanish into English
for use outside of Mexico. These financial statements are presented
on the basis of accounting principles generally accepted in Mexico
(Mexican GAAP). Certain accounting practices applied by the Company
that conform with Mexican GAAP may not conform with accounting
principles generally accepted in the country of use.b.
    
    Merger  The financial statements as of and for the year ended
December 31, 2003 include the effects of the PAPELES Monterrey merger
described in Note 1.b. The assets and liabilities of PAPELES
Monterrey as of the date of the merger, and the statements of
operations for the six-month period ended on December 31, 2003, are as
follows: June 30,2003Current assets
    
    Ps.
    247,798Industrial machinery and equipment
    
    
    200,838Other assets
    
    
    2,997Current liabilities
    
    
    (39,700
    )Long-term liabilities
    
    
    (150,245
    )Net assets
    
    Ps.
    261,688
 July 1 toDecember 31,2003Net sales
    
    Ps.
    149,567Cost of sales, selling, general and administrative
expenses
    
    
    (156,343
    )Net comprehensive financing income
    
    
    91Other expenses
    
    
    (16,547
    )Loss before income tax and employee statutory
profit sharing
    
    
    (23,232
    )Income tax and employee statutory profit sharing
    
    
    (2,446
    )Net loss
    
    Ps.
    (25,678
    )
 F-104




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c.
    
    Going-concern The accompanying financial statements have been
prepared on the assumption that the Company will continue as a going
concern. As indicated in the accompanying financial statements, during
the years ended December 31, 2003 and 2002, the Company has incurred
significant net losses and since 2002, its operating margin has
declined substantially. As of December 31, 2003 and 2002 the Company
has negative working capital and as CODUSA, is experiencing severe
liquidity problems. The Company is guarantor of a portion of CODUSAs
debt. These factors, among others, raise substantial doubt about the
Companys ability to continue as a going concern.The accompanying financial statements do not include any adjustments
related to the valuation and presentation of assets or the
presentation and amount of liabilities that might result if the
Company is unable to continue as a going concern. The Companys
ability to continue as a going concern is dependent upon its ability
to generate profits and the restructuring of CODUSA Group debt. As
mentioned in Note 1, CODUSA is committing significant resources to the
debt restructuring efforts and has reached an agreement in principle
with a significant portion of its creditors, who will support a
comprehensive financial restructuring; however, there can be no
assurance that CODUSA will be successful in its efforts.d.
    
    Comprehensive loss Comprehensive loss presented in the
accompanying statements of changes in stockholders equity represents
all changes in stockholders equity during each year except those
resulting from investments by and distributions to owners, and is
comprised of the net (loss) income of the year, plus other
comprehensive income (loss) items of the same period which, in
accordance with Mexican GAAP, are presented directly in stockholders
equity without affecting the statements of operations. In 2003, 2002
and 2001, the other comprehensive loss items consist of the excess
(insufficiency) in restated stockholders equity.e.
    
    Reclassifications Certain amounts in the financial statements
as of and for the years ended December 31, 2002 and 2001 have been
reclassified in order to conform to the presentation of the financial
statements as of and for the year ended December 31, 2003.  3.
    
    Summary of significant accounting policiesThe accounting policies followed by the Company are in conformity with
Mexican GAAP, which require that management make certain estimates and use
certain assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Although these estimates are based
on managements best knowledge of current events, actual results may
differ. The significant accounting policies of the Company are as follows:  a.
    
    New accounting policies Beginning January 1, 2003, the Company
adopted the provisions of new Bulletin C-8, Intangible Assets, which
establishes that project development costs should be capitalized if
they fulfill the criteria established for recognition as assets;
preoperating costs that are not considered development costs should be
recorded as a period expense; and intangible assets considered to have
indefinite useful lives are not amortized, but instead are subject to
impairment tests. The unamortized balance of capitalized preoperating
costs up to December 31, 2002, under the former Bulletin C-8 will
continue to be amortized according to the provisions of that Bulletin.Beginning January 1, 2003, the Company also adopted the provisions of
new Bulletin C-9, Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments, which establishes additional guidelines
clarifying the accounting for provisions, accruals and contingent
liabilities, and establishes new standards for the use of present
value techniques to measure liabilities and accounting for the early
settlement or substitution of obligations.The adoption of these new bulletins did not have significant effects
on the Companys financial position or results of operations. F-105




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b.
    
    Recognition of the effects of inflation The Company restates
its financial statements to Mexican peso purchasing power of the most
recent balance sheet date presented. Accordingly, the financial
statements of the prior years have been restated to Mexican pesos of
purchasing power of December 31, 2003 and, therefore, differ from
those originally reported in the prior years.c.
    
    Inventories and cost of sales Inventories are stated at the
lower of net realizable value or average cost, which is similar to the
most recent purchase price or production cost. Cost of sales is stated
at estimated replacement cost at the time of sale.d.
    
    Property, plant and equipment Property, plant and equipment are
initially recorded at acquisition cost and restated using the National
Consumer Price Index (NCPI). For fixed assets of foreign origin,
restated acquisition cost expressed in the currency of the country of
origin is converted into Mexican pesos at the market exchange rate in
effect at the balance sheet date. Depreciation is calculated based on
units produced in the period in relation to the total estimated
production of the assets over their service lives. YearsBuildings
    
    
    25-50Industrial machinery and equipment
    
    
    23-40Vehicles
    
    
    1-5Computers
    
    
    1-3Office furniture and equipment
    
    
    5-10
  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.Comprehensive financing cost incurred during the period of
construction and installation of property, plant and equipment is
capitalized and restated using the NCPI.e.
    
    Impairment of long-lived assets in use The Company evaluates
potential impairment losses to long-lived assets by assessing whether
the unamortized carrying amount can be recovered over the remaining
life of the assets through undiscounted future expected cash flows
generated by the assets and without interest charges. If the sum of
the expected future undiscounted cash flows is less than the carrying
amount of the assets, a loss is recognized for the difference between
the fair value and carrying value of the assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Long-lived
assets for which management has committed to a plan of disposal are
recorded at the lower of the unamortized carrying amount or fair value
less disposal cost.f.
    
    Other assets Costs incurred in the development phase that meet
certain requirements and that the Company has determined will have
future economic benefits are capitalized and amortized based on the
straight-line method over their estimated useful life. Those
disbursements that do not meet such requirements are recorded in
results of the period in which they are incurred. Intangible assets
with indefinite lives are not amortized; however, their value is
subject to impairment tests. Preoperating costs incurred after January
1, 2003, are recorded directly in results of the period in which they
are incurred. Preoperating expenses incurred and capitalized up to
December 31, 2002 are amortized using the straight-line method over
four years. F-106




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g.
    
    Financial instruments Financial assets and liabilities resulting
from any type of financial instrument, except for investments in
financial instruments held to maturity, are presented in the balance
sheet at fair value. The effects of the valuation of a financial asset
or liability are recognized in results of operations of the respective
period. Investments in financial instruments held to maturity are
valued at acquisition cost. The costs and yields of financial
instruments are recognized in results of the period in which they
occur. Dividends from equity financial instruments are recognized in
results of operations of the same period in which the fair value of
the financial instrument is adjusted by such dividends.h.
    
    Employee retirement obligations Seniority premiums are
recognized as costs over employee years of service and are calculated
by independent actuaries using the projected unit credit method at net
discount rates. Severance is charged to results when the liability is
determined to be payable.i.
    
    Provisions Provisions are recognized for obligations that
result from a past event, that are likely to result in the use of
economic resources and that can be reasonably estimated. Such
provisions are recorded at net present values when the effect of the
discount is significant.j.
    
    Income tax, tax on assets and employee statutory profit sharing
Income tax (ISR) and employee statutory profit sharing (PTU) are
recorded in results of the year in which they are incurred. Deferred
income tax assets and liabilities are recognized for temporary
differences resulting from comparing the book and tax values of assets
and liabilities plus any future benefits from tax loss carryforwards.
Deferred ISR assets are reduced by any benefits about which there is
uncertainty as to their realizability. Deferred PTU is derived from
temporary differences between the accounting result and income for PTU
purposes and is recognized only when it can be reasonably assumed that
they will generate a liability or benefit, and there is no indication
that circumstances will change in such a way that the liabilities will
not be paid or benefits will not be realized.The tax on assets paid that is expected to be recoverable is recorded
as an advance payment of ISR and is presented in the balance sheet
decreasing the deferred ISR liability.k.
    
    Foreign currency balances and transactions Foreign currency
transactions are recorded at the applicable exchange rate in effect at
the transaction date. Monetary assets and liabilities denominated in
foreign currency are translated into Mexican pesos at the applicable
exchange rate in effect at the balance sheet date. Exchange
fluctuations are recorded as a component of net comprehensive
financing cost in the statements of operations, except those amounts
capitalized as a component of construction cost.l.
    
    Insufficiency in restated stockholders equity Insufficiency in
restated stockholders equity represents the accumulated monetary
position result through the initial restatement of the financial
statements and the increase in the restated value of machinery and
equipment and inventories above (below) inflation, net of its related
deferred ISR.m.
    
    Revenue recognition Revenues are recognized in the period in
which the risks and rewards of ownership of the inventories are
transferred to the customers, which generally coincides with the
delivery of products to customers in satisfaction of orders.n.
    
    Monetary position gain Monetary position gain, which represents
the erosion of purchasing power of monetary items caused by inflation,
is calculated by applying NCPI factors to monthly net monetary
position. Gains result from maintaining a net monetary liability
position. F-107




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4.
    
    Accounts receivable 2003
    
    2002Trade accounts receivable
    
    Ps.
    89,797
    
    
    Ps.
    60,284Recoverable taxes
    
    
    20,290
    
    
    
    11,681Other
    
    
    803
    
    
    
    396110,890
    
    
    
    72,361Allowance for doubtful accounts
    
    
    (6,729
    )
    
    
    (1,863
    )Ps.
    104,161
    
    
    Ps.
    70,498
  5.
    
    Inventories 2003
    
    2002Finished goods
    
    Ps.
    6,248
    
    
    Ps.
    4,119Raw materials
    
    
    34,309
    
    
    
    25,060Spare parts and materials for immediate consumption
    
    
    59,590
    
    
    
    54,777100,147
    
    
    
    83,956Allowance for obsolete inventories
    
    
    (4,728
    )
    
    
    (4,612
    )95,419
    
    
    
    79,344Advances to suppliers
    
    
    12,628
    
    
    
    11,663Merchandise-in-transit
    
    
    34,033
    
    
    
    123,702Ps.
    142,080
    
    
    Ps.
    214,709
  6.
    
    Property, plant and equipment 2003
    
    2002Buildings
    
    Ps.
    557,087
    
    
    Ps.
    636,327Industrial machinery and equipment
    
    
    2,919,893
    
    
    
    2,947,927Vehicles, computers, office furniture and equipment
    
    
    224,358
    
    
    
    234,7773,701,338
    
    
    
    3,819,031Accumulated depreciation
    
    
    (1,736,930
    )
    
    
    (1,491,615
    )Accumulated impairment loss
    
    
    (102,936
    )
    
    
    (351,429
    )1,861,472
    
    
    
    1,975,987Land
    
    
    108,755
    
    
    
    108,742Construction-in-progress
    
    
    6,435
    
    
    
    4,940Ps.
    1,976,662
    
    
    Ps.
    2,089,669
  Depreciation expense for the years ended December 31, 2003, 2002 and 2001
was Ps.58,157, Ps.69,849 and Ps.62,290, respectively.During 2003 and 2002, the Company reviewed the recoverable value of its
long-lived assets, which was determined by the future cash flow generated
over the useful lives of the corresponding assets, which extends from 20 to
35 years after 2003. As a result, the Company recorded Ps.420,968 and
Ps.351,429 during 2003 and 2002, respectively, as an impairment loss for
its long-lived assets. The deferred income tax effect for this reserve
resulted in a benefit of Ps.134,710 and Ps.112,457 during 2003 and 2002,
respectively.As of December 31, 2002 the Company had assets temporarily out of use in
the amount of Ps.235,864. Such assets were sold to an affiliated company
during 2003. F-108




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During 2003, 2002 and 2001 the Company did not capitalize any comprehensive
financing costs. Unamortized capitalized comprehensive financing cost was
Ps.52,924 and Ps.55,183 at December 31, 2003 and 2002, respectively.7.
    
    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. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.The carrying amounts of the Companys accounts receivable and accounts
payable approximate fair value because they have relatively short-term
maturities and bear interest at rates tied to market indicators, as
appropriate. The accounts receivable balance represents the expected
cash flows to be collected by the Company.b.
    
    Concentration of credit risk The financial instruments that
potentially are subject to a concentration of credit risk is
principally trade accounts receivable. 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. There were no
customers exceeding 10% of net sales for any of the periods presented.  8.
    
    Employee retirement obligationsIn accordance with the Mexican Labor Law, the Company provides seniority
premium benefits to employees under certain circumstances. These benefits
consist of a lump sum payment of 12 days wages for each year worked,
calculated using the most recent salary, not to exceed twice the legal
minimum wage established by law. The related liability and annual cost of
such benefits are calculated by an independent actuary on the basis of
formulas defined in the plans using the projected unit credit method. The
present values of these obligations and the rates used for the calculations
are: 2003
    
    2002Accumulated benefit obligation
    
    Ps.
    2,239
    
    
    Ps.
    1,550Projected benefit obligation
    
    Ps.
    2,612
    
    
    Ps.
    1,965Unrecognized items:Variances for assumptions
and adjustments based on
experience
    
    
    8,423
    
    
    
    457Transition asset
    
    
    (9,146
    )
    
    
    (1,063
    )Net projected liability
    
    
    1,889
    
    
    
    1,359Intangible asset
    
    
    350
    
    
    
    191Ps.
    2,239
    
    
    Ps.
    1,550
 F-109




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The rates used in the actuarial calculations, net of effects of inflation,
were: 2003
    
    2002
    
    2001%
    
    %
    
    %Discount of the projected benefit
obligation to present value
    
    
    5
    
    
    
    5
    
    
    
    5Salary increase
    
    
    2
    
    
    
    2
    
    
    
    2
 The amortization periods for the unamortized items are as follows: RemainingYearsTransition asset
    
    
    18Variances in assumptions and adjustments based on experience
    
    
    18
 Net period cost is comprised as follows: 2003
    
    2002
    
    2001Service costs
    
    Ps.
    113
    
    
    Ps.
    247
    
    
    Ps.
    246Amortization of
transition asset,
variances for
assumptions and
adjustments based
on experience
    
    
    (45
    )
    
    
    30
    
    
    
    41Interest cost
    
    
    60
    
    
    
    92
    
    
    
    89Net period cost
    
    Ps.
    128
    
    
    Ps.
    369
    
    
    Ps.
    376
 In connection with the reorganization process of the Companys operations,
there was a termination of administrative and operating personnel during
2003 that represented payments of Ps.26,833, which are included in other
expenses in the accompanying statement of operations.  9.
    
    Stockholders equity  a.
    
    Common stock shares at par value as of December 31 are comprised
as follows: 2003Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed capital
Series A
    
    
    245,492
    
    
    Ps.
    2,233
    
    
    Ps.
    3,401
    
    
    Ps.
    5,634Variable capital
Series B
    
    
    815,559,656
    
    
    
    1,191,338
    
    
    
    1,319,095
    
    
    
    2,510,433Total shares
    
    
    815,805,148
    
    
    Ps.
    1,193,571
    
    
    Ps.
    1,322,496
    
    
    Ps.
    2,516,067
 F-110




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2002Number of
    
    Par
    
    RestatementShares
    
    Value
    
    Effect
    
    TotalFixed capital
Series A
    
    
    245,492
    
    
    Ps.
    2,233
    
    
    Ps.
    3,401
    
    
    Ps.
    5,634Variable capital
Series B
    
    
    592,979,758
    
    
    
    866,202
    
    
    
    1,319,095
    
    
    
    2,185,297Total shares
    
    
    593,225,250
    
    
    Ps.
    868,435
    
    
    Ps.
    1,322,496
    
    
    Ps.
    2,190,931
 Common stock consists of nominative shares without a par value.
Variable capital is unlimited.  b.
    
    As a consequence of the merger described in Note 1.b, at the
General Extraordinary Shareholders Meeting held on July 1, 2003, the
issuance of 222,579,898 shares, without par value, in the amount of
Ps.325,136, was approved, increasing the variable portion of the
common stock.c.
    
    Retained earnings include the statutory legal reserve. 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 (historical pesos). 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, 2003 and 2002, the legal reserve, in
historical pesos, was Ps.11,256.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 2003, the rate was 34% and will be
reduced by one percentage point each year until reaching 32% in 2005.
Any tax paid on such distribution, may be credited against 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 stockholders equity tax accounts as of
December 31, are: 2003
    
    2002Contributed capital account
    
    Ps.
    3,010,005
    
    
    Ps.
    2,643,710Net tax income account
    
    
    1,085,870
    
    
    
    623,026Total
    
    Ps.
    4,095,875
    
    
    Ps.
    3,266,736
 As illustrated in the preceding table, the total amount of the
balances of the stockholders equity tax accounts exceeds
stockholders equity, according to the accompanying balance sheets.  10.
    
    Foreign currency balances and transactions  a.
    
    At December 31, the foreign currency monetary position is as
follows: 2003
    
    2002Thousands of U.S. dollars:Monetary assets
    
    
    253,712
    
    
    
    2,189Monetary liabilities
    
    
    (369,103
    )
    
    
    (89,820
    )Monetary liability position, net
    
    
    (115,391
    )
    
    
    (87,631
    )Equivalent in Mexican pesos
    
    Ps.
    (1,296,672
    )
    
    Ps.
    (914,806
    )
 F-111




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b.
    
    Nonmonetary assets of foreign origin at December 31, 2003 are as
follows: Foreign
    
    EquivalentCurrency
    
    in MexicanCurrency
    
    Balance
    
    PesosInventories
    
    U.S. dollar
    
    
    2,624
    
    
    
    29,486Industrial machinery and
equipment-United States of America
    
    U.S. dollar
    
    
    64,321
    
    
    
    722,792Brazil
    
    Real
    
    
    174,170
    
    
    
    677,226Japan
    
    Yen
    
    
    24,170
    
    
    
    2,533Canada
    
    Canadian dollar
    
    
    2,057
    
    
    
    17,899
  c.
    
    Transactions denominated in foreign currency were as follows: 2003
    
    2002
    
    2001(In thousands ofU.S. dollars)Export sales
    
    
    1,544
    
    
    
    4,408
    
    
    
    5,754Interest income
    
    
    24,013Interest expense
    
    
    24,333
    
    
    
    5,077
    
    
    
    2,714Import purchases
    
    
    21,948
    
    
    
    11,432
    
    
    
    11,757Acquisition of machinery and
equipment
    
    
    43
    
    
    
    
    
    
    
    925Services and spare parts
purchases
    
    
    2,663
    
    
    
    2,354
    
    
    
    2,109
  d.
    
    The exchange rates in effect at the dates of the balance sheets
and of issuance of the financial statements were as follows: December 31
    
    April 30,2003
    
    2002
    
    2004U.S. dollar
    
    Ps.
    11.2372
    
    
    Ps.
    10.4393
    
    
    Ps.
    11.4068
  11.
    
    Transaction and balances with related parties  a.
    
    Transactions with related parties, carried out in the ordinary
course of business, were as follows: 2003
    
    2002
    
    2001Revenues:Sales
    
    Ps.
    979,881
    
    
    Ps.
    853,952
    
    
    Ps.
    916,146Administrative services
    
    
    1,619
    
    
    
    9,374
    
    
    
    10,184Leasing
    
    
    1,250
    
    
    
    1,983
    
    
    
    5,781Interest income
    
    
    369,129
    
    
    
    33,573
    
    
    
    15,560Other income
    
    
    4,926
    
    
    
    29,140
    
    
    
    91,600Sale of industrial
machinery and equipment
    
    
    66,281
 F-112




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##### Table of Contents



2003
    
    2002
    
    2001Expenses:Purchases
    
    Ps.
    256,688
    
    
    Ps.
    280,794
    
    
    Ps.
    397,153Interest expenses
    
    
    463,975
    
    
    
    68,115
    
    
    
    52,837Acquisition of
industrial machinery and
equipment
    
    
    15,845
    
    
    
    
    
    
    
    50,797Services
    
    
    117,204
    
    
    
    6,756
    
    
    
    7,096Leasing
    
    
    22,976Other expenses
    
    
    24,407
    
    
    
    61,057
    
    
    
    110,018
  b.
    
    Balances receivable and payable with related parties are as
follows: 2003
    
    2002Due from related parties-Empaques de Cartón Titán, S. A. de C. V.
    
    Ps.
    2,387,932
    
    
    Ps.
    48,851Administración Corporativa de Durango, S. A.
de C. V.
    
    
    754,722
    
    
    
    24,977Compañía Papelera de Atenquique, S. A. de C. V.
    
    
    445,594
    
    
    
    104,222Envases y Empaques de México, S. A. de C. V.
    
    
    88,865
    
    
    
    95,006Cartonpack, S. A. de C. V.
    
    
    65,021
    
    
    
    12,472Administradora Corporativa y Mercantil, S. A.
de C. V.
    
    
    46,354Grupo Pipsamex, S. A. de C. V.
    
    
    62,375Ectsa International Corporation
    
    
    11,267
    
    
    
    13,810Cajas y Corrugados de Chihuahua, S. A. de C. V.
    
    
    
    
    
    
    6,890Fibras de Durango, S. A. de C. V.
    
    
    
    
    
    
    5,432Other
    
    
    3,889
    
    
    
    4,512Ps.
    3,866,019
    
    
    Ps.
    316,172Due to related parties-Corporación Durango, S. A. de C. V.
    
    Ps.
    4,334,091
    
    
    Ps.
    924,700Fibras de Durango, S. A. de C. V.
    
    
    14,036Fiber Management of Texas
    
    
    16,704Porteadores de Durango, S. A. de C. V.
    
    
    8,535
    
    
    
    12,205Durango McKinley Paper Company
    
    
    
    
    
    
    28,594Other
    
    
    158
    
    
    
    885Ps.
    4,373,524
    
    
    Ps.
    966,384
 In 2003, the Company entered into debt assignment agreements, through
these agreements the Company assumed debt with CODUSA, denominated in
Mexican pesos and U.S. dollars, originally due from TITAN and Compañía
Papelera de Atenquique, S. A. de C. V., affiliated companies. The
accounts payable and receivable bear interest at 15% in Mexican pesos
and 13.8% in U.S. dollars. On July 1, 2003, the Company and TITAN entered into a lease agreement
for the building where PAPELES Monterrey is located. The contract is
for an undefined time period and establishes that the rent payment
will be calculated by adding 1% to the expenses incurred by TITAN
related to the building. F-113




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##### Table of Contents



12.
    
    Other expenses 2003
    
    2002
    
    2001Impairment of long-lived assets
    
    Ps.
    420,968
    
    
    Ps.
    351,429
    
    
    Ps.Severance payments due to
reorganization
    
    
    26,833Other expenses Net
    
    
    5,788
    
    
    
    19,235
    
    
    
    21,515Ps.
    453,589
    
    
    Ps.
    370,664
    
    
    Ps.
    21,515
  13.
    
    Income taxes, tax on assets and employee statutory profit sharing In accordance with Mexican tax law, the Company is subject to income tax
(ISR) and tax on assets (IMPAC). ISR takes into consideration the
taxable and deductible effects of inflation. The ISR rate was 35% in 2002 and 2001 and 34% in 2003, and will be reduced
by one percentage point each year until reaching 32% in 2005. In 2002, the
deduction for employee statutory profit sharing (PTU) and the obligation
to withhold taxes on dividends paid to individuals or foreign residents
were eliminated. IMPAC is calculated by applying a rate of 1.8% on the net average of the
majority of restated assets less certain liabilities and is payable only to
the extent that it exceeds ISR payable for the same period. If in any year
IMPAC exceeds the ISR payable, the IMPAC payment for such excess may be
reduced by the amount by which ISR exceeded IMPAC in the three preceding
years and any required payment of IMPAC is creditable against the excess of
ISR over IMPAC of the following ten years. The Company incurs ISR and IMPAC with CODUSA in the proportion that CODUSA
owns the voting stock of its subsidiaries at the balance sheet date.
Beginning on January 1, 2002, the proportion is calculated based on the
average daily equity percentage that CODUSA owns of its subsidiaries during
the year. The tax results of the subsidiaries are at 60% of such proportion
and the tax results of the holding company are also at 60%. Estimated
payments of ISR and IMPAC of both CODUSA and its subsidiaries are made as
if CODUSA did not file a consolidated tax return.  a.
    
    ISR consists of the following: 2003
    
    2002
    
    2001Current
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    (45,286

    )Deferred
    
    
    178,529
    
    
    
    201,917
    
    
    
    18,626Ps.
    178,529
    
    
    Ps.
    201,917
    
    
    Ps.
    (26,660
    )
  b.
    
    The reconciliation of the statutory and effective ISR rates
expressed as a percentage of income (loss) before ISR and PTU for the
years ended December 31, 2003, 2002 and 2001 is: F-114




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##### Table of Contents



2003
    
    2002
    
    2001Statutory rate
    
    
    34.00
    %
    
    
    35.00
    %
    
    
    35.00
    %(Deduct) add the effect of
permanent differences other
than inflation
    
    
    (4.69
    %)
    
    
    18.51
    %
    
    
    (19.24
    %)Deduct the effects of inflation
    
    
    (0.21
    %)
    
    
    (6.22
    %)
    
    
    (4.90
    %)Effect of change in statutory
rate on deferred ISR
    
    
    0.21
    %
    
    
    7.20
    %Change in valuation allowance
for recoverable IMPAC and
benefit of tax loss
carryforwards
    
    
    0.48
    %Effective rate
    
    
    29.79
    %
    
    
    54.49
    %
    
    
    10.86
    %
  c.
    
    At December 31, 2003 and 2002 the main items comprising the
liability balance of deferred ISR are: 2003
    
    2002Deferred ISR (asset) liability:Property, plant and equipment
    
    Ps.
    595,249
    
    
    Ps.
    510,188Inventories
    
    
    45,465
    
    
    
    68,706Allowance for doubtful accounts
    
    
    (2,153
    )
    
    
    (596
    )Accrued expenses
    
    
    (21,516
    )
    
    
    (496
    )Deferred assets
    
    
    3,250
    
    
    
    3,804Other  Net
    
    
    3,726
    
    
    
    (321
    )Deferred ISR from temporary differences
    
    
    624,021
    
    
    
    581,285Effect of tax loss carryforwards
    
    
    (117,697
    )
    
    
    (11,410
    )Recoverable tax on assets
    
    
    (9,296
    )
    
    
    (6,438
    )497,028
    
    
    
    563,437Valuation allowance for the deferred ISR asset
and recoverable tax on assets
    
    
    7,993
    
    
    
    5,135Net long-term deferred ISR liability
    
    Ps.
    505,021
    
    
    Ps.
    568,572
  d.
    
    Due to deterioration in the circumstances used to assess the
recovery of tax on assets paid in 2003 the valuation allowance for
recoverable tax on assets was increased by Ps.2,858.e.
    
    At December 31, 2003 and 2002, the Company has taxable temporary
and permanent differences related to deferred PTU, mainly inventories
and property, plant and equipment, for which the deferred PTU
liabilities were neither estimated nor recorded because the Company
believes that they will not reverse due to the recurring nature of the
related transactions.f.
    
    Tax loss carryforwards and recoverable IMPAC for which the
deferred ISR asset and prepaid ISR, respectively, have been partially
recognized may be recovered subject to certain conditions. Restated
amounts as of December 31, 2003 and expiration dates are: F-115




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##### Table of Contents



Year of
    
    Tax Loss
    
    RecoverableExpiration
    
    Carryforwards
    
    IMPAC2004
    
    Ps.
    
    
    
    Ps.
    6,4382012
    
    
    35,6562013
    
    
    332,147
    
    
    
    2,858Ps.
    367,803
    
    
    Ps.
    9,296
  g.
    
    For the years ended December 31, 2003, 2002 and 2001, the change
in excess (insufficiency) in restated stockholders equity, as shown
in the accompanying statements of changes in stockholders equity, is
presented net of the effect of the related deferred income tax of
Ps.61,105, Ps.31,044 and Ps.2,342, respectively.  14.
    
    Commitments  a.
    
    The Company entered into a 74-month non-cancelable machinery and
equipment operating lease agreement with CODUSA starting on May 25,
2001. The related lease expense for 2003, 2002 and 2001 amounted to
Ps.22,354, Ps.14,909 and Ps.9,193, respectively. Minimum lease
payments under this contract as a December 31, 2003 were as follows: Amount(In thousands ofYear
    
    U.S. dollars)2004
    
    
    2,4492005
    
    
    2,4492006
    
    
    2,4492007
    
    
    1,9439,290
  b.
    
    On June 24, 2002, CODUSA issued US$175 million in 13 3/4 Senior
Notes due 2009. These notes are jointly and severally guaranteed on
an unsecured basis by the Company. Additionally, upon the issuance of
the notes, the Company also equally and ratably guaranteed the 2006
and 2008 Notes. The total amount guaranteed by the Company is
US$487.1 million. Further, the Company is guarantor of other
financing agreements for CODUSA in the amount of US$136.6 million.
Since the last months of 2002, CODUSA is in default of interest and
principal payments related to these financing agreements, and as
described in Note 1, is currently in a restructuring process with it
creditors.  15.
    
    Contingencies  a.
    
    Additional taxes payable could arise in transactions with
nonresident related parties if the tax authority, during a review,
believes that the prices and amounts used by the Company are not
similar to those used with or between independent parties in
comparable transactions.b.
    
    The Company has initiated an injunction against the Mexican tax
authorities regarding the unconstitutionality of the Substitutive Tax
of the Wage Credit. Management believes that the outcome of this
process will be favorable to the Company, which represents a
contingent asset of Ps.1,139. F-116




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##### Table of Contents



16.
    
    New accounting principlesIn March 2003, the Mexican Institute of Public Accountants (MIPA) issued
Bulletin C-15, Impairment of the Value of Long-Lived Assets and Their
Disposal (C-15), whose adoption is mandatory for fiscal years beginning
on or after January 1, 2004, although early adoption is encouraged. C-15
establishes, among other things, new rules for the calculation and
recognition of impairment losses for long-lived assets and their reversal.
It also provides guidance as to indicators of potential impairment in the
carrying amount of tangible and intangible long-lived assets in use,
including goodwill. Companies must test for impairment unless there is
conclusive evidence that the indicators of impairment are temporary. The
calculation of such loss requires the determination of the recoverable
value, which is now defined as the greater of the net selling price of a
cash-generating unit and its value in use, which is the net present value
of discounted future net cash flows. The accounting principles issued prior
to this new bulletin used future net cash flows, without requiring the
discounting of such cash flows. However, since the present value of
estimated future net cash flows from the use of this machinery is greater
than its book value as of December 31, 2003, the Company estimates that the
adoption of C-15 as of January 1, 2004, will not have any effects on its
financial situation and results of operations.In May 2003, the MIPA issued Bulletin C-12, Financial Instruments of a
Debt or Equity Nature or a Combination of Both (C-12), whose application
is mandatory for financial statements for periods beginning on or after
January 1, 2004, although early adoption is encouraged. C-12 is the
compilation of the standards issued by the MIPA with respect to the issue
of debt or equity financial instruments, or a combination of both, and
includes additional standards on the accounting recognition for these
instruments. Consequently, C-12 indicates the basic differences between
liabilities and stockholders equity and establishes the rules for
classifying and valuing the components of debt and equity of combined
financial instruments in the initial recognition. Subsequent recognition
and valuation of liabilities and stockholders equity of the financial
instruments is subject to the standards issued previously in the applicable
bulletins. Since the Company has not issued any financial instruments with
characteristics of both debt and equity, management believes this new
accounting principle will not have any effects on its financial situation
and results of operations.17.
    
    Differences Between Mexican GAAP and US GAAPThe financial statements of the Company are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from US GAAP. A
reconciliation of the net income (loss), stockholders equity and
comprehensive income (loss) to US GAAP is presented in Note 18. It should
be noted that this reconciliation to US GAAP does not include the reversal
of the restatement of the financial statements for the effects of inflation
as required by Bulletin B-10, Recognition of the Effects of Inflation in
the Financial Information, of Mexican GAAP. The application of this
bulletin represents a comprehensive measure of the effects of price-level
changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting in
Mexican pesos for both Mexican and US accounting purposes.The differences between Mexican GAAP and US GAAP included in the
reconciliation that affect the financial statements of the Company are
described below.  a.
    
    Classification differences Certain items require a different
classification in the balance sheet or statement of operation under US
GAAP. These include:  
    
    As explained in Note 5, under Mexican GAAP, advances to
suppliers are recorded as inventories. Under US GAAP, advances to
suppliers are classified as prepaid expenses. F-117




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##### Table of Contents




    
    The impairment of long-lived assets, the gain or loss on the
disposition of fixed assets, all severance indemnities, and
employee profit sharing must be included in operating expenses
under US GAAP.  b.
    
    Restatement of imported fixed assets As explained in Note 3.d,
under Mexican GAAP, fixed assets of foreign origin have been restated
by applying the inflation rate of the country of origin and then
translated at the year-end exchange rate of the Mexican peso.Under US GAAP, the Company applies the regulations of the Securities
and Exchange Commission (SEC), which require that all machinery and
equipment, both domestic and imported, be restated using Mexican
inflation factors.  c.
    
    Deferred income taxes and employee profit sharing The Company
follows SFAS No. 109, Accounting for Income Taxes, for US GAAP
purposes, which differs from Mexican GAAP as follows:  
    
    Under Mexican GAAP, deferred taxes are classified as
non-current, while under US GAAP deferred taxes are based on the
classification of the related asset or liability.
    
    Under Mexican GAAP, the effects of inflation on the
deferred tax balance generated by monetary items are recognized
in the result on monetary position. Under US GAAP, the deferred
tax balance is classified as a non-monetary item. As a result,
the statement of operations differs with respect to the
presentation of the gain (loss) on monetary position and deferred
income tax provision.
    
    Under Mexican GAAP, deferred employee profit sharing is
calculated considering only those temporary differences that
arise during the year and which are expected to turnaround within
a defined period, while under US GAAP, the same liability method
as used for deferred income taxes is applied.
    
    The US GAAP adjustments to the accounting basis of
assets and liabilities generate a difference calculating the
deferred income tax under US GAAP compared to the one presented
under Mexican GAAP (see Note 13).
    
    Under US GAAP, in view of the going-concern
uncertainty, a full valuation allowance has been provided for all
deferred tax assets not assured of realization. The tax effects of temporary differences that generated deferred tax
liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred ISR (asset) liability:Property, plant and equipment
    
    
    
    
    Ps.
    


    501,974
    
    
    
    
    
    Ps.
    


    494,942Inventories
    
    
    
    
    
    
    45,465
    
    
    
    
    
    
    
    70,981Allowance for doubtful accounts
    
    
    
    
    
    
    (2,153
    )
    
    
    
    
    
    
    (596
    )Accrued expenses
    
    
    
    
    
    
    (21,516
    )
    
    
    
    
    
    
    (146
    )Deferred assets
    
    
    
    
    
    
    3,250
    
    
    
    
    
    
    
    3,985Other  Net
    
    
    
    
    
    
    3,726
    
    
    
    
    
    
    
    (321
    )Deferred ISR from temporary differences
    
    
    
    
    
    
    530,746
    
    
    
    
    
    
    
    568,845Effect of tax loss carryforwards
    
    
    
    
    
    
    (117,697
    )
    
    
    
    
    
    
    (11,410
    )Recoverable tax on assets
    
    
    
    
    
    
    (9,296
    )
    
    
    
    
    
    
    (6,438
    )403,753
    
    
    
    
    
    
    
    550,997Valuation allowance
    
    
    
    
    
    
    126,993
    
    
    
    
    
    
    
    17,848Net long-term deferred ISR liability
    
    
    
    
    Ps.
    

    530,746
    
    
    
    
    
    Ps.
    

    568,845
 F-118




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##### Table of Contents



The changes in the balance of the deferred income taxes for the year
under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    
    
    
    Ps.
    

    568,845
    
    
    
    
    
    Ps.
    

    631,114Provision for the year
    
    
    
    
    
    
    (110,489
    )
    
    
    
    
    
    
    (62,269
    )Increase due to merger
    
    
    
    
    
    
    72,390Balance at end of the year
    
    
    
    
    Ps.
    

    530,746
    
    
    
    
    
    Ps.
    

    568,845
 The tax effects of temporary differences that generated deferred
profit sharing liabilities (assets) under US GAAP are as follows: 2003
    
    2002Deferred employee profit sharing (asset) liability:Property, plant and equipment
    
    
    
    
    Ps.
    

    148,384
    
    
    
    
    
    Ps.
    

    187,712Inventories
    
    
    
    
    
    
    14,208
    
    
    
    
    
    
    
    21,509Allowance for doubtful accounts
    
    
    
    
    
    
    (673
    )
    
    
    
    
    
    
    (188
    )Acrued expenses
    
    
    
    
    
    
    (6,608
    )
    
    
    
    
    
    
    (135
    )Other assets
    
    
    
    
    
    
    1,016
    
    
    
    
    
    
    
    1,207Other  Net
    
    
    
    
    
    
    (8,275
    )
    
    
    
    
    
    
    4,817Net deferred employee profit sharing
liability
    
    
    
    
    Ps.
    

    148,052
    
    
    
    
    
    Ps.
    

    214,922
 The changes in the balance of the deferred employee profit sharing
liability for the year under US GAAP are as follows: 2003
    
    2002Balance at beginning of the year
    
    
    
    
    Ps.
    

    214,922
    
    
    
    
    
    Ps.
    

    203,896Provision for the year
    
    
    
    
    
    
    (86,442
    )
    
    
    
    
    
    
    11,026Increase due to merger
    
    
    
    
    
    
    19,572Balance at end of the year
    
    
    
    
    Ps.
    

    148,052
    
    
    
    
    
    Ps.
    

    214,922
 The deferred income tax and profit sharing classification in the
condensed balance sheet as of December 31, 2003 and 2002 is as
follows: 2003EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred asset:Current
    
    
    
    
    Ps.
    

    (19,943
    )
    
    
    
    
    Ps.
    

    (16,604
    )
    
    
    
    
    Ps.
    

    (36,547
    )Deferred liability:Current
    
    
    
    
    
    
    45,465
    
    
    
    
    
    
    
    15,256
    
    
    
    
    
    
    
    60,721Long term
    
    
    
    
    
    
    505,224
    
    
    
    
    
    
    
    149,400
    
    
    
    
    
    
    
    654,624550,689
    
    
    
    
    
    
    
    164,656
    
    
    
    
    
    
    
    715,345Deferred liability, net
    
    
    
    
    Ps.
    

    530,746
    
    
    
    
    
    Ps.
    

    148,052
    
    
    
    
    
    Ps.
    

    678,798
 F-119




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##### Table of Contents



2002EmployeeIncome Tax
    
    Profit Sharing
    
    TotalDeferred assets:Current
    
    
    
    
    Ps.
    

    (1,064
    )
    
    
    
    
    Ps.
    

    
    
    
    
    
    
    Ps.
    

    (1,064
    )Long term
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )
    
    
    
    
    
    
    (321
    )(1,064
    )
    
    
    
    
    
    
    (321
    )
    
    
    
    
    
    
    (1,385
    )Deferred liability:Current
    
    
    
    
    
    
    70,982
    
    
    
    
    
    
    
    26,324
    
    
    
    
    
    
    
    97,306Long term
    
    
    
    
    
    
    498,927
    
    
    
    
    
    
    
    188,919
    
    
    
    
    
    
    
    687,846569,909
    
    
    
    
    
    
    
    215,243
    
    
    
    
    
    
    
    785,152Deferred liability, net
    
    
    
    
    Ps.
    

    568,845
    
    
    
    
    
    Ps.
    

    214,922
    
    
    
    
    
    Ps.
    

    783,767
  d.
    
    Employee retirement obligations Under Mexican GAAP, the
liabilities for employee benefits are determined using actuarial
computations in accordance with Bulletin D-3, Labor Obligations,
which is substantially the same as US GAAP SFAS No. 87, Employers
Accounting for Pensions. Under Mexican GAAP and US GAAP, there is no difference in the
liabilities for seniority premiums and pension plans. The following sets forth the changes in benefit obligations, and the
funded status of such plans for 2003 and 2002 reconciled with the
amounts reported in the condensed balance sheets under US GAAP. 2003
    
    2002Accumulated benefit obligation:
    
    
    
    
    Ps.
    

    2,239
    
    
    
    
    
    Ps.
    

    1,550Projected benefit obligation at beginning of year
    
    
    
    
    Ps.
    

    1,965
    
    
    
    
    
    Ps.
    

    1,114Service costs
    
    
    
    
    
    
    113
    
    
    
    
    
    
    
    247Interest cost
    
    
    
    
    
    
    60
    
    
    
    
    
    
    
    92Actuarial loss
    
    
    
    
    
    
    474
    
    
    
    
    
    
    
    686Benefits paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174
    )Projected benefit obligations at end of year
    
    
    
    
    Ps.
    

    2,612
    
    
    
    
    
    Ps.
    

    1,965Amounts recognized in the balance sheets consist of:Unfunded liability
    
    
    
    
    Ps.
    

    2,612
    
    
    
    
    
    Ps.
    

    1,965Less-
Unrecognized transition obligation and other
    
    
    
    
    
    
    (723
    )
    
    
    
    
    
    
    (606
    )Net projected liability
    
    
    
    
    
    
    1,889
    
    
    
    
    
    
    
    1,359Intangible asset
    
    
    
    
    
    
    350
    
    
    
    
    
    
    
    191Liability recognized under US and Mexican GAAP
    
    
    
    
    Ps.
    

    2,239
    
    
    
    
    
    Ps.
    

    1,550
  e.
    
    Negative goodwill Under Mexican GAAP, CODUSA recorded negative
goodwill that arose from the acquisition of TITAN realized in prior
years, which represents the excess of the book value of the net assets
acquired over the purchase price. Such negative goodwill was
amortized into income over the period in which CODUSA integrated these
operations into the entity.  Under US GAAP, such excess of the book value was recorded as a
reduction in the carrying value of the long-term assets (primarily
fixed assets) of TITAN. F-120




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##### Table of Contents



As described in Note 1.b, PAPELES Monterrey was incorporated as a
result of a spin-off of TITAN and subsequently was merged into the
Company; consequently, the carrying value of its long-term assets
recorded under Mexican GAAP differs from the US GAAP carrying values.f.
    
    Impairment of long-lived assets For US GAAP purposes, beginning
on January 1, 2002, the Company follows SFAS No.144, Accounting for
the Impairment or Disposal of Long-Lived Assets.For the year ended December 31, 2001, the Company followed SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS Nos. 144 and 121 provide
criteria for when and under what circumstances an impairment loss
(write-down) should be recorded and the manner in which the write-down
should be measured. An evaluation of impairment is undertaken whenever
events or circumstances indicate that the carrying amount of an asset
may not be recoverable. Under SFAS Nos. 144 and 121, the impairment
criteria are met when the carrying value of assets exceeds the sum of
expected future cash flows (undiscounted and without interest charges)
of the related assets. If it is determined that an asset is impaired,
it is written down to its fair value.The Company tested certain long-lived assets for recoverability in
2003 and 2002 in response to significant adverse changes in business
climate occurring during these years (see Note 1.d). Under US GAAP,
certain assets being evaluated for recoverability had lower book
values than under Mexican GAAP and negative goodwill resulting from
acquisitions has reduced the US GAAP carrying value of the assets. As
such, in 2003 the impairment charge recorded under Mexican GAAP was
greater than the impairment charge calculated under US GAAP. As a
result, during 2003, the Company recognized an adjustment to US GAAP
net income (loss) of Ps.8,976. Theses expenses relate primarily to
machinery and equipment.g.
    
    Statement of cash flows Under Mexican GAAP, the Company
presents a statement of changes in financial position in accordance
with Bulletin B-12, Statement of Changes in Financial Position,
which identifies the generation and application of resources by the
differences between beginning and ending financial statement balances
in constant Mexican pesos. Bulletin B-12 also requires that monetary
and foreign exchange gains and losses be treated as cash items for the
determination of resources generated by operations.In accordance with US GAAP, the Company follows SFAS No. 95,
Statement of Cash Flows, which is presented below excluding the
effects of inflation.h.
    
    Summarized financial information under US GAAP The condensed
consolidated balance sheets as of December 31, 2003 and 2002, and the
condensed statements of operations, changes in stockholders equity
and cash flows for the three years ended December 31, 2003, 2002 and
2001, reflecting US GAAP adjustments, are presented below.Condensed balance sheets: 2003
    
    2002Total current assets
    
    
    
    
    Ps.
    

    4,149,865
    
    
    
    
    
    Ps.
    
    653,665Property, plant and equipment  Net
    
    
    
    
    
    
    1,685,179
    
    
    
    
    
    
    
    1,982,181Other assets  Net
    
    
    
    
    
    
    14,755
    
    
    
    
    
    
    
    14,859Total assets
    
    
    
    
    Ps.
    
    5,849,799
    
    
    
    
    
    Ps.
    
    2,650,705
 F-121




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##### Table of Contents



2003
    
    2002Current liabilities
    
    
    
    
    Ps.
    
    4,641,369
    
    
    
    
    
    Ps.
    
    1,186,841Total long-term liabilities
    
    
    
    
    
    
    656,862
    
    
    
    
    
    
    
    694,212Total liabilities
    
    
    
    
    
    
    5,298,231
    
    
    
    
    
    
    
    1,881,053Stockholders equity
    
    
    
    
    
    
    551,568
    
    
    
    
    
    
    
    769,652Total liabilities and stockholders equity
    
    
    
    
    Ps.
    
    5,849,799
    
    
    
    
    
    Ps.
    
    2,650,705
 Condensed statements of operations: 2003
    
    2002
    
    2001Net sales
    
    
    
    
    Ps.
    
    1,113,343
    
    
    
    
    
    Ps.
    
    1,012,284
    
    
    
    
    
    Ps.
    
    1,099,594Cost of sales and operating
expenses
    
    
    
    
    
    
    1,389,829
    
    
    
    
    
    
    
    1,216,543
    
    
    
    
    
    
    
    846,955Income (loss) from operations
    
    
    
    
    
    
    (276,486
    )
    
    
    
    
    
    
    (204,259
    )
    
    
    
    
    
    
    252,639Net comprehensive financing
(cost) income
    
    
    
    
    
    
    (159,143
    )
    
    
    
    
    
    
    (115,422
    )
    
    
    
    
    
    
    51,988Other expenses  Net
    
    
    
    
    
    
    (32,621
    )
    
    
    
    
    
    
    (19,236
    )
    
    
    
    
    
    
    (21,518
    )Income tax benefit
    
    
    
    
    
    
    110,489
    
    
    
    
    
    
    
    62,269
    
    
    
    
    
    
    
    4,891Net income (loss)
    
    
    
    
    Ps.
    
    (357,761
    )
    
    
    
    
    Ps.
    
    (276,648
    )
    
    
    
    
    Ps.
    
    288,000Net income loss
    
    
    
    
    Ps.
    
    (357,761
    )
    
    
    
    
    Ps.
    
    (276,648
    )
    
    
    
    
    Ps.
    
    288,000Excess (insufficiency) in
restated stockholders
equity
    
    
    
    
    
    
    (8,198
    )
    
    
    
    
    
    
    (9,800
    )
    
    
    
    
    
    
    (50,911
    )US GAAP comprehensive income
(loss)
    
    
    
    
    Ps.
    
    (365,959
    )
    
    
    
    
    Ps.
    
    (286,448
    )
    
    
    
    
    Ps.
    
    237,089
 Changes in stockholders equity: 2003
    
    2002Balance at beginning of the year
    
    
    
    
    Ps.
    
    769,652
    
    
    
    
    
    Ps.
    
    1,056,100Net loss under US GAAP
    
    
    
    
    
    
    (357,761
    )
    
    
    
    
    
    
    (276,648
    )Increase due to merger
    
    
    
    
    
    
    147,875Deficit from restatement
    
    
    
    
    
    
    (8,198
    )
    
    
    
    
    
    
    (9,800
    )Balance at end of the year
    
    
    
    
    Ps.
    
    551,568
    
    
    
    
    
    Ps.
    
    769,652
 F-122




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##### Table of Contents



Condensed consolidated statements of cash flows: 2003
    
    2002
    
    2001Operating activities:Net income (loss)
    
    
    
    
    Ps.
    
    (357,761
    )
    
    
    
    
    Ps.
    
    (276,648
    )
    
    
    
    
    Ps.
    
    288,000Items that did not require
(generate) resources
    
    
    
    
    
    
    248,431
    
    
    
    
    
    
    
    452,213
    
    
    
    
    
    
    
    (40,837
    )Changes in operating assets
and liabilities
    
    
    
    
    
    
    50,430
    
    
    
    
    
    
    
    (39,715
    )
    
    
    
    
    
    
    (142,362
    )Net resources generated by
(used in) operating
activities
    
    
    
    
    
    
    (58,900
    )
    
    
    
    
    
    
    135,850
    
    
    
    
    
    
    
    104,801Financing activities:Short-term and long-term
debt  Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,172Other financing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (253,589
    )Net resources used in
financing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (128,417
    )Investing activities:Acquisition of machinery
and equipment
    
    
    
    
    
    
    (7,570
    )
    
    
    
    
    
    
    (1,975
    )
    
    
    
    
    
    
    (44,806
    )Other investing activities
    
    
    
    
    
    
    66,339
    
    
    
    
    
    
    
    (12,125
    )
    
    
    
    
    
    
    140,025Net resources generated by
(used in) investing
activities
    
    
    
    
    
    
    58,769
    
    
    
    
    
    
    
    (14,100
    )
    
    
    
    
    
    
    95,219Effect of inflation and
exchange rate changes on
cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124,094
    )
    
    
    
    
    
    
    (69,942
    )Increase (decrease) in cash
    
    
    
    
    
    
    (131
    )
    
    
    
    
    
    
    (2,344
    )
    
    
    
    
    
    
    1,661Balance at beginning of year
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    2,889
    
    
    
    
    
    
    
    1,228Balance at end of year
    
    
    
    
    Ps.
    
    414
    
    
    
    
    
    Ps.
    
    545
    
    
    
    
    
    Ps.
    
    2,889Supplemental cash flow
information:Interest paid
    
    
    
    
    Ps.
    
    
    
    
    
    
    
    Ps.
    
    
    
    
    
    
    
    Ps.Income tax and tax on asset
paid
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    21,006
    
    
    
    
    
    
    
    986Ps.
    
    400
    
    
    
    
    
    Ps.
    
    21,006
    
    
    
    
    
    Ps.
    
    986
  18.
    
    Reconciliation of Mexican GAAP to US GAAP  a.
    
    Reconciliation of net income (loss) for the year 2003
    
    2002
    
    2001Net income (loss) under
Mexican GAAP
    
    
    
    
    Ps.
    
    (420,616
    )
    
    
    
    
    Ps.
    
    (169,658
    )
    
    
    
    
    Ps.
    
    217,979Deferred income taxes
    
    
    
    
    
    
    (68,855
    )
    
    
    
    
    
    
    (139,395
    )
    
    
    
    
    
    
    29,786Deferred employee
statutory profit sharing
expense
    
    
    
    
    
    
    86,442
    
    
    
    
    
    
    
    (11,026
    )
    
    
    
    
    
    
    26,916Purchase accounting
adjustments:Depreciation
    
    
    
    
    
    
    1,540Effect of fifth
amendment to Bulletin
B-10
    
    
    
    
    
    
    25,624
    
    
    
    
    
    
    
    43,431
    
    
    
    
    
    
    
    13,319Adjustment to fixed
asset impairment
    
    
    
    
    
    
    18,104US GAAP net income (loss)
    
    
    
    
    Ps.
    
    (357,761
    )
    
    
    
    
    Ps.
    
    (276,648
    )
    
    
    
    
    Ps.
    
    288,000
 F-123




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##### Table of Contents



Under US GAAP, the monetary position effect of the statement of
operations adjustments is included in each adjustment, except for
goodwill, which is non-monetary.  b.
    
    Reconciliation of stockholders equity 2003
    
    2002Total stockholders equity under Mexican GAAP
    
    
    
    
    Ps.
    
    1,016,828
    
    
    
    
    
    Ps.
    
    1,092,335Deferred income taxes
    
    
    
    
    
    
    (25,725
    )
    
    
    
    
    
    
    (273
    )Deferred employee statutory profit sharing
    
    
    
    
    
    
    (148,052
    )
    
    
    
    
    
    
    (214,922
    )Purchase accounting adjustments:Accumulated negative goodwill
    
    
    
    
    
    
    (47,832
    )Accumulated depreciation
    
    
    
    
    
    
    15,151Effect of fifth amendment to Bulletin B-10:Fixed assets
    
    
    
    
    
    
    (998,298
    )
    
    
    
    
    
    
    (791,413
    )Fixed assets accumulated depreciation
    
    
    
    
    
    
    739,496
    
    
    
    
    
    
    
    683,925Total US GAAP stockholders equity
    
    
    
    
    Ps.
    
    551,568
    
    
    
    
    
    Ps.
    
    769,652
  c.
    
    Reconciliation of comprehensive income (loss) 2003
    
    2002
    
    2001Comprehensive loss underMexican GAAP
    
    
    
    
    Ps.
    
    (337,195
    )
    
    
    
    
    Ps.
    
    (247,727
    )
    
    
    
    
    Ps.
    
    (987
    )US GAAP adjustments:Net income (loss)
    
    
    
    
    
    
    62,855
    
    
    
    
    
    
    
    (106,990
    )
    
    
    
    
    
    
    70,021Result of holding
non-monetary assets
    
    
    
    
    
    
    (91,619
    )
    
    
    
    
    
    
    68,269
    
    
    
    
    
    
    
    168,055Comprehensive income (loss)
    
    
    
    
    Ps.
    
    (365,959
    )
    
    
    
    
    Ps.
    
    (286,448
    )
    
    
    
    
    Ps.
    
    237,089
  19.
    
    Future impact of recently issued accounting standards under US GAAP not
yet in effect  a.
    
    SFAS No. 149, Amendments of Statement 133 on Derivative
Instruments and Hedging Activities In April 2003 the FASB issued
SFAS No. 149, which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities
under SFAS No. 133. The changes in this Statement improve financial
reporting by requiring that contracts with comparable characteristics
be accounted for similarly. The new standard will be effective for
contracts entered into or modified after September 30, 2003, except as
stated below and for hedging relationships designated after September
3, 2003. In addition, except as stated below, all provisions of this
Statement should be applied prospectively.The provisions of this Statement that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters
that began prior to September 15, 2003, should continue to be applied
in accordance with their respective effective dates. The Company does
not anticipate that this new standard will have a significant impact
on its financial position or results of operations. F-124




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##### Table of Contents



b.
    
    FASB Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46) In January 2003, the FASB issued FIN 46. FIN 46
clarified the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 was effective immediately
for all variable interests held by the Company in a variable interest
entity created after January 31, 2003. For a variable interest held by
the Company in a variable interest entity created before February 1,
2003, the Company will be required to apply the provisions of FIN 46
as of December 31, 2004. The Company does not currently have any
variable interests in a variable interest entity. * * * * * * F-125