##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 20-F o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR 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
Commission File Number: 1-13148 Corporación Durango, S.A. de C.V. Exact name of Registrant as specified in its charter
 Durango Corporation
(Translation of 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 Exchange131/8% Senior Notes due 2006, or the 2006 notes
    
    New York Stock Exchange131⁄2% 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




---

TABLE OF CONTENTS



|             |                                                                                       |  |  |  |  |  |  | 
|------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Identity of Directors, Senior Management and Advisors                        
|             | Item 2. Offer Statistics and Expected Timetable                                      
|             | Item 3. Key Information                                                              
|             | Item 4. Information on Our Company                                                   
|             | Item 5. Operating and Financial Review and Prospects                                 
|             | Item 6. Directors, Senior Management and Employees                                   
|             | Item 7. Major Stockholders and Related Party Transactions                            
|             | Item 8. Financial Information                                                        
|             | Item 9. The Offer and Listing                                                        
|             | Item 10. Additional Information                                                      
|             | Item 11. Quantitative and Qualitative Disclosure about Market Risk                   
|             | Item 12. Description of Securities Other than Equity Securities                      
|PART II     
|             | Item 13. Defaults, Dividend Arrearages and Delinquencies                             
|             | Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|             | Item 15. Controls and Procedures                                                     
|             | Item 16. [Reserved]                                                                  
|             | Item 16A. Audit Committee Financial Expert                                           
|             | Item 16B. Code of Ethics                                                             
|             | Item 16C. Principal Accountant Fees and Services                                     
|             | Item 16D. Exemptions from the Listing Standards for Audit Committees                 
|             | Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers     
|PART III    
|             | Item 17. Financial Statements                                                        
|             | Item 18. Financial Statements                                                        
|             | Item 19. Exhibits                                                                    
|By-Laws     
|Subsidiaries



---



##### Table of Contents



INTRODUCTION In this annual report, the company, we, us and our refer to
Corporación Durango, S.A. de C.V. and its consolidated subsidiaries, as the
context may require. Unless the context otherwise indicates, the terms our
notes and the notes refer collectively to our 12 5/8% Senior Notes due 2003,
or the 2003 notes, the 2006 notes, the 2008 notes and our 13 3⁄4% Senior Notes
due 2009, or the 2009 notes, issued under our indentures, and the notes issued
under our Euro Commercial Paper Program. We are a corporation organized under
the laws of the United Mexican States, or Mexico. Presentation of Financial Information We report our financial statements in pesos and prepare our financial
statements in accordance with generally accepted accounting principles in
Mexico, or Mexican GAAP, which differ in significant respects from generally
accepted accounting principles in the United States, or U.S. GAAP. Notes 24
and 25 to our audited consolidated financial statements provides a description
of the principal differences between Mexican GAAP and U.S. GAAP applicable to
our company and a reconciliation to U.S. GAAP of our consolidated net income
(loss) and total stockholders equity as of December 31, 2003 and 2002 and for
each of the three years in the period ended December 31, 2003. We have a
fiscal year end of December 31. Our company is the result of the merger on October 8, 2001 of Corporación
Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V.,
or GIDUSA. GIDUSA, being the surviving entity, was subsequently renamed
Corporación Durango, S.A. de C.V. Prior to October 8, 2001, GIDUSA was a
majority-owned subsidiary of CODUSA. The financial statements included herein reflect the following:  
    
    Consolidated assets and liabilities and results of operations
of CODUSA, which includes GIDUSA, as of December 31, 2002 and 2003
and for each of the years ended December 31, 2001, 2002 and 2003.
    
    Assets and liabilities and results of operations of Compañía
Papelera de Atenquique, S.A. de C.V., or Atenquique, and assets and
liabilities and results of operations of Industrias Centauro, S.A.
de C.V., or Centauro, as of December 31, 2002 and 2003 and for each
of the years ended December 31, 2001, 2002 and 2003. For accounting purposes, the GIDUSA merger was reflected on a historical
cost basis in a manner similar to a pooling of interest under which there was
no change in the existing assets and liabilities and results of operations of
both entities. The minority interest in CODUSAs consolidated financial
statements prior to the GIDUSA merger reflected the shareholding in GIDUSA not
owned by CODUSA. This minority interest was eliminated upon the merger. Pursuant to Bulletin B-10, Recognition of the Effects of Inflation in
Financial Information, and Bulletin B-12, Statement of Changes in Financial
Position, issued by the Mexican Institute of Public Accountants (Instituto
Mexicano de Contadores Públicos), or MIPA, our audited consolidated financial
statements are reported in period-end pesos to adjust for the effects of
inflation. The presentation of financial information in period-end, or
constant, currency units is intended to eliminate the distorting effect of
inflation on the financial statements and to permit comparisons across
comparable periods in comparable monetary units. Consequently, under Mexican
GAAP, non-monetary assets, with the exception of inventories and fixed assets
of non-Mexican origin and those of our non-Mexican subsidiaries, are restated
using the National Consumer Price Index (Indice Nacional de Precios al
Consumidor), or the NCPI. Inventories are restated at current replacement
costs while fixed assets of non-Mexican origin are restated by the inflation of
the country of origin prior to translation to pesos at the period-end exchange
rate. We use Bulletin B-15, Foreign Currency Transactions and Translation of
Financial Statements of Foreign Operations, which prescribes the methodology
for the translation and recognition of inflation of the financial information
of non-Mexican subsidiaries. Therefore, the peso amounts of our revenues and
expenses of our U.S. based subsidiaries may be impacted by the foreign exchange
rate fluctuations and inflation rates in the United States. -1-




---



##### Table of Contents



Except as otherwise indicated, financial data for all periods throughout
this annual report have been restated in constant pesos as of December 31,
2003. The noon buying rate as reported by the Federal Reserve Bank of New
York, for the purchase of dollars, expressed in nominal pesos per dollar at
December 31, 2003 was Ps 11.24 = US$1.00. Any discrepancies between the
amounts listed and their totals in the tables included in this annual report
are due to rounding. Special Note Regarding Forward-Looking Statements This annual report contains forward-looking statements that involve
substantial risks and uncertainties, including, in particular statements about
our plans, strategies and prospects under the captions Item 5. Operating and
Financial Review and Prospects and Item 4. Information on Our Company. You
can identify these statements by forward-looking words such as anticipate,
believe, could, estimate, expect, intend, may, should, will,
and would or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position or
state other forward-looking information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control.
The factors listed below under the caption Item 3. Key InformationRisk
Factors, as well as any cautionary language in this annual report, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described in these
risk factors and elsewhere could have a material adverse effect on our
business, financial condition and results of operations. The forward-looking
statements are subject to risks, uncertainties, and assumptions about us,
including, among other things:  
    
    our current liquidity crisis and the restructuring negotiations with our creditors;
    
    our substantial debt and significant debt service obligations;
    
    the actions and decisions of creditors of our company and of
other third parties with interests in our May 18, 2004 voluntary
filing for concurso mercantil(commercial reorganization) under the
Mexican Law of Commercial Reorganizations (Ley de Concursos
Mercantiles), which we refer to as the LCR, with the First Federal
District Court in Durango, Mexico, and the May 20, 2004 voluntary
petition filed by our foreign representative, Gabriel Villegas
Salazar, under section 304 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Southern District of New
York commencing a case ancillary to the concurso mercantil
proceeding, which we refer to as the 304 Proceeding;
    
    the effects of the concurso mercantilproceeding and the 304
Proceeding on our liquidity and results of operations;
    
    the instructions, orders and decisions of the First Federal
District Court in Durango, Mexico and the United States Bankruptcy
Court for the Southern District of New York and other effects of
legal and administrative proceedings, settlements, investigations
and claims related to the concurso mercantilproceeding and the 304
Proceeding;
    
    the ability of our company to obtain and maintain normal
terms with vendors and service providers and to maintain contracts
that are critical to our operations;
    
    the duration of the concurso mercantilproceedings;
    
    developments in, or changes to, the laws, regulations and
governmental policies governing our business, including
environmental liabilities;
    
    the competitive nature of the industries in which we are
operating; -2-




---



##### Table of Contents




    
    changes in the dollar-peso exchange rate, interest rates and
other domestic and international market and industry conditions;
    
    the cyclicality of the paper and packaging industries;
    
    our ability to keep key personnel required to operate our business;
    
    limitations on our access to sources of financing on competitive terms;
    
    our need for substantial capital;
    
    interest rate levels; and
    
    the value of our assets in a potential liquidation, including
trade receivables, prepaid expenses, property, plant and equipment
and deferred charges. We do not intend to update or otherwise revise the forward-looking
statements herein to reflect circumstances existing after the date when made or
to reflect the occurrence of future events even in the event that any or all of
the assumptions underlying the forward-looking statements are shown to be in
error, except as may be required under applicable securities laws. 
 PART I 
 Item 1. Identity of Directors, Senior Management and Advisors. Not applicable. 
 Item 2. Offer Statistics and Expected Timetable. Not applicable. 
 Item 3. Key Information. Selected Combined and Consolidated Financial Data The following table set forth selected combined and consolidated financial
information for our company and its consolidated subsidiaries at the dates and
for each of the periods presented. The data does not represent all of our
financial information. You should read this information together with, and
this information is qualified in its entirety by reference to, our audited
consolidated financial statements at December 31, 2002 and 2003 and for the
years ended December 31, 2001, 2002 and 2003, including the notes thereto. The
financial information at December 31, 1999, 2000 and 2001 and for the years
ended December 31, 1999 and 2000, have been derived from audited combined and
consolidated financial statements that are not included in this annual report. The audited consolidated financial statements have been prepared in
accordance with Mexican GAAP, which differs in certain significant respects
from U.S. GAAP. Notes 24 and 25 to our audited consolidated financial
statements provides a description of the principal differences between Mexican
GAAP and U.S. GAAP applicable to our company and a reconciliation to U.S. GAAP
of our consolidated net income (loss) and total stockholders equity as of
December 31, 2003 and 2002 and for each of the three years in the period ended
December 31, 2003. Mexican GAAP requires that all financial information be presented in
constant pesos (having the same purchasing power for each period indicated
taking into account inflation) as of the date of the most recent balance sheet.
Accordingly, all of the financial information included in this annual report is
presented in constant pesos as of December 31, 2003, unless otherwise noted.
Although the restatement of nominal peso amounts into constant peso amounts
lessens the distorting effect that inflation has on comparisons of financial
statements over time, this restatement does not wholly eliminate those
distortions, and evaluation of period-to-period trends may be difficult.
References in this annual report to amounts in nominal pesos are to pesos
that have not been adjusted for inflation. -3-




---



##### Table of Contents



Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. However, our independent auditors have stated
in their most recent report that due to our liquidity condition, among other
factors, there is substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty. Except as otherwise noted, the following information is presented in
constant pesos as of December 31, 2003. At and for the year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions of
constant pesos, except per share data)Statement of Income Data:Mexican GAAP:Net sales
    
    Ps
    6,831.0
    
    
    Ps
    8,124.5
    
    
    Ps
    10,775.3
    
    
    Ps
    13,061.4
    
    
    Ps
    8,080.6Cost of sales
    
    
    5,957.3
    
    
    
    7,057.9
    
    
    
    9,065.8
    
    
    
    10,906.4
    
    
    
    6,115.3Gross profit
    
    
    873.7
    
    
    
    1,066.6
    
    
    
    1,709.5
    
    
    
    2,154.9
    
    
    
    1,965.2Selling, general and administrative
expenses
    
    
    567.3
    
    
    
    570.0
    
    
    
    691.4
    
    
    
    751.7
    
    
    
    624.8Income from operations
    
    
    306.4
    
    
    
    496.6
    
    
    
    1,018.1
    
    
    
    1,403.2
    
    
    
    1,340.5Net comprehensive financing cost
(result):Interest expense
    
    
    (1,186.2
    )
    
    
    (1,130.6
    )
    
    
    (1,118.5
    )
    
    
    (1,121.2
    )
    
    
    (1,023.1
    )Interest income
    
    
    42.4
    
    
    
    40.3
    
    
    
    70.2
    
    
    
    129.6
    
    
    
    120.6Exchange (gain) loss, net
    
    
    (821.4
    )
    
    
    (998.2
    )
    
    
    328.0
    
    
    
    (105.7
    )
    
    
    343.3Monetary position gain
    
    
    367.0
    
    
    
    406.7
    
    
    
    309.8
    
    
    
    609.5
    
    
    
    814.8Total net comprehensive financing cost
(result)
    
    
    (1,598.2
    )
    
    
    (1,681.9
    )
    
    
    (410.4
    )
    
    
    (487.8
    )
    
    
    255.7Other income (expense)
    
    
    (1,511.2
    )
    
    
    (3,127.0
    )
    
    
    476.4
    
    
    
    1,619.3
    
    
    
    10.3Income (loss) from continuing
operations before income taxes and
employee statutory profit sharing
    
    
    (2,803.0
    )
    
    
    (4,312.2
    )
    
    
    1,084.0
    
    
    
    2,534.7
    
    
    
    1,606.4Income tax benefit (expense)
    
    
    (0.2
    )
    
    
    677.2
    
    
    
    (48.6
    )
    
    
    (661.8
    )
    
    
    (179.8
    )Employee statutory profit sharing
expense
    
    
    (1.7
    )
    
    
    (1.1
    )
    
    
    (4.9
    )
    
    
    (7.9
    )
    
    
    (5.4
    )Income (loss) from continuing operations
    
    
    (2,804.9
    )
    
    
    (3,636.1
    )
    
    
    1,030.6
    
    
    
    1,865.0
    
    
    
    1,421.2Discontinued operations
    
    
    (549.2
    )
    
    
    (102.9
    )
    
    
    152.9
    
    
    
    81.3
    
    
    
    224.2Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (317.9
    )
    
    
    
    
    
    
    Consolidated net income (loss)
    
    Ps
    (3,354.2
    )
    
    Ps
    (3,738.9
    )
    
    Ps
    865.5
    
    
    Ps
    1,946.3
    
    
    Ps
    1,645.4Basic and diluted earnings
per share (1)
    
    Ps
    (36.03
    )
    
    Ps
    (39.78
    )
    
    Ps
    9.16
    
    
    Ps
    18.72
    
    
    Ps
    11.95Basic and diluted earnings
per share from continuing operations
    
    Ps
    (30.18
    )
    
    Ps
    (38.65
    )
    
    Ps
    10.96
    
    
    Ps
    19.83
    
    
    Ps
    15.11Weighted-average number of shares
outstanding
    
    
    92,942,916
    
    
    
    94,072,122
    
    
    
    94,072,122
    
    
    
    94,072,122
    
    
    
    94,072,122U.S. GAAP:(2) (3)Net sales
    
    Ps
    6,831.0
    
    
    Ps
    6,511.0
    
    
    Ps
    7,600.9
    
    
    Ps
    9,504.8
    
    
    Ps
    9,347.9Operating
(loss) income
    
    
    (105.6
    )
    
    
    (109.6
    )
    
    
    1,116.2
    
    
    
    1,500.5
    
    
    
    1,909.1Income (loss) before provisions for
income and asset taxes, minority
interest, special items and
discontinued operations
    
    
    (2,143.1
    )
    
    
    (1,590.1
    )
    
    
    349.1
    
    
    
    1,011.7
    
    
    
    2,167.5Net income
    
    
    (2,219.9
    )
    
    
    (2,207.1
    )
    
    
    248.9
    
    
    
    10.5
    
    
    
    1,487.7Basic and diluted earnings
per share (4)
    
    
    (23.88
    )
    
    
    (23.46
    )
    
    
    2.64
    
    
    
    0.11
    
    
    
    15.81Basic and diluted earnings
per share from continuing operations
    
    
    (22.88
    )
    
    
    (18.04
    )
    
    
    2.84
    
    
    
    10.75
    
    
    
    23.04Balance Sheet Data:Mexican GAAP:Cash and temporary investments
    
    Ps
    650.0
    
    
    Ps
    237.6
    
    
    Ps
    537.2
    
    
    Ps
    855.6
    
    
    Ps
    977.5
 -4-




---



##### Table of Contents



At and for the year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in millions of
constant pesos, except per share data)Total current assets
    
    
    3,665.9
    
    
    
    3,699.6
    
    
    
    4,475.8
    
    
    
    5,866.4
    
    
    
    6,104.7Property, plant & equipment, net
    
    
    11,341.1
    
    
    
    12,030.5
    
    
    
    15,766.1
    
    
    
    16,904.6
    
    
    
    16,568.8Total assets
    
    
    15,957.7
    
    
    
    18,073.1
    
    
    
    22,404.9
    
    
    
    24,947.0
    
    
    
    24,852.7Short-term debt, including current
portion of long-term debt
    
    
    8,656.5
    
    
    
    7,874.0
    
    
    
    652.6
    
    
    
    918.4
    
    
    
    1,247.6Long-term debt
    
    
    399.4
    
    
    
    1,021.4
    
    
    
    7,469.8
    
    
    
    7,943.1
    
    
    
    7,753.1Capital stock
    
    
    4,742.3
    
    
    
    4,858.0
    
    
    
    4,858.0
    
    
    
    2,414.0
    
    
    
    4,401.6Total majority stockholders equity
    
    
    1,533.0
    
    
    
    4,568.0
    
    
    
    8,291.6
    
    
    
    6,989.9
    
    
    
    8,004.6Total minority stockholders equity
    
    
    67.8
    
    
    
    71.1
    
    
    
    43.5
    
    
    
    1,662.4
    
    
    
    2,757.9Total stockholders equity
(net assets)
    
    
    1,600.8
    
    
    
    4,639.2
    
    
    
    8,335.2
    
    
    
    8,652.3
    
    
    
    10,762.5U.S.
GAAP: (2)Total assets
    
    Ps
    15,129.6
    
    
    Ps
    17,565.1
    
    
    Ps
    19,529.9
    
    
    Ps
    20,959.4
    
    
    Ps
    20,448.9Total stockholders equity (net assets)
    
    
    (1,192.5
    )
    
    
    1,090.3
    
    
    
    4,217.8
    
    
    
    2,884.5
    
    
    
    2,973.9Other Financial Data:Mexican GAAP:Resources generated by (used in)
operating activities
    
    Ps
    (441.9
    )
    
    Ps
    (157.6
    )
    
    Ps
    1,029.1
    
    
    Ps
    1,500.4
    
    
    Ps
    1,644.4Resources generated by (used in)
financing activities
    
    
    (55.8
    )
    
    
    848.7
    
    
    
    (550.0
    )
    
    
    1,945.8
    
    
    
    (423.3
    )Resources generated by (used in)
investing activities
    
    
    910.1
    
    
    
    (990.6
    )
    
    
    (797.6
    )
    
    
    (3,568.1
    )
    
    
    (1,723.5
    )Capital expenditures
    
    
    (106.7
    )
    
    
    (459.6
    )
    
    
    (846.6
    )
    
    
    (1,192.1
    )
    
    
    (184.4
    )U.S. GAAP:(5)Cash flow provided by (used in)
operating activities
    
    Ps
    (314.1
    )
    
    Ps
    389.5
    
    
    Ps
    1,244.9
    
    
    Ps
    716.7
    
    
    Ps
    845.0Cash flow provided by (used in)
financing activities
    
    
    (406.0
    )
    
    
    1,372.4
    
    
    
    (1,027.2
    )
    
    
    338.4
    
    
    
    (327.2
    )Cash flow provided by (used in)
investing activities
    
    
    910.1
    
    
    
    (1,448.3
    )
    
    
    (525.9
    )
    
    
    (1,314.7
    )
    
    
    (1,705.9
    )
   (1)
    
    See note 3 to our audited consolidated financial statements.(2)
    
    Amounts of sales and long-term debt under U.S. GAAP do not differ
materially from these amounts under Mexican GAAP. See notes 24 and 25 to
our consolidated financial statements.(3)
    
    The difference between net income (loss) under U.S. GAAP and Mexican GAAP
primarily reflects differing accounting treatment for negative goodwill,
deferred income tax, employees statutory profit sharing and the effects
of inflation on fixed assets. See notes 24 and 25 to our audited
consolidated financial statements.(4)
    
    See notes 24 and 25 to our audited consolidated financial statements.(5)
    
    Amounts stated in historical pesos. Dividends Please see Item 8. Financial Information  Dividend Policy. Exchange Rate Information The following table sets forth, for the periods indicated, the high, low,
average and period-end noon buying rate as reported by the Federal Reserve Bank
of New York, for the purchase of dollars, expressed in nominal pesos per
dollar. -5-




---



##### Table of Contents



Noon Buying RatePeriodYear ended December 31,
    
    High
    
    Low
    
    Average(1)
    
    End1999
    
    Ps
    10.60
    
    
    Ps
    9.24
    
    
    Ps
    9.56
    
    
    Ps
    9.482000
    
    
    10.09
    
    
    
    9.19
    
    
    
    9.48
    
    
    
    9.622001
    
    
    9.97
    
    
    
    9.03
    
    
    
    9.34
    
    
    
    9.162002
    
    
    10.42
    
    
    
    9.00
    
    
    
    9.67
    
    
    
    10.432003
    
    
    11.41
    
    
    
    10.11
    
    
    
    10.79
    
    
    
    11.24
 Noon Buying RatePeriodMonth Ended
    
    High
    
    Low
    
    Average(2)
    
    EndJanuary 31, 2004
    
    Ps
    11.10
    
    
    Ps
    10.81
    
    
    Ps
    10.92
    
    
    Ps
    11.01February 28, 2004
    
    
    11.25
    
    
    
    10.91
    
    
    
    11.03
    
    
    
    11.06March 31, 2004
    
    
    11.23
    
    
    
    10.92
    
    
    
    11.01
    
    
    
    11.18April 30, 2004
    
    
    11.43
    
    
    
    11.16
    
    
    
    11.27
    
    
    
    11.40May 2004
    
    
    11.64
    
    
    
    11.38
    
    
    
    11.52
    
    
    
    11.41June 2004
    
    
    11.53
    
    
    
    11.30
    
    
    
    11.39
    
    
    
    11.53July 2004 (through July 14)
    
    
    11.54
    
    
    
    11.46
    
    
    
    11.49
    
    
    
    11.47
   (1)
    
    Average of month-end rates.(2)
    
    Average of daily rates. Source: Federal Reserve Bank of New York. On July 14, 2004, the
noon buying rate was Ps 11.47 per US$1.00. Risk Factors We are subject to various risks resulting from changing economic,
political, industry and business and financial conditions that may affect our
results of operations or financial condition. These risks are described below. Risk Factors Relating to the Our Liquidity Crisis andConcurso Mercantil We have insufficient liquidity to repay our debt obligations. If our company
does not complete a successful financial reorganization, we will not be able to
pay the principal or interest on our unsecured debt, including our notes, and
our operations are likely to be adversely affected. In recent years, we have incurred substantial indebtedness to finance our
growth and operations. As of December 31, 2003, we had consolidated
indebtedness of approximately Ps 9,197.2 million (US$818.5 million). We have
not made any principal or interest payments on any of our unsecured debt since
November 29, 2002. On May 18, 2004, we filed a voluntary petition for concurso
mercantilunder the LCR with the First Federal District Court in Durango,
Mexico. For a discussion of the LCR and concurso mercantilproceedings, see
Item 4. Information on Our CompanyMexican Law of Commercial
Reorganizations. Our failure to pay principal and interest on our unsecured debt has
restricted our sources for short-term financing, thereby impeding our ability
to finance our operations. Furthermore, the negative publicity surrounding
these failures and our filing for concurso mercantilhave adversely affected
the terms of our trade payables. If our current liquidity crisis continues, our ability to undertake
important activities will be impaired, including:  
    
    our ability to maintain relationships with key suppliers;
    
    our ability to enter into long-term contracts with customers;
    
    our ability to attract and retain key employees; -6-




---



##### Table of Contents




    
    our ability to adjust to rapidly changing market conditions,
thus making us more vulnerable in the event the downturn in general
economic conditions or our business continues;
    
    our ability to present a positive image to regulators, investors, lenders or credit rating agencies;
    
    our ability to undertake capital expenditures; or
    
    our ability to maintain and improve our enterprise value. We believe that we are not likely to find a source of financing to fund
the payments due on our unsecured debt and therefore we will not be able to
cure the existing events of default under the indentures and other instruments
governing our debt obligations if our company does not complete a successful
financial reorganization. The events of default give our unsecured creditors
the right to accelerate our repayment obligations on our unsecured debt
representing 85% of our indebtedness. Since we do not have enough funds to
repay these obligations, it is likely that each of these creditors would incur
a significant loss if our company does not complete a successful financial
reorganization. In our opinion, the recovery that would be received by these
creditors in a liquidation scenario would very likely be materially less than
they would receive under a financial reorganization. Even if we successfully complete a financial reorganization, we will
continue to be highly leveraged and will need to increase our cash flow to meet
our payment obligations under our existing indebtedness. The Mexican Law of Commercial Reorganizations may not be as favorable to
holders of our notes or ADSs as the U.S. Bankruptcy Code. Mexican reorganization law is based on the largely untested LCR enacted in
May 2000, which provides for two different phases in the proceedings:
conciliation and bankruptcy/liquidation (quiebra). For a description of the
LCR, see Item 4. Information on Our CompanyMexican Law of Commercial
Reorganizations. Once the concurso mercantilis declared and becomes
effective, and after the appointment of a conciliator, the conciliation phase
begins. The conciliation phase may last up to 185 days, absent protracted
litigation. This initial term is subject to extension for two 90-day periods.
The objective of the conciliation phase is to reach an agreement between the
debtor and its creditors to restructure the indebtedness of the debtor. The
bankruptcy/liquidation (quiebra)phase does not have a specific term within
which it must be concluded. Holders of our notes are required to file proofs
of claims in Spanish against our estate in the First Federal District Court in
Durango, Mexico. Upon the courts recognition of holders of our notes as a
creditor of ours, claim of holders of our notes would be unsecured and ranked
with equal right to payment with all other unsecured claims filed against our
estate. We cannot predict the duration of the concurso mercantilproceeding, as
the statutory provisions governing such proceedings remain largely untested, or
the ability of creditors under our unsecured debt to influence the outcome of
such proceedings. The concurso mercantilproceeding in Mexico will likely
result in significant changes to our existing obligations, including our
unsecured debt, that could include the cancellation of part of those
obligations or the rescheduling of all of those obligations. During the
pendency of the concurso mercantilproceeding, our ability to operate or manage
our business, to retain employees, to maintain existing or create new customer
relationships, to continue to collect payments for our products or to obtain
any type of funding or financing may be materially adversely affected. We
believe that any such adverse effects would be exacerbated if the concurso
mercantilproceeding is protracted. Creditors under our unsecured debt and
holders of our ADSs may receive little or no meaningful recovery in the
concurso mercantilproceeding if a restructuring of our debt is not approved
within the conciliation period. Our unsecured creditors may find it difficult to realize any meaningful
recovery on our indebtedness. Upon the courts decision to declare the concurso mercantil, which is
still pending as of the date hereof, our obligations under our unsecured debt
obligations:  
    
    will be converted into pesos at the exchange rate prevailing
on the day our company is declared in concurso mercantiland from
pesos into inflation indexed units (Unidades de Inversión), or UDIs,
at the conversion rate prevailing at that time; -7-




---



##### Table of Contents




    
    will be dependent upon the outcome of the concurso mercantil
proceeding and payment, if any, would occur at the same time as
claims of all of our unsecured creditors are satisfied if and to the
extent funds are sufficient; and
    
    will cease to accrue interest. There can be no assurance that our unsecured creditors or stockholders
will receive any meaningful recovery in the concurso mercantilproceeding if a
restructuring of our debt is not approved within the conciliation period. If a financial reorganization is not consummated, we face a substantial risk of
liquidation. Our consolidated financial statements have been prepared under the
assumption that we will continue as a going concern. However, our independent
auditors have stated in their most recent report that, due to our liquidity
crisis, among other factors, there is substantial doubt about our ability to
continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
If we are not successful in consummating a financial reorganization, in
generating sufficient cash from operating activities to meet our financial
obligations and to make essential capital expenditures, or in obtaining outside
sources of funding, we will be forced to sell assets. If we need to dispose of
assets, particularly during the current global downturn in the paper and
packaging industry, we will be unable to realize the book value of those assets
upon liquidation. If we are unable to successfully restructure our debt, we
might be unable to continue our operations and may be required to liquidate our
entire operations. If we are required to liquidate our operations, the holders
of our notes and ADSs will likely incur a significant loss and the overall
recovery on our notes and ADSs will very likely be materially less than what
creditors and stockholders would receive if a financial reorganization were
consummated. If our ADSs, the 2006 notes and the 2008 notes are delisted from the New York
Stock Exchange, there may be an adverse effect on the liquidity of our ADSs,
2006 notes and 2008 notes and on our ability to raise capital. On May 25, 2004, following our filing of concurso mercantil, the New York
Stock Exchange announced the trading of our companys ADSs, 2006 notes and 2008
notes would be suspended immediately. At such time the New York Stock Exchange
applied to the United States Securities and Exchange Commission to delist the
ADSs, the 2006 notes and the 2008 notes. Delisting from the New York Stock
Exchange would have an adverse effect on the liquidity of our ADSs, 2006 notes
and 2008 notes and on our ability to raise capital through the issuance of ADSs
or securities convertible into ADSs. Risks Related the Paper and Packaging Industry and Our Business Our operations are and will continue to be restricted by covenants in our debt
agreements. We are party to debt agreements which have negative covenants and other
restrictions that will limit our ability and the ability of our subsidiaries
to:  
    
    incur additional debt;
    
    pay dividends, acquire shares of stock of our company or
certain of our subsidiaries, make payments on subordinated debt or
make investments;
    
    make distributions from our subsidiaries;
    
    issue or sell capital stock of our company or certain of our subsidiaries;
    
    issue guarantees;
    
    sell or exchange assets;
    
    enter into sale and lease-back transactions; -8-




---



##### Table of Contents




    
    enter into transactions with stockholders and affiliates of our company;
    
    create liens on assets of our company or certain of our subsidiaries; and
    
    effect mergers. We are vulnerable to cyclicality and fluctuations in pricing. Our business is affected by trends in international prices and demand for
paper and packaging products. Prices for containerboard and, to a lesser
extent, converted products such as corrugated containers and multi-wall sacks
and bags have historically been subject to cyclical fluctuations. Pricing is
affected not only by demand for paper and packaging products, which correlates
with real economic growth, but also by current inventory levels of customers.
In addition, the paper and packaging industries are highly capital intensive
and the impact of new production facilities may result in imbalances between
supply and demand. Any decrease in demand or increase in supply could
adversely affect the prices of our products and our net sales revenue. We are vulnerable to competition from international paper producers with
substantial resources. We face increasing competition in Mexico from Mexican and non-Mexican
producers of paper and packaging due in part to significantly enhanced market
access for imported products. Many of our competitors are large international
paper producers with substantial resources at their disposal. We try to
maintain our prices in Mexico at levels below those of imports from the Unites
States and in the past, this price differential, combined with protective
tariffs, has discouraged imports from the United States. With the gradual
elimination of tariffs and generally low prices for paper and packaging
products in the United States over the last four years, competition from
imports has increased and may increase further. We face substantial
competition in the United States from a variety of producers of paper and
packaging products. Many of our foreign competitors are substantially larger
and have substantially greater financial, manufacturing, technological and
marketing resources than our company. We anticipate that we may experience
increasingly intense competition from international producers of paper and
packaging products, both in Mexico and in the United States where we sell these
products. Increased competition from imports may have a material adverse
effect on our company by driving down our prices and decreasing our revenues.
Actions by our competitors, including any future increases in their capacity,
may make it increasingly difficult for us to maintain our domestic market share
in paper and packaging products. Our operations may be adversely affected by increases in the price of raw
materials. The cost of our supply of recycled fiber is directly affected by trends in
international and domestic prices of old corrugated containers, or OCC, and old
newsprint, or ONP, which stem from market fluctuations caused by factors beyond
our control. Generally, demand and prices for finished paper vary directly
with demand and prices for these raw materials. In addition, the cost of OCC
in Mexico is affected both by inflation and exchange rates. We might not be
able to recoup any future increases in the costs of raw materials through
increases in sales prices for our products, which would adversely affect our
operating income. We may be adversely affected by the imposition and enforcement of more
stringent environmental and safety requirements. We are subject to strict environmental regulations in Mexico and in the
United States. Changes in environmental regulations, or changes in the policy
of enforcement of existing environmental regulations, could adversely affect
us. Our Mexican operations are supervised by the Mexican Ministry of the
Environment and Natural Resources (Secretaria del Medio Ambiente y Recursos
Naturales)and our U.S. operations are supervised by the U.S. Environmental
Protection Agency and other federal, state and local regulatory agencies.
These agencies are responsible for the implementation of pollution control laws
and regulations and could take action against us by shutting down plants,
revoking licenses, imposing fines or obligating us to clean up waste that we
produced, if we fail to comply with environmental regulations. It is also
possible that the relevant governmental agencies could issue additional
regulations, could seek a more stringent interpretation of existing regulations
or could exercise stricter enforcement actions that would require us to spend
additional funds on environmental matters. In addition, -9-




---



##### Table of Contents



the enactment of new environmental laws or regulations in Mexico or the
United States may cause us to spend additional funds, which may be material, in
order to comply with the new laws or regulations. If we lose key members of our management team and are unable to attract other
qualified personnel, our business could be adversely affected. Our success largely depends on the continuing contributions of our
management team. Our managers have been with our company for an average of 19
years and have implemented our past strategic acquisitions. In particular, our
chief executive officer, chief operations officer, and chief financial officer
have been with our company since the founding of GIDUSA. The loss of key
personnel or our potential inability to attract and retain other qualified
managers could adversely affect us. Our principal stockholders own 95.1% of our shares and may take actions not in
the interest of other holders of our shares or debt securities. We are controlled by the Rincón family, which directly and indirectly owns
95.1% of our outstanding voting stock. See Item 7. Major Stockholders and
Related Party Transactions. As a result, the Rincón family has the power to
elect all of our directors and determine the outcome of any action requiring
stockholder approval, including transactions with related parties, corporate
reorganizations and the timing and payment of any future dividends. The
interests of the Rincón family as stockholders may differ from the interests of
other holders of our shares or debt securities. We are currently involved in litigation that, if decided adversely to us, could
materially adversely affect our financial condition. We are currently involved in a lawsuit relating to our nonpayment of
amounts alleged due under promissory notes issued to HG Estate, LLC in
connection with the acquisition of our former subsidiary, Durango Paper
Company. We have filed a statement of claims in arbitration, among other
things, challenging the validity of these promissory notes. We are involved in
a lawsuit relating to our failure to pay outstanding obligations under our Euro
Commercial Paper Program. In addition, we are involved in a lawsuit by the
creditors of our former subsidiary, Durango Georgia Paper Company, relating to
certain transfers, guarantees and claims. This action is currently pending in
the Durango Georgia Paper Company bankruptcy proceeding. We are also involved
in a lawsuit by the Mexican government through its National Water Commission
(Comisión Nacional del Agua) against our former subsidiary, Productora Nacional
de Papel, S.A. de C.V., or Pronal, relating to water consumption during the
calendar year 2000. We intend to vigorously defend against these lawsuits, but
the results of these proceedings cannot be predicted. Adverse outcomes for our
company in either of these matters could require significant expenditures and
could have a material adverse effect on our financial condition. We have only
reserved against the HG Estate claims and the Euro Commercial Paper Program
litigation. See Item 8. Financial Information  Legal Proceedings. Because our accounting standards are different from those in other countries,
investors may find it difficult to accurately assess our business and financial
operations. We prepare our financial statements in accordance with Mexican GAAP.
These principles differ in significant respects from U.S. GAAP as further
discussed in notes 24 and 25 to our audited consolidated financial statements.
In particular, all Mexican companies must incorporate the effects of inflation
directly in their accounting records and published financial statements. The
effects of inflation accounting under Mexican GAAP are not eliminated in the
reconciliation to U.S. GAAP. For this and other reasons, the presentation of
our financial statements and reported earnings may differ from that of
companies in other countries. A principal objective of the securities laws of Mexico is to promote full
and fair disclosure of all material corporate information. The Series A Shares
are listed on the Mexican Stock Exchange and, as a listed Mexican company, we
are required to report quarterly financial information to the Mexican National
Banking and Securities Commission (Comisión Nacional Bancaria y de Valores), or
CNBV. We file English translations of these filings with the United States
Securities and Exchange Commission on Form 6-Ks. However, there may be less
publicly available information about issuers of securities listed on the
Mexican Stock Exchange, including our company, than would be regularly
published by or about U.S. companies subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. -10-




---



##### Table of Contents



Risks Relating to Mexico Economic and political developments in Mexico may adversely affect our
business. We are a Mexican company with a substantial part of our operations and
assets in Mexico. In the past, Mexico has experienced both prolonged periods
of weak economic conditions and dramatic deteriorations in economic conditions
that have had a negative impact on our company. There can be no assurances that
such conditions will not return or that such conditions will not have a
material adverse effect on our financial condition and results of operations. The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities, in general, and on us, in
particular, and on market conditions, prices, and returns on Mexican
securities, including our Series A Shares and our debt securities. Although the government of Mexico has pursued policies of economic
liberalization and deregulation in the Mexican economy in the past decade, a
significant change in those policies may hurt business and economic conditions
in Mexico in general and our business in particular. If there were instability
or a general market failure, the Mexican government could reverse its economic
policies of liberalization. Since we are a competitive provider of paper and
packaging products in Mexico, we believe that any reversal of the Mexican
liberalization policies in the Mexican markets would restrict our ability to
expand our market share. We do not have and do not intend to obtain political
risk insurance. Downturns in the Mexican economy adversely affect us. The majority of our customers are Mexican companies or individuals and a
substantial part of our operations and our assets are located in Mexico. For
these reasons, our operations, results and financial condition are dependent
upon the level of economic activity in Mexico. Paper and packaging prices in
Mexico and our revenues are highly affected by the level of economic activity
in Mexico and the general purchasing power of individuals and companies. If
the Mexican economy continues to experience a slow rate of growth, our
business, financial condition and results of operations may be adversely
affected because our customers may reduce their consumption of our products. Currency devaluations may impair our ability to service our debt and adversely
affect our profitability. The peso has devalued substantially against the dollar in the past and may
devalue significantly in the future. The value of the peso, based on the
exchange rate calculated and published by the Mexican Central Bank (Banco de
México), declined by 61% against the dollar during 1994, by an additional 54%
during 1995 and continued to weaken between 1995 and 1998. Despite
stabilization of the peso/dollar exchange rate between 1999 and 2001, the peso
devalued a further 13.8% during 2002. In 2003, the peso devalued by 7.6%. Changes in the value of the peso relative to the dollar have adversely
affected and may continue to adversely affect our financial condition and
results of operations. Devaluation of the peso relative to the dollar
adversely affects our results of operations by increasing our dollar-based
costs, including our cost of borrowing, since the peso cost of interest
payments on our dollar-denominated indebtedness increases. For example, our
net loss in 2002 as compared to 2001 increased by Ps 4,604.4 million partially
due to our exchange loss of Ps 998.2 million in 2002 which we incurred as a
result of the 13.8% currency devaluation of the peso against the dollar in
2002. Similarly, the 7.6% currency devaluation of the peso against the dollar
that occurred in 2003 generated an exchange loss of Ps 821.4 million which was
one of the factors leading to our net loss of Ps 3,354.2 million in 2003.
Substantially all of our indebtedness is denominated in dollars, while a
majority of our revenues and operating expenses are denominated in pesos. We
do not have in place hedging arrangements with respect to devaluation risk
because we do not believe them to be cost effective for our company. -11-




---



##### Table of Contents



An increase in inflation may increase our operating costs but not our revenues. During most of the 1980s, 1991, and 1995 through 1998, Mexico experienced
periods of very high levels of inflation. Inflation has led to high interest
rates, devaluations of the peso and, during the 1980s, substantial government
controls over exchange rates and prices. Inflation in Mexico, as measured by
changes in the NCPI, as provided by Banco de México, was 4.4% in 2001, 5.7% in
2002, and 4.0% in 2003. In 2003, the Mexican inflation rate hit its lowest levels in over 30
years. We cannot give any assurance that the Mexican inflation rate will
continue to decrease or maintain its current level for any significant period
of time. Our profitability may be adversely affected by increases in
inflation. High levels of inflation would cause our operating costs to
increase because approximately 80% of our cost of goods sold and selling,
general and administrative expenses are payable in pesos and generally are
based on short-term contracts, which may be subject to inflationary pressures.
However, the prices that we charge for our products are generally denominated
in dollars or are dollar-linked and may not increase at the same rate as our
costs because the prices that we charge our customers for products are either
fixed by long-term contract or effectively limited by the competitive nature of
the markets in which we operate. If, as in the past four years, we are unable
to pass on the increased costs of our inputs to our customers, the real prices
of our products will not keep pace with inflation. As a result, our operating
income may decline unless we have a comparable increase in our sales volume to
offset the decline in real prices of our products. Exchange controls may impair our ability to obtain dollars to make
dollar-denominated payments. The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert pesos into dollars or other
currencies, and vice versa. However, in the past, the Mexican economy has
experienced balance of payment deficits and shortages in foreign exchange
reserves, and the Mexican government has responded by restricting the ability
of Mexican or foreign persons or entities to convert pesos to foreign
currencies generally, and dollars in particular. The Mexican government may
institute a restrictive currency exchange control policy in the future. Any
restrictive currency exchange control policy could prevent or restrict our
access to dollars to meet our dollar-denominated obligations, including our
debt obligations and could also have a material adverse effect on our business,
financial condition and results of operations. We cannot predict the impact of
any such measures on the Mexican economy. The price of our Series A Shares, ADSs, notes and other debt securities may be
affected by economic developments in other emerging market countries. The market value of securities of Mexican companies is, to varying
degrees, affected by economic and market conditions in other emerging market
countries. Investors reactions to developments in any of these other
countries may have an adverse effect on the market value of securities of
Mexican issuers. In the past, economic crises in Asia, Russia, Brazil and
other emerging markets adversely affected the Mexican economy, and thus, future
economic developments in Mexico and other emerging markets, as well as low
growth in the United States, could adversely affect the Mexican economy in
future periods. In 1998, prices of both Mexican debt securities and Mexican equity
securities dropped substantially as a result of a sharp drop in Asian
securities markets and the economic crises in Russia and Brazil. In 2001,
Argentina defaulted on its public debt, and prices of Argentine debt securities
and the level of the Merval Stock Exchange Index declined significantly. As a
result of these economic crises, there were political demonstrations and civil
unrest in Argentina. In 2002, the devaluation of the Argentine peso created
pressures on the price system that prompted inflation to rebound, after several
years of price stability and price deflation, giving rise to hyperinflationary
episodes over the course of the year. Although the events in Argentina have not had a material effect on the
Mexican economy, to the extent that the Argentine government is unsuccessful in
preventing future economic decline, this crisis may adversely affect the price
of our securities. The market value of our Series A Shares, ADSs, notes and
other debt securities could be adversely affected by events elsewhere,
especially in emerging market countries. -12-




---



##### Table of Contents



Item 4. Information on Our Company. History and Development of Our Company We were incorporated on January 22, 1982. However, some of our underlying
operating companies have been in existence since 1975. We were formed in 1975
from the combination of a forest products transportation company and a regional
wholesaler of building products. Between 1987 and 2000 we pursued a strategy
of vertical integration, implemented by both acquisitions and internal
expansion, to attain our present position as Mexicos largest producer, in
terms of capacity, of containerboard and corrugated containers, based on
information published by the Mexican National Chamber for the Pulp and Paper
Industry (Cámara Nacional de la Industria de la Celulosa y el Papel), or the
Mexican National Chamber for the Pulp and Paper Industry. On October 8, 2001, our company, which was then named Grupo Industrial
Durango, S.A. de C.V., merged with Corporación Durango, S.A. de C.V., or
CODUSA. Our company, the surviving entity, was subsequently renamed
Corporación Durango, S.A. de C.V. Prior to the merger, CODUSA owned 59% of our
capital stock and all of the outstanding capital stock of Grupo Pipsamex, S.A.
de C.V., or Grupo Pipsamex, and Durango Paper Company. In connection with the
merger, shares of our company were issued to members of the Rincón family in
exchange for their shares of CODUSA. We are a corporation (sociedad anónima de capital variable) operating
under the laws of Mexico. Our corporate domicile and principal executive
offices are located at Torre Corporativa Durango, Potasio 150, Ciudad
Industrial, Durango, Durango, United Mexican States 34220, and our telephone
numbers are +52 (618) 814-1658 and +52 (618) 829-1000. Our agent for service of process in the United States is Durango McKinley
Paper Company, 700 Sam Houston Rd., Mesquite, Texas 75149, Attention:
Prudencio Calderón. Significant Developments During 2003 and Recent Developments Defaults, Negotiations with Creditors and Concurso Mercantil In November 2002, we defaulted on payments of principal and interest under
our unsecured indebtedness. In December 2002, we retained financial advisors
to advise us in evaluating debt-restructuring alternatives to implement a
long-term solution to our capital structure and debt service requirements. We
also began discussions with our bank creditors and certain holders of our debt
securities. In light of our failure to make payments on our existing notes, on January
21, 2003, Moodys took action to lower the ratings on our existing notes to
their second lowest rating of Ca. On February 4, 2003, Standard & Poors
lowered our foreign and local currency corporate ratings to their lowest rating
of D. Moodys and Standard & Poors have ceased rating our company and its
debt securities. On April 7, 2003, we entered into a forbearance agreement with the
Steering Group of an Ad Hoc Bondholders Committee. In connection with this
forbearance agreement, we paid a forbearance fee of US$12 million. Holders of
approximately US$493 million of our notes agreed to join the forbearance
agreement. The forbearance agreement expired on June 30, 2003. On April 30, 2004, we entered into a plan support agreement with certain
bank creditors and holders of our notes holding an aggregate of 55% of the
outstanding principal amount of our unsecured debt. Under the terms of the
plan support agreement, the parties were obligated to pursue and implement a
financial restructuring along the lines contained in the agreement in principle
with these creditors, including by means of a cash tender offer and certain
exchange offers and, under certain circumstances, a prepackaged plan of
reorganization under U.S. bankruptcy law. The participating creditors agreed
that they would tender their unsecured debt in the offers and vote their
unsecured debt in favor of the prepackaged plan of reorganization under U.S.
bankruptcy law. The plan support agreement contained certain obligations of
our company and the participating creditors. These obligations were not met by
the agreed dates and certain participating creditors terminated the plan
support agreement on May 17, 2004. -13-




---



##### Table of Contents



On May 18, 2004, we filed a voluntary petition for concurso mercantil
under the LCR with the First Federal District Court in Durango, Mexico. On May
20, 2004, our foreign representative, Gabriel Villegas Salazar, commenced the
304 Proceeding on our behalf. The concurso mercantilproceeding in Mexico is
administered under the voluntary petition (Solicitud de Concurso Mercantil
Presentada por el Propio Comerciante), Case No. 3/2004. The 304 Proceeding is
administered under case caption In re: Petition of Gabriel Villegas Salazar,
as Foreign Representative of Corporación Durango, S.A. de C.V., Debtor in
Foreign Proceeding, Case No.: 04-13487(RDD). None of our subsidiaries have
filed for concurso mercantilor other bankruptcy protection. On May 25, 2004, following our filing for concurso mercantil, the New York
Stock Exchange announced the trading of our companys ADSs, 2006 notes and 2008
notes would be suspended immediately. At such time the New York Stock Exchange
applied to the United States Securities and Exchange Commission to delist the
ADSs, the 2006 notes and the 2008 notes. Delisting from the New York Stock
Exchange would have an adverse effect on the liquidity of our ADSs, 2006 notes
and 2008 notes and on our ability to raise capital through the issuance of ADSs
or securities convertible into ADSs. Operations and Asset Dispositions In February 2003, we commenced operation of a new converter in Dallas with
a capacity of 100 thousand short tons. This converter enables Durango McKinley
Paper Company to manufacture specialty packaging products. Following the
commencement of operations of this converter, Durango McKinley Paper Company
closed its Houston facility. On February 27, 2003, our subsidiary, Empaques de Cartón Titán, S.A. de
CV., or Titán, sold the assets of its molded pulp division, representing
approximately 7.0% of Titáns total assets, for approximately US$53.7 million.
As a result of this sale, our company no longer produces molded pulp products. On November 14, 2003, Grupo Pipsamex sold its subsidiary, Pronal, for
approximately US$28.0 million. Pronals principal asset was a paper mill
located in San Luis Potosí, Mexico. On November 25, 2003, Grupo Pipsamex sold its warehouse in Mexico City for
US$11.5 million. As part of the sale, Grupo Pipsamex reserved the right to use
a potion of the warehouse representing approximately 1/3 of the entire property
for a period of five years at no cost. On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale
agreement with a Mexican company, under which Ponderosa agreed to sell its
particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This
sale is subject to customary closing conditions, including the approval of the
Mexican antitrust authority. Upon the closing of this sale, the capacity of
our other segment will be reduced by 272 thousand short tons to 72 thousand
short tons. Business Overview We are a vertically integrated producer of paper and packaging products
with a distribution network that links our strategically located facilities
with our customers. We believe that these factors, as well as our investment
in modern manufacturing technology and our access to raw materials as Mexicos
only producer of unbleached virgin kraft pulp and one of Mexicos largest users
of recycled paper, based on information published by the Mexican National
Chamber for the Pulp and Paper Industry, allow us to be one of the industrys
lowest cost producers. In 2003, our total sales volume was 1.2 million short
tons. We are a strategically-focused paper company, supplying companies in the
maquiladora sector, as well as the traditional Mexican export sector. We
produce and supply paper to our converting facilities which in turn manufacture
packaging products. Our products include:  
    
    Paper: containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet;
    
    Packaging: corrugated containers and multi-wall sacks and bags; and
    
    Other: plywood and particleboard. -14-




---



##### Table of Contents



In Mexico, we are the largest domestic producer of newsprint with an
estimated 35.8% market share in 2003, based on information published by the
Mexican National Chamber for the Pulp and Paper Industry. We sell our products to a broad range of Mexican and United States
manufacturers of consumable and durable goods, including the maquiladora sector
and Mexicos major exporters. Our customers in the United States and Mexico
include many of the largest industrial, construction, consumer, agricultural,
and media companies such as Nestlé, Pepsico, Sara Lee, Kimberly-Clark, Smurfit
Stone, Vitro and El Universal. In Mexico, we produce containerboard,
corrugated containers, multi-wall sacks and bags, newsprint, uncoated free
sheet, particleboard and plywood. In the United States, we produce
containerboard and corrugated containers. Our revenues were Ps 6,831.0 million in 2003. In 2003, approximately
27.3% of our sales were made in dollars, with the balance primarily
dollar-linked. In 2003, 81.3% of our total sales were made in Mexico and 18.7%
were made in and into the United States. Paper and Packaging Industry Overview There are four major groups of paper products produced by the paper
industry:  
    
    packaging paper, which includes linerboard, corrugating
medium, kraft paper, and tubing and folding cartons;
    
    printing and writing paper, which includes newsprint, bond
paper, business and writing forms and other papers used for
photocopying and commercial printing;
    
    sanitary paper; and
    
    specialty paper. We produce packaging paper and printing and writing paper. North American Paper and Packaging Industry Since mid-1995, the North American paper and packaging industry has
experienced a prolonged down-cycle characterized by continued price pressures,
excess capacity and the inability of many industry participants to earn
satisfactory returns on capital. To maintain reasonable capacity utilization,
U.S. paper producers have generally maintained high export levels over the past
three years, including in the exports to Mexico. These exports have increased
supply in the Mexican market and kept pressure on Mexican paper prices during
2003. To counteract these effects, significant industry consolidation has
occurred over recent years, including Weyerhaeusers acquisition of Willamette,
Temple-Inlands acquisition of Gaylord Container, and the merger of Westvaco
and Mead. This follows the earlier large combinations of International Paper
with Champion International, Georgia-Pacific with Fort James, and Jefferson
Smurfit Corp. with Stone Container. Mexican Paper Industry Apparent Demand for Paper Based on installed capacity, Mexicos paper industry is the second largest
in Latin America, according to the 2003 annual report of the Mexican National
Chamber for the Pulp and Paper Industry. The total size of Mexicos paper
industry in 2003, based on apparent demand, was 6,391 million short tons
including temporary imports, according to the 2003 annual report of the Mexican
National Chamber for the Pulp and Paper Industry. Mexican production is
distributed among 64 plants. Apparent demand consists of domestic production,
as reported by manufacturers, plus imports, minus exports. -15-




---



##### Table of Contents



Apparent demand is a concept similar to consumption, but does not reflect
increases and reductions in inventories by customers. Apparent demand may not
match consumption in any given year; however, over a period of years, the two
measures should tend to approximate one another. Over the past decade, levels of apparent demand for paper have fluctuated
according to changes in gross domestic product. Thus, as gross domestic
product increases, apparent demand also increases. Changes in Mexican paper
demand have historically amounted to 1-2 times the change in gross domestic
product for a given year. Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages) Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %
    
    % GDPYear
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change
    
    Change1999
    
    
    4,184
    
    
    
    1,540
    
    
    
    254
    
    
    
    5,471
    
    
    
    8.2
    %
    
    
    3.7
    %2000
    
    
    4,296
    
    
    
    1,785
    
    
    
    227
    
    
    
    5,854
    
    
    
    7.0
    %
    
    
    6.6
    %2001
    
    
    4,272
    
    
    
    1,884
    
    
    
    237
    
    
    
    5,919
    
    
    
    1.1
    %
    
    
    (0.3
    )%2002
    
    
    4,451
    
    
    
    1,997
    
    
    
    227
    
    
    
    6,221
    
    
    
    5.1
    %
    
    
    0.9
    %2003
    
    
    4,497
    
    
    
    2,090
    
    
    
    197
    
    
    
    6,391
    
    
    
    2.7
    %
    
    
    (1.2
    )%
    The dominant portion of the total market for paper products is the market
for packaging paper. The table below shows Mexican apparent demand from 1999
to 2003 for packaging paper in short tons. In 2003, packaging paper accounted
for 59% of Mexicos total paper production and 56% of apparent demand for
paper. Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages) Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change1999
    
    
    2,389
    
    
    
    676
    
    
    
    91
    
    
    
    2,974
    
    
    
    5.5
    %2000
    
    
    2,464
    
    
    
    795
    
    
    
    67
    
    
    
    3,192
    
    
    
    7.3
    %2001
    
    
    2,478
    
    
    
    878
    
    
    
    73
    
    
    
    3,283
    
    
    
    2.9
    %2002
    
    
    2,622
    
    
    
    928
    
    
    
    68
    
    
    
    3,482
    
    
    
    6.1
    %2003
    
    
    2,645
    
    
    
    955
    
    
    
    54
    
    
    
    3,546
    
    
    
    1.8
    %
    The table below show Mexican apparent demand in short tons from 1999 to
2003 for newsprint in short tons. In 2003, newsprint accounted for 5% of
Mexicos total paper production and 7% of apparent demand for paper. Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages) Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change1999
    
    
    272
    
    
    
    190
    
    
    
    33
    
    
    
    429
    
    
    
    10.0
    %2000
    
    
    281
    
    
    
    193
    
    
    
    28
    
    
    
    446
    
    
    
    4.0
    %2001
    
    
    263
    
    
    
    210
    
    
    
    23
    
    
    
    450
    
    
    
    0.9
    %2002
    
    
    217
    
    
    
    214
    
    
    
    
    
    
    
    431
    
    
    
    (4.3
    )%2003
    
    
    213
    
    
    
    235
    
    
    
    3
    
    
    
    445
    
    
    
    3.3
    %
    -16-




---



##### Table of Contents



The table below show Mexican apparent demand in short tons from 1999 to
2003 for printing and writing paper. In 2003, printing and writing paper
accounted for 17% of Mexicos total paper production and 19% of apparent demand
for paper. Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages) Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change1999
    
    
    770
    
    
    
    319
    
    
    
    27
    
    
    
    1,062
    
    
    
    15.2
    %2000
    
    
    759
    
    
    
    371
    
    
    
    19
    
    
    
    1,111
    
    
    
    4.6
    %2001
    
    
    726
    
    
    
    388
    
    
    
    15
    
    
    
    1,099
    
    
    
    (1.1
    )%2002
    
    
    769
    
    
    
    409
    
    
    
    22
    
    
    
    1,156
    
    
    
    5.2
    %2003
    
    
    763
    
    
    
    448
    
    
    
    11
    
    
    
    1,200
    
    
    
    3.8
    %
    Pricing In the past three years, prices for Mexican paper and packaging products
have been influenced by a combination of factors, including:  
    
    the rate of growth of the Mexican economy and the demand for packaging;
    
    prevailing inflation rates in Mexico;
    
    U.S. paper price levels;
    
    prevailing international prices for paper and packaging; and
    
    fluctuations in the peso/dollar exchange rate. Containerboard and newsprint are commodities priced in relation to
international prices for paper, recycled fiber and pulp. Because the paper
industry is highly capital intensive, prices may also be affected by industry
capacity utilization rates, by additions of new capacity and by plant closures. The prices of corrugated containers and multi-wall sacks and bags in
Mexico are affected by prevailing prices of containerboard, as well as the
following factors:  
    
    resistance specifications;
    
    quality control;
    
    customer service;
    
    printing and graphics specifications;
    
    volume of production runs; and
    
    proximity to customers and industrial centers (due to the transportation cost of converted products). Prevailing international prices for paper and packaging, as well as U.S.
price levels, declined sharply during late 1995 and remained weak until the
first half of 1999. In the second half of 1999, newsprint prices recovered
somewhat; however, in the second half of 2001, newsprint prices began a decline
and during 2002, prices for newsprint declined by 19.7%. In 2003, prices for
newsprint recovered by 8.4%. -17-




---



##### Table of Contents



Prices for corrugated containers in Mexico have historically tended to be
approximately 15% below corrugated container prices in the United States and
prices for Mexican containerboard have tended to be 10% to 15% lower than in
the United States. In the past, this price differential, combined with
protective tariffs, has discouraged imports from the United States. With the
complete elimination of tariffs and generally low prices for packaging products
in the United States over the last three years, competition in Mexico from
imports has increased. Our prices for containerboard and packaging products
over the last three years have declined in the face of competition from
imports. Under NAFTA, most of Mexicos tariffs were eliminated in 2003. Since
January 1, 1999, the tariff on newsprint has been 0%. Mexico maintained a
protective tariff on corrugated containers of 5% through the end of 2000, which
was eliminated in 2001. Multi-wall sacks and bags were protected by a 3%
tariff in 2000, but this tariff declined to 0% in 2003. As a result, the
elimination of tariffs has had the effect of shortening the lag time between
price changes in the U.S. and Mexican packaging and paper industries. -18-




---



##### Table of Contents



Subsidiaries and Operating Divisions Organizational Structure (ORGANIZATIONAL STRUCTURE)  (1)
    
    19.80% is controlled through Titán.(2)
    
    4.92% is controlled through Titán.




---



##### Table of Contents



We are comprised of various operating divisions which are distinguished by product type as follows:  
    
    Paper: Grupo Durango, Grupo Pipsamex and Durango McKinley Paper Company
    
    Packaging: Titán and Durango McKinley Paper Company
    
    Other: Ponderosa Our operating divisions interact with each other to comprise a vertically
integrated unit. This integration enables us to limit purchases from external
suppliers and reduce costs. Our operating divisions are:  
    
    Grupo Durango.The Grupo Durango division (formerly Pamex)
produces containerboard. In 2003, approximately 80% of the 516
thousand short tons of linerboard and corrugating medium shipped by
Grupo Durango was used to supply our Titán division. The remainder
of its production was sold to third party manufacturers in Mexico
and the United States.
    
    Grupo Pipsamex.Grupo Pipsamex produces newsprint and bond
paper. In 2003, Grupo Pipsamex shipped 131 thousand short tons of
newsprint and 124 thousand short tons of uncoated free sheet. Grupo
Pipsamexs sales are predominantly to the Mexican market with the
balance primarily sold in the United States.
    
    Durango McKinley. Durango McKinley Paper Company is a
recycled linerboard manufacturer strategically located in the
southwestern United States that supplies our packaging operations in
the United States and northern Mexico and serves the maquiladora
region. Durango McKinley Paper Company is a significant collector
of OCC material, which is processed to create recycled fiber. In
2003, approximately 23% of the paper needs of our packaging
operations in Texas were supplied by Durango McKinley Paper Company.
    
    Titán.Our Titán division, which includes the packaging
operations of Durango McKinley Paper Company, is a large paper-based
packaging manufacturer. Titáns 2003 shipments of 652 thousand
short tons consisted of corrugated containers and multi-wall sacks
and bags. Grupo Durango supplies approximately 75% of Titáns
containerboard requirements, with the balance consisting of higher
grade containerboard, supplied primarily by Durango McKinley Paper
Company. Waste material generated in production of corrugated
containers is sold back to Grupo Durango for recycling and to
produce pulp. Titáns sales are primarily to Mexico and the export
sector.
    
    Ponderosa. Ponderosa Industrial de México, S.A. de C.V., or
Ponderosa, a forest-based building products manufacturer, markets
its products throughout the NAFTA region. In 2003, Ponderosas
continuing operations shipped 11 thousand short tons of plywood. Our operating divisions interact with each other through inter-company
sales as follows. Grupo Durango sells containerboard to Titán for the
production of corrugated containers and multi-wall sacks. Titán sells its
waste to Grupo Durango for the production of recycled fiber. Grupo Pipsamex
purchases some corrugated containers from Titán. Grupo Pipsamex sells OCC and
ONP to Grupo Durango for the production of recycled paper. Our Products General Our main product groups are:  
    
    Papercontainerboard (linerboard and corrugating medium),
newsprint and uncoated free sheet (bond, book stock, miscellaneous
free sheet);
    
    Packagingcorrugated containers and multi-wall sacks and bags; and  
    
    Otherplywood and particleboard.




---



##### Table of Contents



The total capacity of our continuing operations by product and number of
mills and plants as of December 31, 2003, and our actual production for the
periods indicated, is as follows: Production at December 31,Installed Capacity at
    
    Mills/Product Type
    
    December 31, 2003
    
    Plants
    
    2003
    
    2002
    
    2001(in thousands of short tons per year)
    
    
    
    
    
    (in thousands of short tons)Paper:Containerboard
    
    
    815.0
    
    
    
    6
    
    
    
    859.9
    
    
    
    831.4
    
    
    
    710.8Newsprint
    
    
    200.0
    
    
    
    1
    
    
    
    131.0
    
    
    
    125.4
    
    
    
    169.7Uncoated free sheet
    
    
    143.0
    
    
    
    1
    
    
    
    143.5
    
    
    
    145.5
    
    
    
    108.3Kraft paper (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56.8
    
    
    
    66.1Coated bleached board (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137.5
    
    
    
    230.3Total Paper
    
    
    1,158.0
    
    
    
    8
    
    
    
    1,134.3
    
    
    
    1,296.5
    
    
    
    1,285.1Packaging:Corrugated containers
    
    
    892.0
    
    
    
    18
    
    
    
    627.6
    
    
    
    581.9
    
    
    
    543.2Multi-wall sacks and bags
    
    
    66.0
    
    
    
    3
    
    
    
    36.9
    
    
    
    44.6
    
    
    
    69.4Paper tubes
    
    
    0.0
    
    
    
    0
    
    
    
    1.4
    
    
    
    4.3
    
    
    
    2.9Total Packaging
    
    
    958.0
    
    
    
    21
    
    
    
    666.0
    
    
    
    630.9
    
    
    
    615.5Other products
    
    
    58.0
    
    
    
    3
    
    
    
    10.2
    
    
    
    15.4
    
    
    
    25.6Total Production
    
    
    2,174.0
    
    
    
    32
    
    
    
    1,810.5
    
    
    
    1,942.8
    
    
    
    1,926.2
   (1)
    
    In October 2002, we sold all of our interest in Durango Paper Company,
eliminating our production of kraft paper and our production of coated
bleached board. The total sales volume of our continuing operations to third-parties and
net sales by product for the periods indicated is as follows: December 31,Product Type
    
    2003
    
    2002
    
    2001Sales volume
    
    Net Sales
    
    Sales volume
    
    Net Sales
    
    Sales
    
    Net Salesvolume(in million
    
    
    
    
    
    (in million
    
    (in
    
    (in million(in thousands
    
    of constant
    
    (in thousands
    
    of constant
    
    thousands of
    
    of constantof short tons)
    
    pesos)
    
    of short tons)
    
    pesos)
    
    short tons)
    
    pesos)Paper:Containerboard
    
    
    312.7
    
    
    Ps
    1,545.3
    
    
    
    273.6
    
    
    Ps
    1,570.0
    
    
    
    243.5
    
    
    Ps
    1,583.4Newsprint
    
    
    130.8
    
    
    
    646.5
    
    
    
    127.4
    
    
    
    731.0
    
    
    
    264.7
    
    
    
    1,721.0Uncoated free sheet
    
    
    124.4
    
    
    
    615.1
    
    
    
    117.0
    
    
    
    671.4
    
    
    
    128.2
    
    
    
    834.0Kraft paper (1)
    
    
    
    
    
    
    
    
    
    
    57.2
    
    
    
    328.5
    
    
    
    63.8
    
    
    
    415.1Coated bleached board (1)
    
    
    
    
    
    
    
    
    
    
    136.2
    
    
    
    781.4
    
    
    
    228.8
    
    
    
    1,487.9Total Paper
    
    
    567.9
    
    
    
    2,806.9
    
    
    
    711.4
    
    
    
    4,082.2
    
    
    
    929.0
    
    
    
    6,041.4Packaging:Corrugated containers
    
    
    615.6
    
    
    
    3,645.7
    
    
    
    586.3
    
    
    
    3,562.1
    
    
    
    545.0
    
    
    
    4,058.5Multi-wall sacks and bags
    
    
    35.9
    
    
    
    294.0
    
    
    
    45.5
    
    
    
    379.4
    
    
    
    70.4
    
    
    
    524.0Paper tubes
    
    
    0.4
    
    
    
    2.9
    
    
    
    1.0
    
    
    
    7.1
    
    
    
    1.1
    
    
    
    7.9Total Packaging
    
    
    652.0
    
    
    
    3,942.6
    
    
    
    632.8
    
    
    
    3,948.6
    
    
    
    616.5
    
    
    
    4,590.4Other products
    
    
    10.8
    
    
    
    81.6
    
    
    
    15.9
    
    
    
    93.7
    
    
    
    24.3
    
    
    
    143.5Total sales volume
    
    
    1,230.7
    
    
    Ps
    6,831.0
    
    
    
    1,360.1
    
    
    Ps
    8,124.5
    
    
    
    1,569.8
    
    
    Ps
    10,775.3
   (1)
    
    In October 2002, we sold all of our interest in Durango Paper Company,
eliminating our production of kraft paper and our production of coated
bleached board. -21-




---



##### Table of Contents



Paper Products Below is a description of our paper products and their usage. Product Type
    
    Product Description and UsageContainerboard
    
    We produce linerboard and corrugating medium,
white-top and mottled white linerboard and paper, and
high-performance linerboard. Our products are used by
corrugated container manufacturers in the production
of a wide variety of corrugated containers.Newsprint
    
    We produce standard, peach and improved newsprint.
Our products are used by newspaper and magazine
publishers and advertisers for newspapers, books,
advertisements, and magazines.Uncoated free sheet
    
    We produce bond, forms, tablet, copy, and book stock
and miscellaneous free sheet. Our products are used
by consumer goods and office supplies producers for
printing and writing paper, office supplies, and
educational books.
 We are able to produce a wide variety of paper products, in terms of
weight and resistance, and we can use virgin and recycled fiber as raw material
in different proportions to achieve the characteristics required by our
customers. We sell our linerboard in rolls of varying widths depending on the
capacity of the converting machinery on which it will be used. Packaging Products Below is a brief description of our packaging products and their usage. Product Type
    
    Product Description and UsageCorrugated containers
    
    We produce corrugated containers manufactured in
converting plants from containerboard. Our
products are used by consumer, industrial and
agricultural goods producers to ship products
including home appliances, electronics, spare
parts, grocery products, produce, books, tobacco
and furniture.Multi-wall sacks and bags
    
    We produce flat, expandable, glued, sewn and
laminated bags. Our products are used by
cement, powdered foods and chemicals
manufacturers for delivery of cement, flour,
powdered food, chemical products, gypsum and
lime products.
 We produce a wide range of corrugated containers depending on the product
to be shipped, its size and weight and the distance the product is to be
shipped. Our multi-wall sacks and bags are high-resistance containers that are
designed to be used reliably in adverse conditions of filling, handling,
transportation, warehousing and distribution. The bags we manufacture are made
from paper produced from virgin pulp which gives our bags their superior
strength. Other Products Below is a description of our other products and their usage. -22-




---



##### Table of Contents



Product Type
    
    Description and UsageParticleboard
    
    We produce thermalfused melamine panels. Our products are
used in the construction and furniture industry for raw
particle, shelving and stepping.Plywood
    
    We produce ponderosa pine plywood, hardwood plywood and
medium density overlay, and specialty plywood. Our products
are used in the construction industry in Mexico and the
United States. Other uses are signs, doors, concrete
pouring, and toys.
 Demand in the Mexican forest products industry is driven primarily by the
Mexican construction and furniture industries. Demand for our other products
declined sharply in 2001 and has subsequently remained depressed. Customers We primarily sell our products in Mexico and the United States. In 2003,
81.3% of our total sales were made in Mexico and 18.7% were made in and into
the United States. Our major customers in Mexico and the United States include: Paper
    
    Packaging
    
    Other ProductsMexico:
    
    Mexico:
    
    Mexico:El Universal
    
    Vitro
    
    Grupo GAMAO.E.M.
    
    Allen
    
    Grupo CambelGrupo Multimedios
    
    Nestlé
    
    MaderichiNovedades
    
    Kimberly-Clark
    
    Contructora BarahonaGrupo Reforma
    
    Sara LeeLos Debates
    
    Gamesa and Sabritas (PepsiCo.)Comisión Nacional de Libros
    
    Grupo GISde Texto Gratulto
    
    HerdezMEADUnited States:
    
    United States:
    
    United States:Smurfit Stone
    
    Russell Athletic
    
    InterstateBox USA
    
    Sara Lee
    
    HuttingWeyerhauser
    
    Victor Pkg  Dallas
    
    Continental Inc.Corru Kraft
    
    Iris
    
    WeyerhauserIndependent
    
    Bronco Packaging
    
    BoiseMalena Produce
 Sales and Marketing In 2003, sales to our 10 largest customers accounted for approximately 13%
of our net sales. None of our customers accounted for a material amount of our
revenues. We do not believe that the loss of any single customer would have a
material adverse effect on our business. Our sales and marketing staff are responsible for identifying and
developing markets as well as notifying our research and development staff of
customer product requirements. We sell our products through our direct sales
force at our Mexican offices located in Mexico City, Guadalajara and Monterrey,
Mexico, and our U.S. offices located in Albuquerque, New Mexico and Dallas,
Texas. As of December 31, 2003, we had approximately 52 employees involved in
direct sales. We make substantially all of our sales directly to our clients.
We use brokers only in limited circumstances. -23-




---



##### Table of Contents



Our sales strategy involves targeting niche markets, such as the
maquiladora sector, growing manufacturing regions in central and southern
Mexico, Mexican export markets and lightweight markets. A core element of our
sales strategy is to establish long-term customer relationships by ensuring
that we satisfy our customers specific requirements. The customized service
we provide and the strategic relationships we have developed ensure we retain
our existing customers while attracting new ones. Over the past three years,
changes in Mexican tax law have reduced the number of manufacturers in the
maquiladora sector of Mexico, reducing the aggregate productive capacity of the
region. However, many of these manufacturers have relocated their operations
to more centralized locations in Mexico and are now permanently established in
the market. To enable us to maintain the advantages of strategically located
facilities, we continue to update our distribution network to accommodate the
trends of our important manufacturing customers. To support our direct sales efforts and to actively promote our products,
we engage in a variety of marketing activities. These activities include
regular meetings with our entire sales force and educational seminars and
social outings with customers. Customer service is an important factor in maintaining and gaining market
share and customers. We deliver products to our customers in a manner that
addresses individual technical specifications, delivery methods, timing
constraints and other customer specific requirements. Our sales force has
established customer complaint procedures and undergoes customer retention
reviews to ensure that the level of our service is maintained and constantly
improved. Our advertising and promotional campaigns are carried out in
specialized industry publications and industry trade shows. With respect to corrugated containers, by engaging in sales on both sides
of the Mexican-U.S. border, we continuously evaluate the pricing levels for our
products in both the U.S. and Mexican markets. While pricing is generally
negotiated on a yearly basis, our contracts normally include price adjustment
provisions to compensate for market movements as published in reputable trade
publications. Raw Materials We believe we have a flexible raw material mix. The principal raw
materials used in our production processes are recycled fiber and virgin pulp.
Recycled fiber is obtained by processing OCC material, ONP material, magazines
and office waste paper material. We also use virgin pulp, which is made by
processing wood chips, which we mix with recycled fiber to produce a variety of
semi-recycled grades of other packaging and paper products. In the case of
newsprint and printing grades, we produce a high quality product with a high
content of recycled fiber. Recycled Fiber Our business is affected by trends in international and domestic prices of
OCC and ONP material. In Mexico, the price differential between domestic and
imported OCC and ONP material fluctuates in peso terms, due to demand and
currency fluctuations, and at any given time we may supply ourselves from
either market, depending on the then current price differential. In 2003,
approximately 92% of the fiber we used in our Mexican operations was recycled
and approximately 37% of this recycled fiber was imported from third party
producers. In the United States, our McKinley mill uses only recycled fiber. In
2003, our recycling centers in Albuquerque, Phoenix and El Paso provided
approximately 43% of our fiber requirements in the United States and we
obtained the balance of our recycled fiber requirements in the open market. Pulp We are Mexicos sole producer of unbleached kraft pulp and we are
currently able to produce 110,000 short tons of unbleached kraft pulp per year,
which is more than sufficient to supply our internal requirements for virgin
kraft pulp. We are also able to produce 79,000 short tons per year of chemical
thermo-mechanical pulp, 79,000 short tons per year of thermo-mechanical pulp,
79,000 short tons per year of sugar cane bagasse pulp, and 165,000 short tons
per year of deinked pulp. -24-




---



##### Table of Contents



In Mexico, we buy our wood, the raw material from which we produce virgin
kraft pulp, from small property owners and ejidos,which are small plots of
land granted by the Mexican government to small groups of land workers. The
wood is purchased from sellers located in the states of Durango, Jalisco,
Oaxaca and Michoacán. In total we have access to approximately 600,000
hectares of forestry land. In 2002, the Mexican government made significant
changes to the ejidosystem in order to increase productivity. The changes
have restructured the ejidosystem to allow large private investors to
co-invest with small owners or to lease properties on a long-term basis. We
have traditionally managed our supply of resources through direct negotiations
with landowners. In general, we believe that our existing wood supply
arrangements are sufficient to provide for our currently anticipated rates of
consumption for the foreseeable future. We also have a strong presence in the
Mexican forestry sector that allows us to effectively source our wood supply. Water Other than at our Atenquique and Mexpape pulp and paper mills, which use
treated river water, we obtain our water requirements for both our Mexican and
U.S. operations from wells located at our production facilities. We believe
that our water supply is sufficient for all existing and contemplated
activities. Our McKinley mill is one of only three zero-effluent paper mills in the
world. Water is initially obtained from wells, and after using it in the
papermaking process, it is then treated and recycled through the plant.
Accordingly, the ongoing water supply requirements at our McKinley mill are
significantly less than for conventional paper mills. Electric Power Atenquique generates its own electric power from an on-site power plant,
while the other Grupo Durango mills purchase all of their electric power from
the Comisión Federal de Electricidad, the Mexican state-owned electric company.
Some of our mills generate a portion of the power needed in our pulp mills:
the Mexpape mill generates 50% of its electric power, the Centauro paper mill
generates approximately 20% of its electric power, while the balance is
purchased from the Mexican state-owned electric company. Our other Mexican
plants purchase all their electric power from the Mexican state-owned electric
company. The contracts for electric power supply signed with the Mexican
state-owned electric company are the standard contracts used for all Mexican
companies and there is no specific termination date for the contracts. In the United States, a rural electric cooperative supplies 100% of the
electric power used by our McKinley mill at formula prices under a long-term
contract. Our U.S. converting facilities purchase electric power from local
utilities. Distribution and Supply of our Products Our distribution network is an extensive and efficient delivery system
within the Mexican paper and packaging industry. Our production facilities are
strategically located in close proximity to our suppliers and customers. In
creating our vertically integrated manufacturing process, we have generally
located our raw material supply, processing and production assets near major
industrial centers around Mexico to reduce transportation costs and delivery
time for our products. We distribute and deliver our products from our plants
as well as from several warehouses strategically located throughout Mexico. In
the United States, we deliver our products from our plants located in Prewitt,
New Mexico and Dallas and Houston, Texas. We are able to deliver our products
to our customers within one to five days from the date of the purchase order.
We are able to adjust deliveries of our products through the use of a
just-in-time system, offering same day deliveries, at the request of our
customers. We currently own approximately 76 trailer trucks and have access to
approximately 1,500 additional trailer trucks owned by independent operators
who provide services principally to us. We use our trucks to transport wood
from forests to our production facilities, and we also use our trucks, and
trucks operated by independent operators, to ship finished products to our
customers in Mexico and in the United States. The independent operators
benefit from their relationship with us because they can frequently haul our
finished goods to industrial centers and raw material in the form of recycled
fiber to our plants on a single round trip. This also reduces our shipping
costs. -25-




---



##### Table of Contents



Among our products, containerboard, newsprint and printing grades, which
are transported in large rolls, can be economically shipped over long
distances. Corrugated containers and bags have a much smaller economic
shipping radius because their low density results in a relatively high
transport cost per ton compared to paper. Consequently, our broad network of
container and bag plants, located near major industrial centers around Mexico,
is an important factor in the timely and economic delivery of our packaging
products to both local and national customers. We rely heavily on our distribution and supply system to obtain raw
materials for our strategically located network of production facilities and to
deliver our products to customers. We believe that the reach and efficiency of
our distribution and supply system are important to our customers, and we
believe customer loyalty depends as much on service and quality as on price. We also use railroads for the transportation of raw materials to our
production facilities and finished products to our customers. Our Competition In Mexico, we compete with a number of Mexican paper producers and
packaging producers and with major non-Mexican integrated paper and packaging
producers, who are primarily importers from the United States. In addition, as
an integrated paper and packaging producer, we compete not only with other
integrated paper and packaging producers, but also with companies that produce
only paper, converted products, or packaging. Many of our non-Mexican
competitors have greater financial resources than we do. We compete primarily
on customer service, product quality differentiation and price. In the United States, we compete with a number of paper producers and
packaging producers, including Boise Cascade Corp., Smurfit Corp., Stone
Container Corp., International Paper, Abitibi Consolidated, Inc., Packaging
Corporation of America, Bowater Incorporated, and Weyerhaeuser Company, many of
whom have greater financial resources than we do. Constant review and benchmarking of competitive factors is necessary to
remain competitive in our industry. We monitor the paper industry through
market publications, and through our participation in many industry-related
events. While pricing is normally negotiated on an annual basis for the
majority of our products, our contracts normally include price adjustment
provisions to compensate for market movements as published in reputable trade
publications. We produce, distribute and sell different paper grades and paper products,
which we believe gives us, unlike our Mexican competitors, the flexibility to
avoid the impact of cyclically occurring in the market. We can increase paper
production for export opportunities, as conditions warrant, such as changes in
raw material prices, without interrupting a steady supply of paper to our
internal converting operations and our existing customers. While the phased
reduction in Mexican tariffs under NAFTA may increase our competition from U.S.
producers of containerboard, we are not aware of any plans by domestic or
foreign producers to construct additional production capacity in Mexico. In 2003, approximately 66% of our net sales of paper to third parties were
to customers in Mexico and approximately 34% of our net sales of paper to third
parties were to customers in the United States. In 2003, approximately 87% of
our net sales of packaging products to third parties were to customers in
Mexico; and approximately 13% of our net sales of packaging products to third
parties were to customers in the United States. In 2003, approximately 7% of
our net sales of packaging products were to companies in Mexico that primarily
export their products, including exporters located in the border region,
maquiladoras located outside of the border region and other Mexican exporters. Environmental Matters Our Mexican operations are subject to the Mexican General Law of
Ecological Stabilization and Environment Protection (Ley General del Equilibrio
Ecológico y de Protección al Ambiente)and the rules and regulations -26-




---



##### Table of Contents



published under this law. Under this law, companies engaged in industrial
activities are subject to the regulatory jurisdiction of the Mexican Ministry
of the Environment and Natural Resources. In 1988, we agreed with Mexican environmental regulatory authorities on a
compliance plan which we proceeded to implement. Today, our paper mills are in
compliance with general standards established by law and with specific
standards promulgated by the Mexican regulatory authorities. In 1995, we
purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a
joint venture of industrial water users in Monterrey, Nuevo León. The venture
processes and recycles water used by plants in the industrial park where our
Monterrey paper mill is located. Our paper mills in Mexico are subject to
periodic environmental audits by the Mexican Ministry of the Environment and
Natural Resources. We have frequently been recognized for our environmental
record and our role in implementing modern forest management techniques.
However, there can be no assurance that relevant Mexican authorities will
continue to find our environmental procedures adequate, or that more stringent
environmental laws will not be enacted by Mexico in the future. Were
enforcement of existing laws to increase, or new environmental laws to be
enacted, we could incur material compliance costs. Our U.S. operations are subject to federal, state, and local provisions
regulating the discharge of materials into the environment and otherwise
related to the protection of the environment. Compliance with these
provisions, primarily the Federal Clean Air Act, Clean Water Act, Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, and
Resource Conservation and Recovery Act, or RCRA, has required us to invest
substantial funds to modify facilities to assure compliance with applicable
environmental regulations. We are committed to protecting the health and welfare of our employees,
the public, and the environment and we strive to maintain compliance with all
state and federal environmental regulations in a manner that is also cost
effective. In any construction of new facilities and the modernization of
existing facilities, we intend to use modern technology for our air and water
emissions. These forward-looking programs will minimize the impact that
changing regulations have on capital expenditures for environmental compliance. Mexican Law of Commercial Reorganizations On May 12, 2000, the LCR replaced the Mexican Law of Bankruptcy and
Suspension of Payments (Ley de Quiebras y Suspensión de Pagos), which had been
in effect since 1943, as Mexicos reorganization regime. To date, the LCR has
been largely untested, thus the manner in which it will be interpreted by
Mexican courts and the impact it will have on the rights of debtors and
creditors is uncertain. Under the LCR, a debtor that fails to satisfy generally its debt payment
obligations may be found insolvent and potentially subject to a reorganization
proceeding under the LCR. An insolvency declaration may be requested by the
debtor if either of the following situations are present, or by two or more of
its creditors, or the public prosecutor, if both of the following conditions
are met. An entity filing a voluntary petition will be deemed to be insolvent
if at least one of the following conditions is met:  
    
    it fails to pay one or more creditors holding debt past due
in excess of thirty days, and such past due debt represents 35% or
more of all of the debtors liabilities as of the date of filing the
request for concurso mercantilunder the LCR; or
    
    the debtors liquid assets, namely, short-term cash,
securities, deposits or accounts receivable (realizable in less than
90 days) are not sufficient to pay at least 80% of its past due debt
as of the date of the filing. The determination of a debtors solvency or insolvency is made by a judge
based largely upon an insolvency report made by an examiner (visitador)
appointed by the Mexican
Federal Institute of Commercial Reorganization Specialists (Institute Federal
de Especialistas de Concursos Mercantiles), which we refer to as
the Institute, after the petition for concurso mercantilis filed. -27-




---



##### Table of Contents



When the judge declares the effectiveness of the concurso mercantil,
unless the debtor requests a bankruptcy declaration, a conciliator is appointed
and the conciliation phase begins. In the conciliation phase the judge:  
    
    orders the suspension of the payment of the debtors
liabilities incurred before the proceedings began, except those
deemed necessary for the debtor to continue its ordinary operations;
    
    sets the retroaction date;
    
    starts the creditor recognition process; and
    
    orders that all attachment orders and enforcement proceedings
against the debtors assets be suspended, except for certain labor
and fiscal indebtedness. The conciliator arranges for the debtor and its recognized creditors to
engage in negotiations to restructure and rehabilitate the insolvent company in
accordance with the LCR. If a restructuring agreement is reached, it is
presented before the judge for approval and the proceeding is terminated with
the rehabilitation of the debtor. Any agreement among the creditors in the
conciliation phase requires the support of the creditors of the debtor holding
more than 50% of the aggregate of the recognized amount of debt of all the
recognized unsecured creditors. During the conciliation phase, the debtor continues to manage its affairs
under the supervision and oversight of the conciliator, subject to certain
restrictions. Removal of the debtors management at the request of the
conciliator is provided for in certain circumstances, in which case the
conciliator assumes management. The conciliator may request that the debtors
operations be terminated, in whole or in part, temporarily or permanently. At
the request of third parties, assets owned by such third parties in the
possession of the debtor may be segregated from the proceedings. Monetary
obligations of the debtor denominated in Mexican currency are accelerated and
are converted into investment units (Unidades de Inversion), an accounting unit
linked to the peso and the inflation rate in Mexico. Monetary obligations also
stop bearing interest, except in the case of ordinary interest bearing debts
secured with real estate collateral (in which case interest accrues up to the
value of the collateral). Monetary obligations denominated in a currency other
than pesos, are converted into pesos and then converted into investment units,
except in the case of secured debt. The conciliation phase has an initial duration of up to 185 days and may
be renewed for two 90-day periods, subject to certain requirements. If the
conciliation phase is not successful, a bankruptcy declaration is entered. A
bankruptcy declaration may also be entered at any time during the conciliation
phase at the request of the debtor or the conciliator. Should the conciliator
request a bankruptcy declaration, we would have the opportunity to oppose such
a request. During the bankruptcy phase, the debtors business and its assets are
liquidated and the proceeds used to pay recognized creditors. The First
Federal District Court in Durango, Mexico will appoint a receiver for this
purpose, who also replaces the debtors management. The receiver will
administer the assets of the debtor and take the necessary measures for their
preservation, pending realization. The receiver sells the debtors assets,
mainly through public auction. Bankruptcy payment to creditors with the
liquidation proceeds is made in accordance with the LCR rules regarding ranking
and priority. The proceeds are paid in accordance with the receivers proposal,
subject to the judges approval. A bankruptcy judgment:  
    
    suspends the rights and obligations of the bankrupt company,
pending liquidation and payment to recognized creditors;
    
    obligates the bankrupt company, its officers and managers to
turn the possession and management of the assets and rights of the
company over to the receiver, except for those considered by the LCR
as non-sellable and non-attachable assets; -28-




---



##### Table of Contents




    
    orders all third parties which at such time are holding
failed company assets to deliver them to the receiver, unless such
assets have been attached and are to be executed upon in order to
comply with a non-appealable judgment that originated prior to the
declaration of concurso mercantil; and
    
    enjoins debtors of the failed company from paying their debts
without prior authorization. As
of July 15, 2004, the voluntary petition filed by our company to
request the concurso mercantilhad not yet been declared effective by the First
Federal District Court in Durango, Mexico. If we enter into a conciliation phase, we may not reach an agreement with
our creditors. Creditors holding more than 50% in amount of the total
recognized unsecured debt must agree to the
terms of the conciliation. Pursuant to the LCR, any such restructuring
agreement is required to treat all unsecured creditors not signing the
agreement at least equal to the most favored unsecured creditors that represent
at least 30% of such class. Since the LCR has been recently enacted and its provisions affecting
debtors and creditors fights have not been fully tested in court, we cannot
predict whether the actual implementation of the above structural and
procedural descriptions of the LCR by the Mexican courts will be consistent
with our interpretation of the statute. Insurance We carry all risk insurance policies for each of our facilities. These
policies cover our property, plant, equipment, raw materials, finished products
and inventory at levels customary with market practice. Property, Plant and Equipment The table below sets forth information regarding the identity, location,
products and capacity of our production facilities as of December 31, 2003: short tons per yearPaper:ContainerboardCentauro Mill (Durango)
    
    
    264,000Atenquique Mill (Jalisco)
    
    
    132,000McKinley Mill (New Mexico, U.S.) (1)
    
    
    200,000Monterrey Mill (Nuevo León)
    
    
    137,000Guadalajara Mill (Jalisco)
    
    
    55,000Texcoco Mill (Edo. de México) (2)
    
    
    27,000Total
    
    
    815,000NewsprintTuxtepec Mill (Oaxaca) (3)
    
    
    200,000Uncoated Free SheetMexpape Mill (Veracruz)
    
    
    143,0001,158,000Pulp:Unbleached Softwood PulpAtenquique Mill (Jalisco)
    
    
    110,000Bleached Chemical Thermomecanical PulpPipsamex Pulp Mill (Durango) (2)
    
    
    79,000Thermomecanical Pulp (TMP)Tuxtepec Pulp Mill (Oaxaca)
    
    
    79,000Bleached Bagasse PulpMexpape Pulp Mill (Veracruz) (2)
    
    
    79,000
 -29-




---



##### Table of Contents



short tons per yearBleached Deinking PulpTuxtepec DIP Mill (Oaxaca)
    
    
    79,000Mexpape DIPHB Mill (Veracruz)
    
    
    86,000Total
    
    
    165,000512,000Packaging:Corrugated containersMexicali Plant (Baja California Norte) (1)
    
    
    39,000Chihuahua Plant (Chihuahua)
    
    
    37,000Monterrey Centro Plant (Nuevo León)
    
    
    52,000CartonPack (Nuevo León)
    
    
    59,000Monterrey Plant (Nuevo León)
    
    
    56,000Culiacán Plant (Sinaloa)
    
    
    39,000Guadalajara Plant (Jalisco)
    
    
    52,000Guadalajara Ceosa Plant (Jalisco)
    
    
    39,000Guadalajara San Sebastián Plant (Jalisco)
    
    
    16,000Querétaro Plant (Querétaro)
    
    
    47,000Atenpack Juárez Plant (DF)
    
    
    51,000Atenpack Tultitlan Plant (Edo. de México)
    
    
    52,000Titán Tlalnepantla Plant (Edo. de México)
    
    
    58,000Eyemsa Izcalli Plant (Edo. de México)
    
    
    47,000Eyemsa Tlalnepantla Plant (Edo. de México)
    
    
    46,000Eyemsa Tapachula Plant (Chiapas)
    
    
    52,000Eyemsa Tepatitlán Plant (Jalisco)
    
    
    50,000Durango McKinley Paper Dallas Plant (Texas, U.S.)
    
    
    100,000Total
    
    
    892,000Multi-wall Sacks & BagsCd. Guzmán Plant (Jalisco)
    
    
    22,000Tula Plant (Hidalgo)
    
    
    22,000Apasco Plant (Edo. de México) (2)
    
    
    22,000Total
    
    
    66,000958,000Other:Particleboard Chihuahua Mill (Chihuahua) (4)
    
    
    200,000Plywood Anahuac Mill (Chihuahua) (2)
    
    
    26,000Particleboard Durango Mill (Durango) (2)
    
    
    17,000Plywood Durango Mill (Durango)
    
    
    15,000Total
    
    
    258,000
   (1)
    
    Leased facility.(2)
    
    These facilities are not currently in operation.(3)
    
    This mill has the ability to produce 50,000 short tons of kraft paper per
year on one of its newsprint machines.(4)
    
    These facilities are being held for sale and the operations of these
facilities are classified as discontinued operations. In 2003:  
    
    we rehabilitated a second machine in the Tuxtepec Mill and
commenced operation of this machine, increasing this mills capacity
from 137,000 short tons per year to 200,000 short tons per year; -30-




---



##### Table of Contents




    
    we commenced operations on a new
converting machine at our Dallas, Texas plant, increasing the
capacity of this plant from 46,000 short tons per year to 100,000
short tons per year, and closed our corrugated container plan in
Houston, Texas, eliminating capacity of 33,000 short tons per year;
and
    
    we permanently closed our unbleached softwood pulp mill at
the Centauro Mill in Durango, Mexico. This mill had a production
capacity of 110,000 short tons per year. In addition to our facilities described above, our headquarters are
located in Durango, Mexico, approximately 900 kilometers (560 miles) north of
Mexico City. We maintain sales offices in Mexico City, Guadalajara, Jalisco
and Monterrey, Nuevo León and representative offices in Dallas, Texas. Our
various production facilities in Mexico are located in the states of Durango,
Nuevo León, Jalisco, Baja California, Sonora, Estado de México, Hidalgo,
Querétaro, Sinaloa, Chihuahua and Chiapas, as well as in Mexico City. In the
United States, we operate facilities in the states of New Mexico, Texas and
Arizona. We own our headquarters and all of our operating facilities, except
as noted in the table above. 
 Item 5. Operating and Financial Review and Prospects. General The discussion and analysis of our financial condition and results of
operations has been organized to present the following:  
    
    a brief overview of our company and the principal factors
that influence our results of operations, financial condition and
liquidity;
    
    a review of our financial presentation and accounting
policies, including our critical accounting estimates;
    
    a discussion of the principal factors that influence our
results of operations;
    
    a discussion of developments since the end of 2003 that may
materially affect our results of operations, financial condition and
liquidity;
    
    a discussion of our results of operations for the years ended
December 31, 2003, 2002 and 2001;
    
    a discussion of our liquidity and capital resources,
including our liquidity crisis, our working capital at December 31,
2003 and 2002, our changes in financial position for the years ended
December 31, 2003, 2002 and 2001, and our short-term and long-term
indebtedness;
    
    a discussion of our capital expenditures and our contractual commitments; and
    
    a qualitative and quantitative discussion of market risks that we face. Overview We are a vertically integrated producer of paper and packaging products
with an extensive distribution network that links our strategically located
facilities with our customers. We believe that these factors, as well as our
investment in modern manufacturing technology and our access to raw materials
as Mexicos only producer of unbleached virgin kraft pulp and one of Mexicos
largest users of recycled paper, based on information published by the Mexican
National Chamber for the Pulp and Paper Industry, allow us to be one of the
industrys lowest cost producers. Our results of operations have been influenced and will continue to be
influenced by a variety of factors, including: - 31 -




---



##### Table of Contents




    
    the level of our outstanding indebtedness and the interest we
are obligated to pay on this indebtedness, which affects our net
financial expenses;
    
    the substantial reduction in our production capacity and
product offerings as a result of the disposition of Durango Paper
Company, Pronal and the molded pulp division of Titán, and our
proposed disposition of our Chihuahua particleboard plant;  
    
    the Mexican and U.S. market prices of corrugated containers,
containerboard and newsprint, which significantly affect our net
revenue;  
    
    the level of production capacity in the United States and
Mexico for the products that we sell and our capacity utilization
rate, which significantly affects the cost of producing our products
and may lead to the impairment of our assets;  
    
    the Mexican and U.S. market prices of OCC and ONP, the
principal raw materials in our paper manufacturing operations, which
significantly affects the cost of producing our products;  
    
    the growth rate of Mexican GDP and U.S. GDP, which affects
the demand for our products, and consequently our sales volume;  
    
    the exchange rate of the peso against the dollar, which
affects our net sales in pesos and our financing costs;  
    
    inflation rates in Mexico; and  
    
    our ability to use our net operating loss carryforwards. Our financial condition and liquidity is and will be influenced by a
variety of factors, including:  
    
    our ability to extend the average maturity of our loans and
debt securities through a financial reorganization;  
    
    our ability to generate cash flows from our operations;  
    
    prevailing domestic and international interest rates and
movements in exchange rates, which affect our debt service
requirements;  
    
    our inability to borrow funds from Mexican and international
financial institutions or to sell our debt securities in the Mexican
and international securities markets, primarily as a result of our
defaults on our unsecured indebtedness; and  
    
    our capital expenditure requirements, which consist primarily
of major maintenance of our operating facilities. Financial Presentation and Accounting Policies Consolidated Financial Statements We have prepared our consolidated financial statements at December 31,
2003 and 2002 and for the three years ended December 31, 2003 in accordance
with Mexican GAAP, which differs in significant respects from U.S. GAAP. Notes
24 and 25 to our audited consolidated financial statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP
applicable to our company and a reconciliation to U.S. GAAP of our consolidated
net income (loss) and total stockholders equity as of December 31, 2003 and
2002 and for each of the three years in the period ended December 31, 2003. - 32 -




---



##### Table of Contents



Our company is the result of the merger on October 8, 2001 of Corporación
Durango, S.A. de C.V., or CODUSA, into Grupo Industrial Durango, S.A. de C.V.,
or GIDUSA. GIDUSA, the surviving entity, was subsequently renamed Corporación
Durango, S.A. de C.V. Prior to October 8, 2001, GIDUSA was a majority owned
subsidiary of CODUSA. For accounting purposes, the GIDUSA merger took effect as of October 8,
2001 and was reflected on a historical cost basis in a manner similar to a
pooling of interests under which there was no change in the existing assets and
liabilities and results of operations of both entities. The minority interest
in Colusas consolidated financial statements prior to the GIDUSA merger
reflected the shareholding in GIDUSA not owned by CODUSA. This minority
interest was eliminated upon the merger. With the prior approval of the
Foreign Relations Ministry of Mexico, our name change became effective on
February 12, 2002 when GIDUSAs bylaws (estatutos sociales) were amended and
registered with the Public Registry of Commerce. Our financial statements reflect the consolidated assets and liabilities
and results of operations of CODUSA, which includes GIDUSA, as of December 31,
2002 and 2003 and for each of the three years ended December 31, 2003. Business Segments We manage our business and report our results on a product basis in three
segments. Our reportable segments are:  
    
    Paper This segment includes our production and sale of
containerboard (linerboard and corrugating medium), newsprint, kraft
paper, uncoated free sheet and coated bleached board. This segment
includes the operating results of Grupo Durango and Grupo Pipsamex
in Mexico and Durango Paper Company and Durango McKinley Paper
Companys paper operations in the United States. We sold Durango
Paper Company in October 2002 and no longer produce kraft paper and
coated bleached board.  
    
    Packaging This segment includes the manufacturing and
selling of corrugated containers, multi-wall sacks and bags and
paper tubes. This segment includes the operating results of Titán
in Mexico and Durango McKinley Paper Companys packaging operations
in the U.S. We sold our paper tube manufacturing operation to Tubos
y Especialidades de México, S.A. de C.V., a related party, in April
2003 for Ps 2.0 million. As a result, we no longer produce paper
tubes.  
    
    Other This segment includes the manufacturing and selling
of plywood and particleboard. In 2003, paper products accounted for 41.1% of our total sales; packaging
products accounted for 57.7% of our total sales and other products accounted
for the remaining 1.2% of our total sales. Discontinued Operations In connection with our financial and operating restructuring, during 2003
we authorized the discontinuation and/or sale of some subsidiaries or
significant assets. The related assets, liabilities and operating results are
presented in our financial statements as discontinued operations. Discontinued
operations are (1) the molded pulp division of Titán, which we sold on February
27, 2003, (2) Pronal, which we sold on November 14, 2003, and (3) the Chihuahua
particleboard plants of Ponderosa. Critical Accounting Estimates We have identified the most critical accounting estimates that involve a
higher degree of judgment and complexity and that management believes are
important to a more complete understanding of our financial position and
results of operations. The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could
differ from those estimates. In order to provide an understanding about how - 33 -




---



##### Table of Contents



we form our judgments and estimates about certain future events, including
the variables and assumptions underlying the estimates, and the sensitivity of
those judgments to different variables and conditions, we have included
comments related to the following critical accounting estimates under Mexican
GAAP. Allowance for doubtful accounts We have attempted to reserve for expected credit losses based on our past
experience with similar accounts receivable and believe our reserves to be
adequate. It is possible, however, that the accuracy of our estimation process
could be materially impacted as the composition of this pool of accounts
receivable changes over time. We continually review and refine the estimation
process to make it as reactive to these changes as possible; however, we cannot
guarantee that we will be able to accurately estimate credit losses on these
accounts receivable. Deferred taxes As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves our
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as allowance for
doubtful accounts, deferred assets, inventories, property, machinery and
equipment, accrued expenses and tax loss carryforwards, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities,
which are included within our consolidated balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. Property, plant and equipment Fixed assets and intangible assets are assigned useful lives, which
impacts the annual depreciation and amortization expense. The assignment of
useful lives involves significant judgments and the use of estimates. Changes
in technology or changes in intended use of these assets may cause the
estimated useful life to change. We also evaluate the carrying value property, plant and equipment to be
held and used and any assets to be disposed of when events or circumstances
suggest that the carrying value may not be recoverable, such as plant temporary
shut downs or permanent closures. Such reviews have been necessary in recent
years. Impairment losses for equipment held and used are recorded when the
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amount. The estimates of undiscounted cash flows take into
consideration expectations of future macroeconomic conditions as well as our
companys internal strategic plans. Therefore, inherent in the estimated
future cash flows is a certain level of risk that we have considered in our
valuation, nevertheless, actual future results may differ. Should an
impairment exist, the amount of the loss is then quantified by comparing the
carrying amount of the assets to the weighted discounted cash flows. For
assets to be disposed of, our company assesses whether machinery or equipment
can be used at other facilities and if not, estimates the proceeds to be
realized upon sale of the assets. Our company has recorded impairment losses
related to certain unused assets and such losses may potentially occur in the
future. Pension plans, seniority premiums and indemnities The determination of our obligation amid expense for pension plans,
seniority premiums and indemnities are dependent on our selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions
are described in note 12 to the consolidated financial statements and include,
among others, the discount rate, expected long-term rate of return on plan
assets and rates of increase in compensation and healthcare costs. In
accordance with generally accepted accounting principles, actual results that
differ from our assumptions are accumulated and amortized over future periods
and therefore, generally affect our recognized expense and recorded obligation
in such future periods. While we believe that our assumptions are appropriate,
significant - 34 -




---



##### Table of Contents



differences in our actual experience or significant changes in our
assumptions may materially affect our pension and other postretirement
obligations and our future expense. Negative goodwill Negative goodwill is amortized under the straight-line method over a
period not to exceed two years, which in our opinion, approximates the period
in which the acquired subsidiaries are integrated into our company. The period
that it takes an acquired subsidiary to be integrated into our company involves
significant judgments and the use of estimates. Principal Factors Affecting Our Results of Operations Our Liquidity Crisis At December 31, 2003, our total outstanding indebtedness on a consolidated
basis was Ps 9,197.2 million. As a result of our substantial indebtedness, our
company incurred interest expenses of Ps 1,186.2 million in 2003, Ps 1,130.6
million in 2002 and Ps 1,118.5 million in 2001. In addition, because
substantially all of this indebtedness is denominated in dollars and the peso
has depreciated significantly against the dollar during 2003 and 2002, our
company incurred foreign exchange losses of Ps 821.4 million in 2003 and Ps
998.2 million in 2002. These interest expenses and foreign exchange losses were
substantial factors in our net losses for 2003 and 2002. In addition, as a result of our declining operating results during the
past two years, we were not able to generate sufficient resources to pay the
principal and interest that has come due under our unsecured indebtedness since
November 29, 2002. As a result of our negative credit ratings and downgrades,
our access to sources for short-term financing has been severely restricted,
thus impeding our ability to finance our operations. Furthermore, the negative
publicity surrounding the downgrades and our liquidity crisis has adversely
affected the terms of our trade payables and ability to obtain new customers.
For a further discussion of our liquidity crisis, see Liquidity and Capital
Resources  Our Liquidity Crisis. Disposition of Certain of Our Operations Our results of operations have been affected during the last three years
by our disposition of some of our operations. As a result of these
dispositions, our net sales, gross profit and operating income have decreased
significantly and we have recorded significant other expenses, net losses of
discontinued operations and an extraordinary loss. Disposition of Eastman and Sky Divisions of Durango Paper Company As part of our strategy to reduce the indebtedness we incurred in
connection with the acquisition of Durango Paper Company, we sold substantially
all of the converting assets of Durango Paper Company consisting of the Eastman
and Sky divisions for Ps 330.4 million (US$29.4 million), which resulted in a
loss of Ps 138.2 million (US$12.3 million). This loss was recorded as an
extraordinary loss in our statement of operations for 2001. As a result of
these dispositions, the capacity of our packaging segment was reduced by 180
thousand short tons. Disposition of Durango Paper Company In August 2002, our subsidiary Durango Paper Company suffered a boiler
explosion at one of its plants located in St. Marys Georgia, which resulted in
the suspension of operations and the generation of significant losses.
Additionally, at the date of the accident, we did not have sufficient insurance
coverage for such an event and were exposed to the entire loss relating to the
incident. In October 2002, we sold Durango Paper Company and certain
promissory notes to Operadora Omega Internacional, S.A. de C.V., a related
party. 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 promissory notes due to our company with an aggregate principal
amount of US$128.8 million. As a result of this sale, the capacity of our
paper segment was reduced by 420 thousand short tons and we ceased producing
kraft paper and coated bleached board. - 35 -




---



##### Table of Contents



This sale gave rise to an aggregate loss of Ps 1,509.1 million, which is
included in other expenses in our statement of operations for 2002. Prior to
this sale, we had guaranteed certain obligations of Durango Paper Companys
subsidiaries, specifically a loan agreement with the Bank of America, N.A. and
certain letters of credit, in an aggregate principal amount of US$25.2 million
(Ps 283.2 million). In 2003, the creditors of these obligations called these
guarantees. As a result, we recorded a charge to the statement of operations
of Ps 262.2 million (US$23.6 million), which is included in other expenses in
2003 and corresponds to the principal amount of these obligations at the date
these obligations were transferred to our company. Disposition of Molded Pulp Division On February 27, 2003, our subsidiary, Titán, sold the assets of its molded
pulp division for approximately US$53.7 million (Ps 603.4 million), resulting
in a gain of Ps 335.0 million, which is included in the net loss of
discontinued operations in the statement of operations for 2003. Pursuant to
the asset purchase agreement, Titán transferred to the buyer some accounts
receivable and trade accounts payable, in order to enable the buyer to continue
with the production and selling of molded products. As a result of this sale,
the capacity of our packaging segment was reduced by 40 thousand short tons and
we ceased producing molded pulp products. Disposition of Pronal On November 14, 2003, our subsidiary, Grupo Pipsamex, sold its subsidiary,
Pronal, for US$28.0 million (Ps 314.6 million), resulting in a loss of Ps 447.5
million, which is included in the net loss of discontinued operations in the
statement of operations for 2003. As a result of this sale, the capacity of
our paper segment was reduced by 160 thousand short tons and we ceased being
the sole Mexican producer of newsprint. A portion of the proceeds of this sale is pledged to Banco Nacional de
Comercio Exterior S.N.C., or Bancomext, under the terms of our loan agreements
with Bancomext. We must use these proceeds to repay a portion of the principal
amount outstanding under this loan agreement or reinvest these proceeds in
capital assets of Grupo Pipsamex. As a result, a portion of the proceeds of
this sale is included in our balance sheet as restricted cash. Disposition of Mexico City Warehouse On November 25, 2003, our subsidiary, Grupo Pipsamex, sold a warehouse
located in Mexico City for US$11.5 million (Ps 129.2 million). As part of the
sale, Grupo Pipsamex reserved the right to use a portion of the warehouse
representing approximately one third of the entire property for a period of
five years at no cost. This sale generated a loss of Ps 193.9 million, which
is recorded in other expenses in our statement of operations for 2003. A portion of the proceeds of this sale is pledged to Bancomext under the
terms of our loan agreements with Bancomext. We must use these proceeds to
repay a portion of the principal amount outstanding under this loan agreement
or reinvest these proceeds in capital assets of Grupo Pipsamex. As a result, a
portion of the proceeds of this sale is included in our balance sheet as
restricted cash. Disposition of Chihuahua Particleboard Operations During 2003, our management authorized a plan to sell a plant located in
Chihuahua, which is primarily engaged in the manufacturing of particleboard.
Based on the negotiations with the potential buyer, we reduced the book value
of the net assets to be sold by Ps 351.3 million, which reduction is included
in the net loss of discontinued operations in the statement of operations for
2003. On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale
agreement with a Mexican company, under which Ponderosa agreed to sell its
particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This
sale is subject to customary closing conditions, including the approval of the
Mexican antitrust authority. Upon the closing of this sale, the capacity of
our other segment will be reduced by 272 thousand short tons to 72 thousand
short tons. - 36 -




---



##### Table of Contents



Pricing of Our Products The pricing of our products is influenced by a number of factors, including:  
    
    industry capacity utilization and significant increases in capacity in the industry;  
    
    recycled fiber prices;  
    
    demand for packaging products as a result of the level of
growth of the Mexican and U.S. economies;  
    
    fluctuations in the exchange rate between the peso and the dollar; and  
    
    prevailing inflation rates. Containerboard.Prices for containerboard primarily reflect international
paper prices. From 1998 through June 1999, international prices for
containerboard were low compared to the prior four years. From June 1999
through December 2000, international prices for containerboard recovered. In
2001, prices remained flat and in 2002 prices declined drastically and the
industry was unable to implement expected price increases, primarily because of
the slowing of the economies in Mexico and the United States. In 2003 prices
continued to be depressed due to the slow economic recovery in the United
States and Mexico. Prices for Mexican containerboard have historically tended to be
approximately 10% to 15% lower than in the United States. In the past, this
price differential, combined with protective tariffs, has discouraged imports
from the United States. With the complete elimination of tariffs and generally
low prices for containerboard in the United States over the last three years,
competition in Mexico from imports has increased. Over the last three years, our prices for Mexican containerboard have
tended to be approximately 20% lower than U.S. prices. Prices for
containerboard in Mexico are lower than prices in the United States as a result
of strong international competition in the form of imports of containerboard
and packaging products. We compete with U.S. and Mexican producers in both the
United States and Mexico. Newsprint.The overall global newsprint pricing environment during 1999
was depressed by oversupply resulting in low capacity utilization and operating
margins worldwide. This environment, coupled with the elimination of tariffs
effective January 1, 1999, has significantly reduced newsprint prices in
Mexico. Although global prices for newsprint began to rise at the end of 1999,
our prices for newsprint remained flat in 2000 and 2001 and have decreased in
2002. In 2003 our prices for newsprint increased. We were the only producer
of newsprint in Mexico from the end of 1998, when we acquired Grupo Pipsamex,
until November 2003, when we sold Pronal. Packaging products.In general, the prices of our packaging products
fluctuate in accordance with international prices. Prices for corrugated
containers in Mexico have historically tended to be approximately 15% below
corrugated container prices in the United States. In the past, this price
differential, combined with protective tariffs, has discouraged imports from
the United States. With the complete elimination of tariffs and generally low
prices for packaging products in the United States over the last three years,
competition in Mexico from imports has increased. Our prices for packaging
products over the last three years have declined in the face of competition
from imports. Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization
and Pricing Global consumption of containerboard and newsprint has increased
significantly over the past 30 years. Due to this growth in consumption,
producers have experienced periods of insufficient capacity for these products.
Periods of insufficient capacity, including some due to raw material
shortages, have usually resulted in increased capacity utilization rates and
international market prices for our paper products, leading to increased
operating margins. These periods have often been followed by periods of
capacity additions, which have resulted in declining capacity utilization rates
and international selling prices, leading to declining operating margins. - 37 -




---



##### Table of Contents



We expect that these cyclical trends in international selling prices and
operating margins relating to global capacity shortfalls and additions will
likely persist in the future, principally due to the continuing impact of four
general factors:  
    
    cyclical trends in general business and economic activity
produce swings in demand for paper and packaging products;  
    
    during periods of reduced demand, the high fixed cost
structure of the capital intensive paper industry generally leads
producers to compete aggressively on price in order to maximize
capacity utilization;  
    
    significant capacity additions, whether through plant
expansion or construction, can take two to three years to implement
and are therefore necessarily based upon estimates of future demand;
and  
    
    as competition in paper and packaging products is generally
focused on price, being a low-cost producer is critical to improved
profitability. This favors producers with larger plants that
maximize economies of scale but construction of plants high capacity
may result in significant increases in capacity that can outstrip
demand growth. Since mid-1995, the North American paper and packaging industry has
experienced a prolonged down cycle characterized by continued price pressures,
excess capacity and the inability of many industry participants to earn
satisfactory returns on capital. To maintain reasonable capacity utilization,
U.S. paper producers have generally maintained high export levels over the past
three years, including in the exports to Mexico. Capacity expansion plans in the North American paper and packaging
industry have been reduced to their lowest levels in over 20 years. In
addition, large amounts of capacity have been permanently closed since the
beginning of 2001. Capacity Utilization Our operations have high fixed costs. Accordingly, to obtain low unit
production costs and maintain adequate operating margins, we seek to maintain a
high capacity utilization rate at all of our production facilities. The table below sets forth capacity utilization rates with respect to the
production facilities for some of our principal products for the years ended
December 31, 2003, 2002 and 2001. Year Ended December 31,2003
    
    2002
    
    2001Containerboard
    
    
    100
    %
    
    
    100
    %
    
    
    89
    %Newsprint
    
    
    86
    %
    
    
    58
    %
    
    
    90
    %Corrugated containers
    
    
    70
    %
    
    
    67
    %
    
    
    76
    %Multi-wall sacks and bags
    
    
    56
    %
    
    
    68
    %
    
    
    90
    %
 We recorded impairment losses for our long-lived assets of Ps 604.8
million during 2003 and Ps 1,569.5 million during 2002 in other expenses in our
statement of operations and reserved these amounts against the value of our
property, plant and equipment on our balance sheet. The deferred income tax
effect for this reserve resulted in a benefit of Ps 193.5 during 2003 and Ps
502.3 during 2002, which was recorded in income tax expenses (benefit) in our
statement of operations. In addition, we reviewed the fair value less disposal cost of the
long-lived assets for which management has committed to a plan of disposal,
principally Ponderosas particleboard plant in 2002 and 2003 and Pronals
assets in 2002, and recorded impairment losses for these assets of Ps 101.0
million during 2003 and Ps 351.3 million during 2002 in loss on discontinued
operations in our statement of operations. The deferred income tax effect for
this reserve resulted in a benefit of Ps 32.3 during 2003 and Ps 112.4 during
2002, which was recorded in loss on discontinued operations in our statement of
operations. - 38 -




---



##### Table of Contents



Until December 31, 2003, Mexican GAAP required the calculation of
impairment of long-lived assets by comparing the unamortized carrying amount of
the asset to the undiscounted future expected cash flows to be generated by the
assets, without interest charges. Under these rules, if the sum of the
expected future undiscounted cash flow is less than the carrying amount of the
asset, a loss was recognized for the difference between the fair value and
carrying value of the assets. In March 2003, the MIPA issued Bulletin C-15, Impairment of the Value of
Long-Lived Assets and Their Disposal, or Bulletin C-15, whose adoption is
mandatory for fiscal years beginning on or after January 1, 2004. Bulletin
C-15 establishes new rules for the calculation and recognition of impairment
losses for long-lived assets and their reversal. These new rules require the
calculation of impairment of long-lived assets by comparing the unamortized
carrying amount of the asset to the greater of the net selling price of a
cash-generating unit and the net present value of future expected net cash
flows. Because the net present value of estimated future net cash flows from
the use of certain of our assets is less than their book value as of December
31, 2003, we estimate that the adoption of Bulletin C-15 as of January 1, 2004
will result in impairment of these assets, reducing their value by
approximately Ps 914.1 million and reducing our deferred income tax liability
by Ps 292.5 million, with a net charge to our statement of operations of Ps
621.6 million. Effects of Fluctuations in Raw Materials Prices Fluctuations in the market price of OCC and ONP, which are the primary raw
materials used in our paper making activities have significant effects on our
costs of goods sold and the prices that we are able to charge our customers for
our paper and packaging products. In addition, our cost of goods sold is
significantly affected by energy costs. Recycled Fiber Costs OCC and ONP are the primary raw materials used in the production of our
paper products. In 2003, OCC and ONP represented approximately 45% of the total
cost of goods sold of our paper segment and approximately 31% of our
consolidated cost of goods sold. The cost of OCC and ONP varies in accordance
with international market prices, which fluctuate depending upon the supply of
OCC and ONP and the demand for finished paper. Mexican OCC or ONP prices tend
to follow price movements in the United States, but are generally lower because
Mexican OCC or ONP is lower in quality. We believe that we are one of Mexicos largest users of recycled paper and
operate recycling centers in the United States in Albuquerque and Phoenix. In
2003, approximately 43% of the OCC and ONP used in our United States paper
production were collected by our recycling centers. We purchase the remainder
of our OCC and ONP requirements in the open market. Because the primary raw material of our packaging segment is
containerboard produced by our paper segment or other paper producers with cost
structures similar to ours, fluctuations in the international market price of
OCC and ONP result in similar fluctuations in the cost of the primary raw
materials of the packaging segment. We attempt to revise the prices for our products, which are generally
denominated in dollars or are dollar-linked, to reflect changes in the
international market prices of these products, which in turn reflect
fluctuations in the international market prices of OCC and ONP. However, as a
result of the current imbalance between supply of and demand for paper and
packaging products, during 2002 and 2003 we were not able to successfully pass
through the increased prices of OCC and ONP to our customers. The international market price of OCC and ONP has fluctuated significantly
in the past, and we expect that it will continue to do so in the future. The
international market price of OCC and ONP has been subject to significant
upward pressures during the past several years as a result of significantly
increased demand for OCC and ONP in Asia, particularly China. Significant
increases in the price of OCC and ONP and, consequently, the cost of producing
our products, reduces our gross margins and negatively affects our results of
operations to the extent that we are unable to pass all of these increased
costs on to our customers and could result in reduced sales volumes of our
products. Conversely, significant decreases in the price of OCC and ONP and,
consequently, the cost of - 39 -




---



##### Table of Contents



producing our products, would likely increase our gross margins and our
results of operations and could result in increased sales volumes if this lower
cost leads us to lower our prices. We do not currently hedge our exposure to
changes in the prices of OCC and ONP. Energy Costs Our energy cost represents approximately 18% of our cost of production.
In particular, our paper mills consume significant amounts of electric power.
We purchase approximately 60% of the electric power needs of our Mexican
operations from the Federal Electricity Commission (Comisión Federal de
Electricidad),the Mexican state-owned electric company, under long-term
contracts and we produce the remainder at our own power plants. These
long-term contracts guarantee the supply of electric power at prices that have
historically increased by the Mexican inflation rate. In the United States,
our McKinley mill is supplied 100% by a rural electric cooperative at formula
prices under a long-term contract. Our U.S. converting facilities purchase
electric power from local utilities. Mexican and United States Demand for Our Products We produce paper and packaging products in Mexico and the United States.
In 2003, paper products accounted for 41.1% of our total sales and packaging
products accounted for 57.7% of our total sales. The following is our geographic segment sales information for the periods
indicated. Year Ended December 31,2003
    
    2002
    
    2001(in million of constant pesos)Mexico
    
    Ps
    7,426.6
    
    
    Ps
    7,670.0
    
    
    Ps
    9,879.1United States
    
    
    2,051.1
    
    
    
    3,350.4
    
    
    
    4,548.7Eliminations
    
    
    (2,646.7
    )
    
    
    (2,896.0
    )
    
    
    (3,652.5
    )Total
    
    Ps
    6,831.0
    
    
    Ps
    8,124.5
    
    
    Ps
    10,775.3
 In 2003:  
    
    approximately 66% of our net sales of paper to third parties was to customers in Mexico;
    
    approximately 34% of our net sales of paper to third parties was to customers in the United States;  
    
    approximately 87% of our net sales of packaging products to
third parties was to customers in Mexico; and  
    
    approximately 13% of our net sales of packaging products to
third parties was to customers in the United States. In 2003, approximately 7% of our net sales of packaging products was to
companies in Mexico that primarily export their products, including exporters
located in the border region, maquiladoras located outside of the border region
and other Mexican exporters. As a Mexican company with most of our operations in Mexico, we are
significantly affected by economic conditions in Mexico. Our results of
operations and financial condition have been, and will continue to be, affected
by the growth rate of Mexicos GDP because our products are used in the
packaging of a wide range of consumer, agricultural, manufacturing and
industrial products. In addition, because a significant portion of our operations are in the
United States and a large portion of our packaging products are used in Mexico
to packaged consumer, agricultural, manufacturing and industrial products - 40 -




---



##### Table of Contents



destined for the United States, our results of operations and financial
condition have been, and will continue to be, affected by the growth rate of
the United States GDP. Mexican GDP growth has fluctuated significantly, and we anticipate that it
will likely continue to do so. Our management believes that economic growth in
Mexico would positively affect our future net sales and results of operations.
However, a continued recession in Mexico would likely reduce our future net
sales and have negative impacts on our results of operations. Effects of Fluctuations in Exchange Rates between the Peso and the Dollar Our results of operations and financial condition have been, and will
continue to be, affected by the rate of depreciation or appreciation of the
peso against the dollar because:  
    
    a substantial portion of our net sales are denominated in
dollars or linked to dollars;  
    
    we have significant amounts of dollar-denominated liabilities
that require us to make principal and interest payments in dollars;  
    
    the operations of our subsidiary, Durango McKinley Paper
Company, are conducted in the United States; and  
    
    our costs for some of our raw materials, principally imports
of OCC and OPP to Mexico and certain chemicals required in our
production processes, are incurred in dollars or are dollar-linked. Approximately 27% of our sales were made in dollars during 2003 with the
balance primarily dollar-linked. Historically, costs of production in Mexico
have been incurred in pesos, although substantially all of the costs and
expenses of Durango McKinley Paper Company are incurred in dollars. During
2003, 20% of our consolidated cost of goods sold was incurred in dollars or was
dollar-linked. The primary dollar costs of our Mexican operations are incurred
for imports of OCC and ONP. Fluctuations in the peso affect the cost of
imported OCC and ONP and other dollar-linked or imported raw materials. The
peso appreciated by 4.6% against the dollar in 2001, depreciated by 13.8%
against the dollar in 2002 and depreciated by 7.6% against the dollar in 2003. Depreciation of the peso against the dollar generally results in our
receiving more pesos for our dollar sales but our dollar-based costs increase.
The net effect on our operating is generally positive because the percentage of
our net sales denominated in dollars or dollar-linked is significantly higher
than the percentage of our costs and expenses that are denominated in dollars
or dollar-linked. In addition, depreciation of the pesos against the dollar
generally benefits Mexican traditional exporters and maquiladora exporters that
consume our packaging products. Conversely, appreciation of the peso against the dollar generally results
in our receiving fewer pesos for our dollar sales but our dollar-based costs
decrease. The net effect on our operating income is generally negative because
the percentage of our net sales denominated in dollars or dollar-linked is
significantly higher than the percentage of our costs and expenses that are
denominated in dollars or dollar-linked. In addition, appreciation of the
pesos against the dollar generally reduces the sales of Mexican traditional
exporters and maquiladora exporters that consume our packaging products. At December 31, 2003, substantially all of our indebtedness was
denominated in dollars. As a result, when the peso depreciates against the
dollar:  
    
    the interest costs on our dollar-denominated indebtedness in
pesos increases, which negatively affects our results of operations;  
    
    the amount of our dollar-denominated indebtedness in pesos
increases, and our total liabilities in pesos increase; and  
    
    our financial expenses increase as a result of foreign
exchange losses that we must record. - 41 -




---



##### Table of Contents



For example, the 13.8% devaluation of the peso in 2002 and the 7.6% devaluation
of the peso in 2003 substantially increased our financial expenses and were
substantial factors in our net losses for those years. Conversely, when the peso appreciates against the dollar:  
    
    the interest costs on our dollar-denominated indebtedness in
pesos decreases, which positively affects our results of operations;  
    
    the amount of our dollar-denominated indebtedness in pesos
decreases, and our total liabilities in pesos decrease; and  
    
    our financial expenses tend to decrease as a result of
foreign exchange gains that we must record. We do not have in place hedging arrangements with respect to devaluation
risk because we do not believe them to be cost effective for our company. Effects of Inflation Our results of operations and financial condition have been, and will
continue to be, affected by the rate of inflation in Mexico because:  
    
    most of our costs and expenses are incurred in pesos in
Mexico and are subject to inflationary pressures while most of our
sales are denominated in dollars or are dollar-linked and are made
at prices set by reference to international market prices; and  
    
    our monetary assets and liabilities are restated to give
effect to the rate of Mexican inflation, as expressed by the NCPI,
and as a result we record monetary position gains and losses that
depend on our net monetary asset (liability) position and the rate
of Mexican inflation. A component of our net comprehensive financing cost includes our gain or
loss from monetary position, which refers to the gains or losses, due to the
effects of inflation, from holding net monetary liabilities or assets. A gain
from monetary position results from holding net monetary liabilities during
periods of inflation as the purchasing power represented by nominal peso
liabilities declines over time. Accordingly, since our monetary liabilities,
including debt and other payables, exceeded our monetary assets, including
cash, temporary investments and accounts receivable, in 2001, 2002 and 2003 we
recorded a gain from monetary position for those periods. The table below shows Mexican inflation according to the NCPI and our gain
from monetary position for the periods indicated: Year Ended December 31,2003
    
    2002
    
    2001(in millions of constant pesos, except percentages)Inflation
    
    
    4.0
    %
    
    
    5.7
    %
    
    
    4.4
    %Gain from monetary position
    
    Ps
    367.0
    
    
    Ps
    406.7
    
    
    Ps
    309.8
 Effect of Taxes on Our Income In accordance with Mexican tax law, we are subject to federal income tax,
tax on assets and employee statutory profit sharing. - 42 -




---



##### Table of Contents



Income Taxes and Employee
Statutory Profit Sharing The income tax 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. Mexican
income taxes take into consideration the taxable and deductible effects of
inflation. Like other Mexican companies, we are required by law to pay our
employees, in addition to their agreed compensation and benefits, profit
sharing in an aggregate amount equal to 10% of our taxable income (calculated
without reference to inflation adjustments). Prior to 2002, the payment of
employee statutory profit sharing was deductible in certain instances. This
deduction was completely eliminated in 2002. Deferred income tax assets and
liabilities are recognized for temporary differences resulting from comparing
the book and tax values of assets and liabilities plus any future benefits from
tax loss carryforwards. Deferred income tax assets are reduced by any benefits
about which there is uncertainty as to their realizability. Asset Taxes Taxes on assets are calculated by applying a rate of 1.8% on the net
average of the majority of our restated assets less certain liabilities and is
payable only to the extent that it exceeds income tax payable for the
applicable period. If in any year the asset tax exceeds the income tax
payable, the asset tax payment for such excess may be reduced by the amount by
which income taxes exceeded asset taxes in the three preceding years and any
required payment of asset taxes is creditable against the excess of income
taxes over asset taxes of the following ten years. The asset taxes paid that
are expected to be recoverable are recorded as an advance payment of income
taxes and decrease the deferred income tax liability on our balance sheet. Tax Loss Carryforwards and Recoverable Asset Taxes Tax loss carryforwards and recoverable asset taxes for which the deferred
income tax asset and prepaid income tax, respectively, have been partially
recognized may be recovered subject to certain conditions. Due to a
deterioration in the circumstances used to assess the realization of the
benefit of tax loss carryforwards and recovery of tax on assets paid, the
valuation allowance for benefit of tax loss carryforwards and recoverable tax
on assets was increased by Ps 546.9 million in 2003 and Ps 965.8 million in
2002 and charged to results of operations. Restated amounts as of December 31, 2003 and expiration dates are: Tax Loss
    
    RecoverableYear of expiration
    
    Carryforwards
    
    Asset Taxes(millions of constant pesos)2004
    
    Ps
    484.1
    
    
    Ps
    48.72005
    
    
    221.4
    
    
    
    13.12006
    
    
    169.4
    
    
    
    26.32007
    
    
    99.8
    
    
    
    26.12008
    
    
    147.3
    
    
    
    25.32009
    
    
    100.8
    
    
    
    19.82010
    
    
    112.2
    
    
    
    23.92011
    
    
    128.0
    
    
    
    22.22012
    
    
    1,950.8
    
    
    
    58.12013
    
    
    1,415.4
    
    
    
    53.0Total
    
    Ps
    4,829.3
    
    
    Ps
    316.3
 Tax Disputes We have initiated a proceeding requesting an injunction against the
Mexican tax authorities regarding the methodology used to determine our
employee statutory profit sharing liability. We have initiated a proceeding requesting an injunction against the
Mexican tax authorities with respect to the assessment against our company of
Ps 17.6 million with respect to the Substitutive Tax of the Wage Credit. We
have asserted in this action that the assessment of the Substitutive Tax of the
Wage Credit is unconstitutional. Management believes that the outcome of this
proceeding will be favorable to our company, which represents a contingent
asset of Ps 12,196. - 43 -




---



##### Table of Contents



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 our company are not similar to those used with or between
independent parties in comparable transactions. Price studies prepared by
independent third parties are used to compare market prices. Recent Developments First Quarter Results Our results for the first quarter of 2004 are presented, and our results
for the first quarter of 2003 have been restated, in constant pesos as of March
31, 2004. The noon buying rate as reported by the Federal Reserve Bank of New
York, for the purchase of dollars, expressed in nominal pesos per dollar at
March 31, 2004 was Ps 11.18 = US$1.00 and inflation for the first quarter of
2004 as measured by the NCPI was 1.56%. Net sales increased by 3.9% during the first quarter of 2004 to Ps 1,718.9
million compared to Ps 1,655.1 million during the first quarter of 2003. Sales
volume of our products increased by 9% during the first quarter of 2004
compared to the first quarter of 2003; however, average prices for our products
declined by 4% during the first quarter of 2004 compared to the first quarter
of 2003. Our gross margin decreased to 10.1% during the first quarter of 2004
compared to 12.7% during the first quarter of 2003 and our operating margin
decreased to 3.4% during the first quarter of 2004 compared to 4.7% during the
first quarter of 2003. Net comprehensive financing costs decreased by 78.9% during the first
quarter of 2004 compared to the first quarter of 2003, principally as a result
of our Ps 63.9 million foreign exchange gain during the first quarter of 2004
compared to our Ps 327.1 million foreign exchange loss during the first quarter
of 2003. We recorded a Ps 918.0 million impairment loss during the first quarter of
2004, which was partially offset by the tax effects of this impairment, which
were included in our Ps 265.7 million deferred income tax benefit recorded in
the first quarter of 2004. Principally as a result of these factors, we recorded a net loss of Ps
708.5 million during the first quarter of 2004 compared to a net loss of Ps
194.3 million during the first quarter of 2003. Plan Support Agreement On April 30, 2004, we entered into a plan support agreement with certain
bank creditors and holders of our existing notes holding an aggregate of 55% of
the outstanding principal amount of our unsecured debt. Under the terms of the
plan support agreement, the parties were obligated to pursue and implement a
financial restructuring along the lines contained in the agreement in principle
with these creditors, including by means of a cash tender offer and certain
exchange offers and, under certain circumstances, a prepackaged plan of
reorganization under U.S. bankruptcy law. The participating creditors agreed
that they would tender their unsecured debt in the offers and vote their
unsecured debt in favor of the prepackaged plan of reorganization under U.S.
bankruptcy law. The plan support agreement contained certain obligations of
our company and the participating creditors. These obligations were not met by
the agreed dates and certain participating creditors terminated the plan
support agreement on May 17, 2004. Concurso Mercantil and 304 Proceeding On May 18, 2004, we filed a voluntary petition for concurso mercantil
under the LCR with the First Federal District Court in Durango, Mexico. As of
the date hereof, the court has not yet been declared the concurso mercantil
effective. For a discussion of the LCR and concurso mercantilproceedings, see
Item 4. Information on Our CompanyMexican Law of Commercial
Reorganizations. On May 20, 2004, our foreign representative, Gabriel Villegas Salazar,
filed the 304 Proceeding with the United States Bankruptcy Court for the
Southern District of New York, commencing a case in the United States ancillary
to the concurso mercantilproceeding currently underway in Durango, Mexico.
The 304 Proceeding is being - 44 -




---



##### Table of Contents



administered under the case caption In re: Petition of Gabriel Villegas
Salazar, as foreign representative of Corporación Durango, S.A. de C.V., Debtor
in Foreign Proceeding. Pursuant to sections 105(a) and 304(b) of the United States Bankruptcy
Code and in furtherance of the concurso mercantilproceeding, on June 4, 2004,
the United States Bankruptcy Court for the Southern District of New York
entered a preliminary injunction preliminarily enjoining the commencement or
continuation of any action against our company, its officers and directors, and
four of our operating subsidiaries, Titán, Centauro, Atenquique, and Ponderosa.
At a hearing on June 30, 2004, the United States Bankruptcy Court for the
Southern District of New York extended the preliminary injunction through and
including August 16, 2004. Disposition of Chihuahua Particleboard Operations On June 3, 2004, our subsidiary, Ponderosa, entered into an asset sale
agreement with a Mexican company, under which Ponderosa agreed to sell its
particleboard plant in Chihuahua for US$22.5 million (Ps 252.8 million). This
sale is subject to customary closing conditions, including the approval of the
Mexican antitrust authority. Upon the closing of this sale, the capacity of
our other segment will be reduced by 272 thousand short tons to 72 thousand
short tons. Results of Operations The following discussion of our results of operations is based on our
consolidated financial statements prepared in accordance with Mexican GAAP.
The discussion of the results of our business segments is based upon financial
information reported for each of the three segments of our business, as
detailed in note 22 to our consolidated financial statements. In the following discussion, references to increases or decreases in any
year are made by comparison with the corresponding prior year, except as the
context otherwise indicates. The following table sets forth consolidated financial information for each
of the three years ended December 31, 2003. Year Ended December 31,2003
    
    2002
    
    2001(in millions of constant pesos)Net sales
    
    Ps
    6,831.0
    
    
    Ps
    8,124.5
    
    
    Ps
    10,775.3Cost of sales
    
    
    5,957.3
    
    
    
    7,057.9
    
    
    
    9,065.8Gross profit
    
    
    873.7
    
    
    
    1,066.6
    
    
    
    1,709.5Selling, general and administrative expenses
    
    
    567.3
    
    
    
    570.0
    
    
    
    691.4Operating income
    
    
    306.4
    
    
    
    496.6
    
    
    
    1,018.1Net comprehensive financing cost:Interest expense
    
    
    (1,186.2
    )
    
    
    (1,130.6
    )
    
    
    (1,118.5
    )Interest income
    
    
    42.4
    
    
    
    40.3
    
    
    
    70.2Foreign exchange gain (loss)
    
    
    (821.4
    )
    
    
    (998.2
    )
    
    
    328.0Monetary position gain
    
    
    367.0
    
    
    
    406.7
    
    
    
    309.8(1,598.2
    )
    
    
    (1,681.9
    )
    
    
    (410.4
    )Other income (expense), net
    
    
    (1,511.2
    )
    
    
    (3,127.0
    )
    
    
    476.4Income (loss) from continuing operations
before income taxes and employee statutory
profit sharing
    
    
    (2,803.0
    )
    
    
    (4,312.2
    )
    
    
    1,084.0Income tax benefit (expense)
    
    
    (0.2
    )
    
    
    677.2
    
    
    
    (48.6
    )Employee statutory profit sharing expense
    
    
    (1.7
    )
    
    
    (1.1
    )
    
    
    (4.9
    )(2,804.9
    )
    
    
    (3,636.1
    )
    
    
    1,030.6Discontinued operations
    
    
    (549.2
    )
    
    
    (102.9
    )
    
    
    152.9Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (317.9
    )Consolidated net income (loss)
    
    Ps
    (3,354.2
    )
    
    Ps
    (3,738.9
    )
    
    Ps
    865.5
 - 45 -




---



##### Table of Contents



The following table sets forth consolidated financial information for our
business segments for each of the three years ended December 31, 2003. Year Ended December 31,2003
    
    2002
    
    2001(in millions of constant pesos, except percentages)PaperSales to third parties
    
    Ps
    2,806.9
    
    
    Ps
    4,082.2
    
    
    Ps
    6,041.4Intersegment sales
    
    
    2,497.2
    
    
    
    2,756.9
    
    
    
    3,511.2Total sales
    
    
    5,304.1
    
    
    
    6,839.1
    
    
    
    9,552.6Operating income
    
    
    (109.6
    )
    
    
    2.5
    
    
    
    439.1Operating margin (%)
    
    
    (3.9
    )%
    
    
    0.1
    %
    
    
    7.3
    %Depreciation and amortization
    
    
    265.9
    
    
    
    334.3
    
    
    
    354.9PackagingSales to third parties
    
    Ps
    3,942.6
    
    
    Ps
    3,948.6
    
    
    Ps
    4,590.4Intersegment sales
    
    
    133.3
    
    
    
    93.5
    
    
    
    95.1Total sales
    
    
    4,075.9
    
    
    
    4,042.1
    
    
    
    4,685.6Operating income
    
    
    430.4
    
    
    
    495.1
    
    
    
    485.2Operating margin (%)
    
    
    10.9
    %
    
    
    12.5
    %
    
    
    10.6
    %Depreciation and amortization
    
    
    119.6
    
    
    
    113.4
    
    
    
    114.5OtherSales to third parties
    
    Ps
    81.6
    
    
    Ps
    93.7
    
    
    Ps
    143.5Intersegment sales
    
    
    16.1
    
    
    
    45.6
    
    
    
    46.1Total sales
    
    
    97.7
    
    
    
    139.2
    
    
    
    189.6Operating income
    
    
    (14.5
    )
    
    
    (0.9
    )
    
    
    93.7Operating margin (%)
    
    
    (17.8
    )%
    
    
    (1.0
    )%
    
    
    65.3
    %Depreciation and amortization
    
    
    11.0
    
    
    
    10.1
    
    
    
    17.3
 Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Net Sales Net sales decreased by 15.9% in 2003 due to:  
    
    the 31.2% decrease of net sales to third parties of our paper segment;  
    
    the 12.9% decrease of net sales to third parties of our other segment; and  
    
    the 0.2% decrease of net sales to third parties of our packaging segment. Net sales to third parties of our packaging segment decreased by 0.2% in
2003, primarily as a result of a 22.5% decrease in net sales to third parties
of multi-wall sacks and bags, principally due to a 21.1% decline in sales
volumes as a result of our closure of a plant in Apasco. The effect of this
decrease was partially offset by a 2.3% increase in net sales to third parties
of corrugated containers, due to a 5.0% increase in sales volumes. This
increase in sales volumes was partially offset by a 2.6% decrease in our
average price of corrugated containers. Net sales to third parties of our paper segment decreased by 31.2% in
2003, primarily due to:  
    
    the elimination of our kraft paper and coated bleach board
operations as a result of our sale of Durango Paper Company;  
    
    a 12.2% increase in net sales to third parties of newsprint,
principally due to a 9.3% increase in our average sales price for
newsprint and a 2.7% increase in our sales volume of newsprint; and - 46 -




---



##### Table of Contents



 a 3.9% decrease in net sales to third parties of uncoated
free sheet, principally due to a 9.7% decline in our average sales
price for uncoated free sheet, which was partially offset by a 6.4%
increase in our sales volume of uncoated free sheet. Net sales to third parties of our other segment decreased by 12.9% in
2003, primarily due to a 32.0% decrease in sales volumes of our other products.
The decrease in sales volume was partially offset by a 28.0% increase in our
average price for our other products. Cost of Sales Cost of sales decreased by 15.6% in 2003, primarily due to lower sales
volumes of paper products and improved use of raw materials, which offset the
higher unit costs we paid for the principal inputs in our production process.
Average prices for recycled fiber, consisting of OCC and ONP, which accounted
for approximately 31% of our cost of sales in 2003, increased in nominal dollar
terms from US$120 per short ton in 2002 to US$124 per short ton in 2003. Our
energy cost, which represents approximately 18% of our cost of production,
increased by 15% despite the higher unit costs we paid for energy, primarily as
a result of greater efficiency in our operations. Our labor cost, which
represents approximately 11% of our cost of production, decreased by 21% on a
unit cost basis, primarily as a result of our sale of Durango Paper Company in
October 2002. Gross Profit and Gross Margin Gross profit decreased by 18.1% in 2003, primarily as a result of the
decline in our net sales. Gross margin decreased to 12.8% in 2003 compared to
13.1% in 2002. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 0.5% in 2003;
however, because we were not able to reduce these expenses at the same rate as
the decline in our net sales, selling, general and administrative expenses as a
percentage of our net sales increased to 8.3% in 2003 compared to 7.0% in 2002. Operating Income Operating income decreased by 38.3% in 2003, primarily as a result of the
18.1% decline in our gross profit that principally resulted from our declining
net sales. Operating margin decreased to 4.5% in 2003 compared to 6.1% in
2002. Operating loss in our paper segment was Ps 109.6 million compared to
operating income of Ps 2.5 million in 2002, primarily as a result of this
segments lower net sales and reduced operating margin as a result of the
decline in average sales prices of our paper products. Operating margin in our
paper segment decreased to (3.9)% in 2003 compared to 0.1% in 2002. Operating income in our packaging segment decreased by 13.1%, primarily as
a result of a decline in the average prices of our packaging products.
Operating margin in our packaging segment decreased to 10.9% in 2003 compared
to 12.5% in 2002. Operating loss in our other segment decreased to Ps 14.5 million in 2003
from Ps 0.9 million in 2002, primarily as a result of lower net sales of our
other products. Operating margin in our other segment decreased to (17.8)% in
2003 compared to (1.0)% in 2002. Net Comprehensive Financing Cost Net comprehensive financing cost decreased by 5.0%, primarily due to the
17.7% decrease in foreign exchange loss resulting from the reduction of the
depreciation of the peso against the dollar to 7.6% in 2003 from 13.8% in 2002.
This effect was partially offset by:  
    
    a 4.9% increase in interest expense, primarily as a result of
an increase in the average interest rate for our debt obligations;
and  
    
    a 9.8% decrease in gain from monetary position, primarily as
a result of the reduction of the rate of inflation in Mexico to 4.0%
in 2003 from 5.7% in 2002. - 47 -




---



##### Table of Contents



Other Expense, Net Other expense, net was Ps 1,511.2 million in 2003 compared to Ps 3,127.0
million in 2002. In 2003, other expense, net arose primarily as a result of:  
    
    a Ps 604.8 million expense recorded as a result of the
impairment of long-lived assets at our five of our mills and plants.  
    
    a Ps 315.1 million expense recorded as a result of our
assumption of the Bank of America, N.A. loan agreement and the
JPMorgan letters of credit relating to the call of our guarantees of
these instruments following the defaults on these instruments by
Durango Georgia Receivables Company and Durango Paper Company,
respectively.  
    
    a Ps 272.9 million expense reflecting the expenses we
incurred in 2003 related to the restructuring of our indebtedness,
including our payment of US$12.0 million in fees related to certain
forbearance agreements.  
    
    a Ps 199.7 million expense reflecting our loss on the sale of
property, plant and equipment, principally the sale of Grupo
Pipsamexs warehouse in Mexico City. In 2002, other expense, net arose primarily as a result of:  
    
    a Ps 1,569.5 million expense recorded as a result of the
impairment of long-lived assets at our nine of our mills and plants.  
    
    a Ps 1,509.1 million expense reflecting our loss on the sale
of Durango Paper Company. Income Tax Expense Income tax expense was a cost of Ps 0.2 million in 2003 as compared to a
benefit of Ps 677.2 million in 2002. Our effective tax rate
decreased to 0.0% in 2003 from 15.7% in 2002 to due mainly to a
change in the valuation allowance for recoverable tax on assets and benefit of
tax loss carryforwards. Discontinued Operations, net Discontinued operations, net was a loss of Ps 549.2 million in 2003
compared to a loss of Ps 102.9 million in 2002. In 2003 and 2002, our
discontinued operations were:  
    
    the operations of our molded pulp division, which we sold for
US$53.7 million on February 27, 2003;  
    
    the operations of Pronal, which we sold for US$28 million on
November 14, 2003; and  
    
    the operations of our Chihuahua particleboard mill, which
were held for sale at December 31, 2003. In 2003, discontinued operations, net was composed of:  
    
    a Ps 563.9 million loss incurred by our discontinued
operations, including a Ps 351.3 million impairment charge assessed
against the Chihuahua particleboard mill;  
    
    a Ps 447.5 million loss recorded on the sale of Pronal;  
    
    a Ps 335.0 million gain recorded on the sale of our molded pulp division; and - 48 -




---



##### Table of Contents



 a Ps 127.2 million income tax and employee statutory profit
sharing benefit recorded with respect to our discontinued
operations. In 2002, discontinued operations, net was composed of:  
    
    a Ps 11.4 million loss incurred by our discontinued
operations, primarily as a result of the Ps 159.3 million net
comprehensive financing cost incurred by our discontinued operations
and the Ps 101.0 million impairment charge assessed against our
Pronal mill, which exceeded the Ps 162.1 million operating income
and the Ps 86.8 million other income of our discontinued operations;
and  
    
    a Ps 91.5 million income tax and employee statutory profit
sharing expense incurred by our discontinued operations. Consolidated Net Loss Net loss decreased by 10.3% in 2003. Net loss as a percentage of net
sales increased to 49.1% in 2003 compared to 46.0% in 2002. Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Net Sales Net sales decreased by 24.6% in 2002 due to:  
    
    the 32.4% decrease of net sales to third parties of our paper segment;  
    
    the 14.0% decrease of net sales to third parties of our packaging segment; and  
    
    the 34.7% decrease of net sales to third parties of our other segment. Net sales to third parties of our packaging segment decreased by 14.0% in
2002, primarily as a result of:  
    
    a 2.8% decrease in net sales to third parties of corrugated
containers, principally due to a 9.6% decline in our average sales
price for corrugated containers, which was partially offset by a
7.6% increase in our sales volume of corrugated containers; and  
    
    a 49.7% decrease in net sales to third parties of multi-wall
sacks and bags, principally due to a 35.3% decrease in our sales
volume of multi-wall sacks and bags as a result of the sale of the
assets comprising the Eastman and Sky divisions of Durango Paper
Company in 2001 and a 22.2% decrease in our average sales price for
multi-wall sacks and bags. Net sales to third parties of our paper segment decreased by 32.4% in
2002, primarily due to:  
    
    a 26.2% decrease in net sales to third parties of newsprint,
principally due to a 51.8% decline in our sales volume of newsprint
as a result of the market downturn in Mexico, partially offset by a
53.3% increase in our average sales price for newsprint;  
    
    a 47.5% decrease in net sales to third parties of coated
bleached board, principally due to (1) a 40.5% decline in our sales
volume of coated bleached board as a result of the market downturn
in the United States as well as our sale of Durango Paper Company in
October 2002, and (2) an 11.8% decrease in our average sales price
for coated bleached board; and - 49 -




---



##### Table of Contents



 an 11.2% decrease in net sales to third parties of uncoated
free sheet, principally due to a 8.8% decline in our sales volume of
uncoated free sheet as a result of the market downturn in Mexico,
and a 2.6% decline our average sales price for uncoated free sheet. Net sales to third parties of our other segment decreased by 34.7% in
2002, primarily due to a 34.6% decrease in sales volume. Cost of Sales Cost of sales decreased by 22.1% in 2002, primarily due to lower sales
volumes of paper and packaging products and improved use of raw materials,
which offset the higher unit costs we paid for the principal inputs in our
production process. Average prices for recycled fiber, consisting of OCC and
ONP, which accounted for approximately 22% of our cost of sales in 2002,
increased in nominal dollar terms from US$115 per short ton to US$120 per short
ton. Our energy cost, which represents approximately 12% of our cost of
production, decreased by 8%, despite the higher unit costs we paid for energy,
primarily as a result of greater efficiency in our operations. Our labor cost,
which represents approximately 12% of our cost of production, decreased by 14%
on a unit cost basis, attributable to the savings achieved by the sale of
Durango Paper Company in October 2002. Gross Profit and Gross Margin Gross profit decreased by 37.6% in 2002, primarily as a result of the
decline in our net sales. Gross margin decreased to 13.1% in 2002 compared to
15.9% in 2001. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by 17.6% in 2002,
primarily due to the sale of Durango Paper Company in October 2002. In
addition, this decrease was a result of our cost cutting initiatives, which
consist of, among other things, simplifying our management structure, capturing
synergies in the operation of our subsidiaries in the same segments and
combining the sales forces of our subsidiaries. However, because we were not
able to reduce these expenses at the same rate as the decline in our net sales,
selling, general and administrative expenses as a percentage of our net sales
increased to 7.0% in 2002 compared to 6.4% in 2001. Operating Income Operating income decreased by 51.2% in 2002, primarily as a result of the
37.6% decline in our gross profit that principally resulted from our declining
net sales. The effects of our declining gross profit was partially offset by
the reduction in our selling, general and administrative expenses. Operating
margin decreased to 6.1% in 2002 from 9.4% in 2001. Operating income of our paper segment decreased by 99.4% in 2002,
primarily as a result of this segments lower net sales and reduced operating
margin primarily as a result of a lower average unit price. The operating
margin of our paper segment declined to 0.1% in 2002 from 7.3% in 2001. Operating income of our packaging segment increased by 2.0% in 2002
primarily as a result of lower raw materials costs in packaging production.
The operating margin of our packaging segment increased to 12.5% in 2002 from
10.6% in 2001. Operating loss in our other segment was Ps 0.9 million in 2002 as compared
to operating income of Ps 93.7 million in 2001. This change was primarily a
result of the decline in net sales of our other products. The operating margin
of our other segment was (1.0)% in 2002 as compared to 65.3% in 2001. Financing Cost Financing cost increased by 309.8% in 2002, primarily due to foreign
exchange results. Foreign exchange results experienced a loss of Ps 998.2
million in 2002 as compared to a gain of Ps 328.0 million in 2001. The foreign
exchange loss in 2002 resulted from a 13.8% depreciation of the peso in 2002,
whereas the foreign exchange gain in 2001 resulted from a 4.6% appreciation of
the peso in 2001. - 50 -




---



##### Table of Contents



Other Income (Expense), Net Other expense, net was Ps 3,127.0 million in 2002 compared to other
income, net of Ps 476.4 million in 2001. In 2002, other expense, net arose
primarily as a result of:  
    
    a Ps 1,569.5 million expense recorded as a result of the
impairment of long-lived assets at our nine of our mills and plants.  
    
    a Ps 1,509.1 million expense reflecting our loss on the sale
of Durango Paper Company. In 2001, other income, net arose primarily as a result of:  
    
    the amortization of Ps 543.2 million of negative goodwill
related to our acquisition of the Durango Paper Company.  
    
    a Ps 30.6 million expense reflecting our loss on the sale of
property, plant and equipment. Income Tax Expense Income tax expense was a benefit of Ps 677.2 million in 2002 as compared
to a cost of Ps 48.6 million in 2001. This change resulted from (1) an
increase in deferred income tax benefits to Ps 792.1 million in 2002 compared
to Ps 194.8 million in 2001 as a result of a reduction of temporary difference
in inventories and property, plant and equipment, a reduction in the tax rate
and an increase in tax loss carryforwards, and (2) a 52.8% decrease in current
income tax expenses as a result of a reduction in temporary differences in
inventory and property, plant and equipment, a reduction in the applicable tax
rate and an increase in tax loss carryforwards. Discontinued Operations, net Discontinued operations, net was a loss of Ps 102.9 million in 2002
compared to a gain of Ps 152.9 million in 2001. In 2002 and 2001, our
discontinued operations were the operations of our molded pulp division, the
operations of Pronal and the operations of our Chihuahua particleboard mill. In 2002, discontinued operations, net was composed of:  
    
    a Ps 11.4 million loss incurred by our discontinued
operations, primarily as a result of the Ps 159.3 million net
comprehensive financing cost incurred by our discontinued operations
and the Ps 101.0 million impairment charge assessed against our
Pronal plant, which exceeded the Ps 162.1 million operating income
and the Ps 86.8 million other income of our discontinued operations;
and  
    
    a Ps 91.5 million income tax and employee statutory profit
sharing expense incurred by our discontinued operations. In 2001, discontinued operations, net was composed of:  
    
    income of Ps 77.2 million incurred by our discontinued
operations, primarily as a result of the Ps 53.3 million operating
income and the Ps 88.1 million other income of our discontinued
operations, partially offset by the Ps 64.2 million net
comprehensive financing cost incurred by our discontinued
operations; and  
    
    a Ps 75.7 million income tax and employee statutory profit
sharing expense incurred by our discontinued operations. Extraordinary Loss In 2001, we recorded an extraordinary loss of Ps 317.9 million composed
of: - 51 -




---



##### Table of Contents




    
    a Ps 174.9 million loss reflecting employee severance costs
related to the cancellation of certain collective bargaining
agreements and the termination of certain employees of Atenquique
and Ponderosa.  
    
    a Ps 143.0 million loss on the sale of the assets comprising
the Eastman and Sky divisions of Durango Paper Company. Consolidated Net Income (Loss) Net loss was Ps 3,738.9 million in 2002 as compared to a net income of Ps 865.5 million in 2001. Liquidity and Capital Resources Our principal cash requirements consist of the following:  
    
    working capital requirements;  
    
    the servicing of our indebtedness; and  
    
    capital expenditures related to investments in operations,
major maintenance and expansion of plant facilities. Our principal sources of liquidity have historically consisted of:  
    
    cash flows from operating activities;  
    
    short-term and long-term borrowings; and  
    
    sales of debt securities in domestic and international capital markets. Our Liquidity Crisis As a result of the factors described below, we did not generate sufficient
cash flows from our operations to make a total of US$52.2 million of principal
or a total of US$34.7 million of interest payments that were due on our
unsecured indebtedness during 2002. In 2003, we did not pay a total of US$78.7
million of principal or a total of US$77.3 million of interest that was due on
our unsecured indebtedness. In 2004, we have not made any principal payments
or interest payments that have become due on our unsecured indebtedness prior
to the date of this annual report, other than the payment of our reimbursement
obligation to the Bank of America, N.A. related to a letter of credit that had
been drawn for US$1.6 million. At December 31, 2003 and December 31, 2002, we had cash and temporary
investments totaling Ps 650.0 million and Ps 237.6 million, respectively. At
December 31, 2003, we had restricted cash totaling Ps 157.5 million. We had no
restricted cash at December 31, 2002. Our liquidity crisis has been caused by, among other things:  
    
    the substantial capital expenditures required to expand our
production capacity, which has resulted in a substantial debt
service burden and led to our default on our unsecured indebtedness,
which has restricted our access to the capital markets;  
    
    the economic slow-down in the U.S. and Mexico, which has
resulted in a reduction in the demand for manufactured products
requiring the goods supplied by our company; - 52 -




---



##### Table of Contents




    
    a significant drop in international market prices for paper
and packaging products over the past several years;  
    
    the significant increase in raw material costs and other production costs;  
    
    the devaluation of the peso against the dollar in 2002 and 2003; and  
    
    a significant delay in the implementation of our planned divestiture of certain non-strategic assets. The table below presents our cash flow from operations and our debt
service obligations: At and for the year
    
    At and for the year
    
    At and for the yearended
    
    ended
    
    endedDecember 31
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001(in millions of constant pesos, except ratios)Resources (used in) provided by:Operating activities
    
    Ps
    (441.9
    )
    
    Ps
    (157.6
    )
    
    Ps
    1,029.1Financing activities
    
    
    (55.8
    )
    
    
    848.7
    
    
    
    (550.0
    )Investing activities
    
    
    910.1
    
    
    
    (990.6
    )
    
    
    (797.6
    )Debt service obligations (1)Outstanding debt under our 2006 notes, 2008 notes
and 2009 notes (2)
    
    
    771.6
    
    
    
    592.3
    
    
    
    266.5Outstanding unsecured bank debt (3)
    
    
    42.6
    
    
    
    84.6
    
    
    
    214.0Outstanding other unsecured debt (4)
    
    
    69.2
    
    
    
    171.8
    
    
    
    395.6Outstanding secured debt
    
    
    95.5
    
    
    
    99.7
    
    
    
    117.7Other debt service obligations
    
    
    207.4
    
    
    
    182.2
    
    
    
    124.7Total debt service obligations
    
    
    1,186.2
    
    
    
    1,130.6
    
    
    
    1,118.5Unrestricted cash and temporary investments available
    
    
    650.0
    
    
    
    237.6
    
    
    
    537.2Ratio of current assets to current liabilities
    
    
    0.32
    
    
    
    0.37
    
    
    
    1.59
   (1)
    
    Includes scheduled payments of interest.(2)
    
    Our interest payment obligation on our debt under our 2006 notes, 2008
notes and 2009 notes is US$67.2 million per year. Fluctuations are the
result of changes in the exchange rate.(3)
    
    Our interest payment obligation on our unsecured bank debt is US$3.7
million per year. Fluctuations are the result of changes in the exchange
rate.(4)
    
    Our interest payment obligation on our other unsecured debt is US$6.0
million per year. Fluctuations are the result of changes in the exchange
rate. On October 31, 2002, December 23, 2002 and January 16, 2003, Standard &
Poors lowered our foreign and local currency corporate ratings to B, CC
and SD, respectively. On February 4, 2003, Standard & Poors lowered our
foreign and local currency corporate ratings to D. D is Standard & Poors
lowest rating category out of 22 and signifies a payment default. On June 3,
2002 and December 23, 2002, Moodys Investors Service lowered all ratings on
our existing notes to a rating of B3 and Caa3, respectively. On January
21, 2003, Moodys again lowered all ratings on existing notes to a rating of
Ca. Ca is the 2nd-lowest rating category out of 22 and describes
obligations which Moodys believes are speculative to a high degree and which
are often in default or have other marked shortcomings. These rating agencies
have ceased rating our company and our debt instruments. As a result of the negative credit ratings and downgrades, and the
cessation of these ratings agencies coverage of our company and its debt
instruments, our access to sources for short-term financing has been severely
restricted, thus impeding our ability to finance our operations. Furthermore,
the negative publicity surrounding the downgrades has adversely affected the
terms of our trade payables and ability to obtain new customers. - 53 -




---



##### Table of Contents



Assuming we are able to restructure our indebtedness to our unsecured
creditors, we believe that cash generated by our operating activities will be
adequate to meet our anticipated debt service requirements, capital
expenditures and working capital needs for the foreseeable future. Our future
operating performance and our ability to service our existing debt are subject
to future economic conditions and to financial, business and other factors,
many of which are beyond our control. In the event that we are unsuccessful in restructuring our indebtedness to
our unsecured creditors, the cash generated by our operating activities will
not be sufficient to meet our anticipated debt service requirements, capital
expenditures and working capital needs during the next twelve months or
thereafter. As we have not made principal or interest payments on our
unsecured debt since November 29, 2002, the creditors under our existing notes
have the right to accelerate our existing notes, Banco Nacional de México,
S.A., or Banamex, JPMorgan Chase Bank, Bank of America, N.A., Banc of America
Securities Limited, Deutsche Bank AG and California Commerce Bank each have the
right to accelerate the indebtedness under their respective debt instruments,
and HG Estate, LLC has the right to accelerate the indebtedness under the 10%
promissory note due December 17, 2004, thereby requiring the immediate
repayment of their entire principal amount. In addition, unsecured debt in the
aggregate principal amount of US$97.8 million is past due. The creditors under
some of this unsecured debt have instituted legal proceedings against our
company to collect the past due amounts and accelerate other amounts. See
Item 8. Financial Information  Legal Proceedings. If our unsecured debt
that is not yet due is accelerated, we would not be able to pay the overdue
interest as of July 15, 2004 of US$301.9 million or the accelerated principal
amount of US$697.5 million. Working Capital We had consolidated negative working capital of Ps 7,881.8 million and Ps
6,181.2 million at December 31, 2003 and 2002, respectively. Our working
capital deficit principally reflects the classification of our unsecured debt
as short term as a result of our defaults on this debt. Our consolidated current assets decreased by Ps 33.8 million to Ps 3,665.9
million at December 31, 2003 from Ps 3,699.6 million at December 31, 2002. The
decrease in our consolidated current assets was primarily due to:  
    
    a Ps 305.6 million decrease in the current assets of our
discontinued operations, principally as a result of the sale of our
molded products division and Pronal; and  
    
    a Ps 177.0 million decrease in due from related parties,
principally due to the provision made on our balance sheet for the
amounts due to our company from Administradora Corporativa y
Mercantil, S.A. de C.V., Durango Paper Company and Durango Georgia
Receivables Company. The effects of these decreases in our consolidated current assets was partially
offset by (1) a Ps 412.3 million increase in our cash and temporary
investments, and (2) a Ps 92.1 million increase in trade accounts receivable,
net principally as a result of a 133.3% increase in recoverable taxes as a
result of our payment of income tax installments in excess of the amounts due,
and a 78.8% increase in other trade accounts receivable. Our consolidated current liabilities increased by Ps 1,666.9 million to Ps
11,547.7 million at December 31, 2003 compared to Ps 9,880.8 million at
December 31, 2002. The increase in our consolidated current liabilities was
largely due to (1) a Ps 939.7 million increase in our short-term debt as a
result of the reclassification of certain debt owed by our company to
Bancomext, and (2) a Ps 918.5 million increase in our accrued interest as a
result of our failure to pay interest payments due on our unsecured
indebtedness during 2003. The effects of these increases was partially offset
by a Ps 157.3 million decrease in the current portion of long-term debt, and a
Ps 127.4 million decrease in current liabilities of discontinued operations,
principally as a result of the sale of our molded products division and Pronal. - 54 -




---



##### Table of Contents



Changes in Financial Position Net Resources Generated (Used) by Operating Activities Net resources used by operating activities was Ps 441.9 million in 2003
and Ps 157.6 million in 2002, and net resources generated by operating
activities was Ps 1,029.1 million in 2001. The significant factors that led to
the use of net resources from operating activities in 2003 were (1) our
consolidated net loss, net of items that not requiring or generating resources
of Ps 1,245.5 million; (2) the net loss of Ps 178.7 million by discontinued
operations, net of items not requiring the use of resources; (3) a Ps 90.4
million increase in trade accounts receivable, net principally as a result of
the increase in recoverable taxes; and (4) a Ps 81.6 million decrease in other,
net resulting from an increase in deferred income of Grupo Pipsamex. The effects of these items were partially offset by:  
    
    a Ps 918.5 million increase in interest payable as a result
of our failure to pay interest payments due on our unsecured
indebtedness during 2003;  
    
    a Ps 86.2 million increase in trade accounts payable
resulting from our decision to delay payments to certain of our
trade creditors and provide fewer days of credit in order to
conserve our cash resources;  
    
    a Ps 75.3 million decrease in liabilities of discontinued
operations principally resulting from the sale of our molded
products division and Pronal; and  
    
    a Ps 48.3 million decrease in inventories resulting from a
decrease in spare parts and finished products. The significant factors that led to the use of net resources from
operating activities in 2002 were (1) our consolidated net loss, net of items
that not requiring or generating resources of Ps 525.2 million; (2) a Ps 353.8
million decrease in trade accounts payable resulting from the sale of Durango
Paper Company; (3) a Ps 155.6 million increase in assets of discontinued
operations principally resulting from an increase in accounts receivable of
Grupo Pipsamex; and (4) a Ps 113.5 million decrease in liabilities of
discontinued operations. The effects of these items were partially offset by:  
    
    a Ps 451.8 million decrease in trade accounts receivable, net
resulting from the sale of Durango Paper Company;  
    
    a Ps 244.3 million decrease in inventories resulting from the
sale of Durango Paper Company;  
    
    a Ps 158.8 million increase in interest payable as a result
of our failure to pay interest payments due on our unsecured
indebtedness after November 29, 2002; and  
    
    the net income of Ps 129.6 million of discontinued
operations, net of items not requiring the use of resources. The significant factors that led to the generation of net resources from
operating activities in 2001 were (1) our consolidated net income, net of items
that not requiring or generating resources of Ps 866.4 million; (2) a Ps 933.0
million decrease in inventories principally resulting from a reduction in our
finished procucts inventory and merchandise in transit; (3) a Ps 131.2 million
decrease in assets of discontinued operations principally resulting from an
increase in inventories of Grupo Pipsamex; and (4) the net income of Ps 114.9
million of discontinued operations, net of items not requiring the use of
resources. The effects of these items were partially offset by:  
    
    a Ps 350.5 million decrease in trade accounts payable
primarily resulting from increased trade accounts payable of Grupo
Pipsamex; - 55 -




---



##### Table of Contents




    
    a Ps 317.9 million of non-cash extraordinary items; and  
    
    a Ps 163.7 million decrease in accrued expenses and taxes. Net Resources Used in Financing Activities Financing activities used net resources of Ps 55.8 million in 2003,
provided net resources of Ps 848.7 million in 2002, and used net resources of
Ps 550.0 million in 2001. In 2003, net resources used by financing activities
on a consolidated basis primarily consisted of leases and some secured debt
payments. In 2002, net resources generated by financing investing activities on a
consolidated basis primarily consisted of our incurrence of:  
    
    the 2009 notes in an aggregate principal amount of US$175.0
million (Ps 1,966.5 million);  
    
    US$22.0 million (Ps 247.2 million) of indebtedness under the
Bank of America, N.A. loan agreement; and  
    
    US$24.0 million (Ps 269.7 million) of indebtedness under the
Bank of Albuquerque loan agreement. In 2002, in addition to scheduled amortizations under our outstanding debt:  
    
    we repurchased US$103.5 million (Ps 1,162.8 million) of our 12 5/8% Senior Notes due 2003;  
    
    we prepaid US$19.6 million (Ps 220.2 million) of our outstanding debt to Banamex; and  
    
    we prepaid US$3.9 million (Ps 43.8 million) of our outstanding debt to California Commerce Bank. In 2001, net resources generated by financing activities on a consolidated
basis primarily consisted of our incurrence of the 2006 notes in an aggregate
principal amount of US$ 180.0 million (Ps 2,022.7 million); In 2001, in addition to scheduled amortizations under our outstanding debt:  
    
    we repurchased US$150.0 million (Ps 1,685.6 million) of our 12% Senior Notes due 2001;  
    
    we prepaid US$22.0 million (Ps 247.2 million) of our outstanding debt to Banamex; and  
    
    we prepaid US$8.0 million (Ps 89.9 million) of our outstanding debt to JPMorgan Chase. Net Resources Used in Investing Activities Investing activities generated net resources of Ps 910.1 million in 2003,
and used net resources of Ps 990.6 million in 2002, and Ps 797.6 million in
2001. In 2003, net resources generated by investing activities on a
consolidated basis primarily consisted of (1) Ps. 924.6 million received as
proceeds from the sale of our molded products division and Pronal, and (2) Ps
231.1 million received as proceeds from the sale of property, plant and
equipment, primarily Grupo Pipsamexs Mexico City warehouse. The effects of
these transactions were partially offset by the restrictions placed on Ps 157.5
million of the proceeds of the sales of Pronal and Grupo Pipsamexs Mexico City
warehouse and our acquisition of machinery and equipment for Ps 106.7 million. In 2002, net resources used in investing activities on a consolidated
basis primarily consisted of our acquisition of machinery and equipment for Ps
459.6 million, our acquisition of other assets for Ps 379.4 million, and our
investment of Ps 212.9 million in our subsidiaries, due to our sale of Durango
Paper Company. - 56 -




---



##### Table of Contents



In 2001, net resources used in investing activities on a consolidated
basis primarily consisted of our acquisition of machinery and equipment for Ps
846.6 million and our acquisition of other assets for Ps 261.5 million. The
effects of these transactions were partially offset by receipt of Ps 310.6
million as proceeds from the sale of property, plant and equipment, primarily
the assets comprising the Eastman and Sky divisions of Durango Paper Company. Indebtedness At December 31, 2003, our total outstanding indebtedness on a consolidated
basis was Ps 9,197.2 million, consisting of Ps 8,686.7 million of short-term
indebtedness (or 94.4% of our total indebtedness), including current portion of
long-term indebtedness, and Ps 510.5 million of long-term indebtedness (or 5.6%
of our total indebtedness). On a consolidated basis, our indebtedness at December 31, 2003 consisted
of foreign currency-denominated indebtedness of Ps 9,197.2 million. The
weighted average interest rate on our indebtedness was 10.8% in 2003, 10.9% in
2002 and 10.4% in 2001. Short-Term Indebtedness We have not made the payments of principal or interest on our unsecured
debt since November 29, 2002. As a result, an aggregate principal amount of
US$ 604.9 million (Ps 6,797.8 million) of our unsecured debt was past due on
December 31, 2003 and has been recorded as short-term indebtedness as of
December 31, 2003. As a result of our interest payment defaults, the creditors under our
unsecured debt that is not past due have had the right to accelerate the
outstanding principal on this unsecured debt, thereby requiring the immediate
repayment of the entire principal amount. In these circumstances, Mexican GAAP
requires that these liabilities be classified as current liabilities. As a
result, we have classified the aggregate principal amount of US$117.8 million
(Ps 1,324.2 million) of this unsecured debt as short-term indebtedness as of
December 31, 2003. We have not made the interest payments on our existing notes since
November 29, 2002. As a result, the trustee or the holders of at least 25% of
the principal amount of each series of our existing notes have had the right to
accelerate the outstanding principal on our these existing notes, thereby
requiring the immediate repayment of the entire principal amount. In these
circumstances, Mexican GAAP requires that these liabilities be classified as
current liabilities. As a result, we have classified the aggregate principal
amount of US$487.1 million (Ps 5,473.6 million) of our existing notes as
short-term indebtedness as of December 31, 2003. - 57 -




---



##### Table of Contents



Long-Term Indebtedness The following table sets forth selected information with respect to
certain of our principal outstanding long-term debt instruments at December 31,
2003. OutstandingPrincipal Amount atInstrument
    
    December 31, 2003
    
    Final MaturityECP Note
    
    US$
    5.0 million
    
    
    February 20032003 Notes
    
    US$
    18.2 million
    
    
    August 20032006 Notes
    
    US$
    301.7 million
    
    
    August 20062008 Notes
    
    US$
    10.4 million
    
    
    August 20082009 Notes
    
    US$
    175.0 million
    
    
    July 200910% HG Estate Note
    
    US$
    30.0 million
    
    
    December 200413% HG Estate Note
    
    US$
    6.0 million
    
    
    April 200310% HG Estate Note
    
    US$
    12.1 million
    
    
    December 2002Banamex Loan
    
    US$
    75.3 million
    
    
    September 2004Banamex Promissory Note
    
    US$
    5.1 million
    
    
    December 2002First California Commerce Bank Loan
    
    US$
    11.7 million
    
    
    January 2003Second California Commerce Bank Loan
    
    US$
    12.5 million
    
    
    May 2004JPMorgan Chase Loan
    
    US$
    10.0 million
    
    
    December 2002Bank of America, N.A. Loan Agreement Guarantee
    
    US$
    17.0 million
    
    
    December 2002First JPMorgan Chase Letter of Credit
    
    US$
    2.6 million
    
    
    April 2000Second JPMorgan Chase Letter of Credit
    
    US$
    2.4 million
    
    
    April 2000Bank of America, N.A. Letter of Credit
    
    US$
    1.7 million
    
    
    December 2003Bancomext Loan
    
    US$
    62.9 million
    
    
    January 2009Bancomext Fabrica Mexicana Loan
    
    US$
    10.8 million
    
    
    September 2009Bank of Albuquerque Loan
    
    US$
    18.0 million
    
    
    May 2008Commerzbank Loan
    
    
    10.0 million
    
    
    January 2010NAFIN Loan
    
    Ps
    2.5 million
    
    
    May 2005Arrendadora Bank of America, N.A. Leases
    
    US$
    9.1 million
    
    
    August 2005GE Capital Leasing Leases
    
    US$
    8.3 million
    
    
    April 2009
 Our Notes ECP Note. As of December 31, 2003, we had one series of notes outstanding
under our Euro Commercial Paper Program in an aggregate amount of US$5.0
million (Ps 56.2 million). On February 12, 2003, we failed to make the
principal payment due. The overdue amounts are currently the subject of a
litigation action with the holders of these notes. See Item 8. Financial
Information  Legal Proceedings. Notes under our Euro Commercial Paper
Program are issued under an Issuing and Paying Agency Agreement, dated as of
October 4, 2001, among us, JPMorgan Chase Bank and JPMorgan Chase Bank, London
Branch. 2003 Notes. As of December 31, 2003, we had outstanding US$18.2 million
(Ps 204.9 million) aggregate principal amount of our 2003 notes. The 2003
notes were issued under an indenture, dated as of July 25, 1996, between us and
Wells Fargo Bank, National Association, as amended and supplemented. In August
2001, we issued US$121.7 million of our 2006 notes and US$10.4 million of our
2008 notes in exchange for US$128.3 million of our outstanding 2003 notes. In
connection with this exchange, we obtained the consent of the holders of our
2003 notes to the elimination of the restrictive covenants contained in the
indenture governing the 2003 notes. The 2003 notes matured on August 1, 2003
and have not been paid. 2006 Notes. As of December 31, 2003, we had outstanding US$301.7 million
(Ps 3,390.7 million) aggregate principal amount of our 2006 notes. The 2006
notes were issued under an indenture, dated as of February 5,2001, between us
and Wells Fargo Bank, National Association, as amended and supplemented. The
2006 notes mature on August 1, 2006 and pay interest semiannually. We issued
US$180 million aggregate principal amount of our 2006 notes in February 2001
and used the proceeds thereof to, among other things, repurchase all of our
outstanding 12% Senior Notes due 2001. In August 2001, we issued an additional
US$121.7 million aggregate principal amount of our 2006 notes in exchange for
US$118.2 million of our 2003 notes as described above. On June 24, 2002,
payments due on the 2006 notes were guaranteed, jointly and severally on an
unsecured basis, by our subsidiaries, Titán, Atenquique, Ponderosa and
Centauro. We have not made interest payments on the 2006 notes since - 58 -




---



##### Table of Contents



November 29, 2002. As of December 31, 2003, the aggregate amount of due
and unpaid interest of the 2006 notes was US$56.2 million (Ps 631.5 million).
As a result, the 2006 notes are in default. 2008 Notes. As of December 31, 2003, we had outstanding US$10.4 million
(Ps 116.5 million) aggregate principal amount of our 2008 notes. The 2008
notes were issued under an indenture, dated as of September 13, 2001, between
us and Wells Fargo Bank, National Association, as amended and supplemented.
The 2008 notes mature on August 1, 2008 and pay interest semiannually. We
issued US$10.4 million aggregate principal amount of our 2008 notes in August
2001 in exchange for US$10.1 million of our 2003 notes as described above. On
June 24, 2002, payments due on the 2008 notes were guaranteed, jointly and
severally on an unsecured basis, by our subsidiaries, Titán, Atenquique,
Ponderosa and Centauro. We have not made interest payments on the 2008 notes
since November 29, 2002. As of December 31, 2003, the aggregate amount of due
and unpaid interest of the 2008 notes was US$2.0 million (Ps 22.5 million). As
a result, the 2008 notes are in default. 2009 Notes. As of December 31, 2003, we had outstanding US$175.0 million
(Ps 1,966.5 million) aggregate principal amount of our 2009 notes. The 2009
notes were issued under an indenture, dated as of June 24, 2002, between us and
Wells Fargo Bank, National Association, as amended and supplemented. The 2009
notes mature on July 15, 2009 and pay interest semiannually. We issued
US$175.0 million aggregate principal amount of our 2009 notes in June 2002 and
used the proceeds thereof to, among other things, repurchase US$103.5 million
of our outstanding 2003 notes. Payments due on the 2009 notes were initially
guaranteed, jointly and severally on an unsecured basis, by our subsidiaries,
Titán, Atenquique, Ponderosa and Centauro. We have not made interest payments
on the 2009 notes. As of December 31, 2003, the aggregate amount of due and
unpaid interest of the 2009 notes was US$36.6 million (Ps 411.3 million). As a
result, the 2009 notes are in default. HG Estate Notes. As of December 31, 2003, we had outstanding US$48.1
million (Ps 540.5 million) aggregate principal amount under three promissory
notes issued in exchange for subordinated promissory notes issued by Durango
Paper Company in connection with our acquisition of Gilman Paper Company.
These notes were issued in the same principal amounts as the notes refinanced
and are on identical terms, except that they are not guaranteed or
subordinated. The first of these notes, in the principal amount of US$30.0 million (Ps
337.1 million), was issued to HG Estate, LLC and St. Marys Railroad
Corporation, matures on December 17, 2004 and bears interest at a rate of 10%
per annum payable semiannually. We have not made interest payments on this
note since November 29, 2002. As of December 31, 2003, the aggregate amount of
due and unpaid interest of this note was US$4.6 million (Ps 51.7 million). As
a result, this note is in default. The second of these notes, in the principal amount of US$6.0 million (Ps
67.4 million) and was issued to HG Estate, LLC. This note bears interest at a
rate of 13.0% per annum payable semiannually. This note matured in April 2003
and has not been paid. As of December 31, 2003, the aggregate amount of due
and unpaid interest of this note was US$0.9 million (Ps 10.1 million). The last of these notes has a principal amount of US$12.1 million (Ps
136.0 million) and was issued to HG Estate, LLC. This note bears interest at a
rate of 10% per annum payable semiannually. This note matured in December 2002
and has not been paid. As of December 31, 2003, the aggregate amount of due and
unpaid interest of this note was US$1.9 million (Ps 21.4 million). We are
currently engaged in arbitration challenging the validity of these three
promissory notes. See Item 8. Financial Information  Legal Proceedings. For a description of the payment defaults on our notes, see Item 13.
Defaults, Dividend Arrearages and Delinquencies. Our Unsecured Bank Debt and Guarantees Banamex Loan. We borrowed an aggregate principal amount of US$94 million
(Ps 1,056.3 million) from Banamex under a loan agreement. This loan is payable
in 10 quarterly installments beginning in June 2002 and bears interest at a
rate of LIBOR + 2.8% payable quarterly. Payments due under this loan were
initially guaranteed, jointly and severally on an unsecured basis, by our
subsidiaries, Titán, Atenquique, Ponderosa and Centauro. As of - 59 -




---



##### Table of Contents



December 31, 2003, the
outstanding principal amount under this loan was US$75.3 million (Ps 846.6
million). We have not made principal or interest payments under this loan
since November 29, 2002. As of December 31, 2003, the aggregate amount of due
and unpaid principal under this loan was US$31.9 million (Ps 358.5 million) and
the aggregate amount of due and unpaid interest under this loan was US$4.2
million (Ps 47.2 million). As a result, this loan is in default. Banamex Note. We borrowed an aggregate principal amount of US$7.3 million
(Ps 82.0 million) from Banamex under a promissory note. This promissory note
matured in December 2002 and bears interest at a rate of 5.2% per annum payable
semi-annually. Payments due under this promissory note were initially
guaranteed, jointly and severally on an unsecured basis, by our subsidiaries,
Titán, Atenquique, Ponderosa and Centauro. As of December 31, 2003, the
outstanding principal amount under this promissory note was US$5.1 million (Ps
57.3 million). We have not made principal or interest payments under this
promissory note since November 29, 2002. As of December 31, 2003, the
aggregate amount of due and unpaid interest under this promissory note was
US$0.4 million (Ps 4.5 million). As a result, this promissory note is in
default. California Commerce Bank Loans. We borrowed an aggregate principal amount
of US$26.7 million (Ps 299.8 million) from California Commerce Bank under two
loan agreements. The first California Commerce Bank loan agreement in the
principal amount of US$11.7 million (Ps 131.3 million) bears interest at a rate
of LIBOR +2.75%. The first California Commerce Bank loan agreement matured in
January 2003 and has not been paid. The second California Commerce Bank loan
agreement in the amount of US$15.0 million (Ps 168.6 million) bears interest at
a rate of LIBOR + 3.25%. The second California Commerce Bank loan agreement
matured in May 2004 and has not been paid. We have not made principal or
interest payments under the California Commerce Bank loan agreements since
November 29, 2002. Our obligations under both California Commerce Bank loan
agreements were initially guaranteed by our subsidiary, Centauro. As of
December 31, 2003, the aggregate amount of due and unpaid principal under the
California Commerce Bank loan agreements was US$16.7 million (Ps 187.4 million)
and the aggregate amount of due and unpaid interest under the California
Commerce Bank loan agreements was US$1.3 million (Ps 14.3 million). JPMorgan Chase Loan. We borrowed an aggregate principal amount of US$50.0
million (Ps 561.9 million) from JPMorgan Chase Bank (f/k/a Chase Manhattan
Bank) under a loan agreement. The JPMorgan Chase loan agreement is payable in
five semiannual installments beginning in December 2000 and bears interest at a
rate of LIBOR + 1.5% payable quarterly. On June 24, 2002, our obligations
under this loan were guaranteed, jointly and severally on an unsecured basis,
by our subsidiaries, Titán, Atenquique, Ponderosa and Centauro. As of December
31, 2003, the outstanding principal amount under this loan was US$10.0 million
(Ps 112.4 million). This loan matured in December 2002 and was not paid. As of
December 31, 2003, the aggregate amount of due and unpaid interest under this
loan was US$0.5 million (Ps 5.6 million). Bank of America, N.A. Loan. Our former subsidiary, Durango Georgia
Receivables Company, borrowed an aggregate principal amount of US$22.0 million
(Ps 247.2 million) from Bank of America, N.A. under a loan agreement. This
loan is payable in five monthly installments beginning in August 2002, and
bears interest at a rate of LIBOR + 3.0%. We guaranteed this loan. Durango
Georgia Receivables Company filed for protection from its creditors under
chapter 11 of the U.S. bankruptcy code in November 2002. Bank of America, N.A.
called our guarantee in February 2003. As a result, the obligations under this
loan have been recorded as indebtedness of our company in our financial
statements. As of December 31, 2003, the aggregate amount of due and unpaid
principal under this loan was US$17.0 million (Ps 191.0 million) and the
aggregate amount of due and unpaid interest under this loan was US$0.9 million
(Ps 10.1 million). As a result, our guarantee of the obligations under this
loan is in default. First JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank) issued a letter of credit to SunTrust Leasing Corporation in
the aggregate principal amount of US$2.6 million (Ps 29.4 million) for the
benefit of our former subsidiary, Durango Georgia Paper Company. This letter
of credit was drawn on April 19, 2000. We guaranteed Durango Georgia Paper
Companys reimbursement obligation under this letter of credit. Durango
Georgia Paper Company filed for protection from its creditors under chapter 11 of the U.S. bankruptcy code in November 2002.
JPMorgan Chase Bank called our guarantee on January 15, 2003. As a result, the
reimbursement obligation under the letter of credit has been recorded as
indebtedness of our company in our financial statements. Under the terms of
the reimbursement agreement, past due obligations under the -60-




---



##### Table of Contents



reimbursement
agreement bear interest at a rate of 7.25% per annum. As of December 31, 2003,
the aggregate amount of due and unpaid principal under this reimbursement
obligation was US$2.6 million (Ps 29.4 million) and the aggregate amount of due
and unpaid interest under this reimbursement obligation was US$0.1 million (Ps
1.1 million). As a result, our guarantee of the reimbursement obligations
under this letter of credit is in default. Second JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase
Manhattan Bank) issued a letter of credit to Pitney Bowes Credit Corporation in
the aggregate principal amount of US$3.1 million (Ps 34.8 million) for the
benefit of our former subsidiary, Durango Georgia Paper Company. This letter
of credit was drawn on April 19, 2000. We guaranteed Durango Georgia Paper
Companys reimbursement obligation under this letter of credit. Durango
Georgia Paper Company filed for protection from its creditors under chapter 11
of the U.S. bankruptcy code in November 2002. JPMorgan Chase Bank called our
guarantee on January 15, 2003. As a result, the reimbursement obligation under
this letter of credit has been recorded as indebtedness of our company in our
financial statements. Under the terms of the reimbursement agreement, past
due obligations under the reimbursement agreement bear interest at a rate of
7.25% per annum. As of December 31, 2003, the aggregate amount of due and
unpaid principal under this reimbursement obligation was US$2.4 million (Ps
26.6 million) and the aggregate amount of due and unpaid interest under this
reimbursement obligation was US$0.1 million (Ps 1.1 million). As a result, our
guarantee of the reimbursement obligations under this letter of credit is in
default. Bank of America, N.A. Letter of Credit. Bank of America, N.A. issued a
letter of credit to Lumbermans Underwriting Alliance in the aggregate
principal amount of US$2.5 million (Ps 28.1 million) for the benefit of our
former subsidiary, Durango Georgia Paper Company. This letter of credit was
drawn on December 31, 2002. Our subsidiary, Grupo Pipsamex, guaranteed Durango
Georgia Paper Companys reimbursement obligation under this letter of credit.
Durango Georgia Paper Company filed for protection from its creditors under
chapter 11 of the U.S. bankruptcy code in November 2002. Bank of America, N.A.
called our guarantee on February 25, 2003. As a result, the reimbursement
obligation under this letter of credit has been recorded as indebtedness of our
company in our financial statements. As of December 31, 2003, the aggregate
amount of due and unpaid principal under this reimbursement obligation was
US$1.7 million (Ps 18.6 million) and the aggregate amount of due and unpaid
interest under this reimbursement obligation was US$0.2 million (Ps 2.2
million). We reimbursed Bank of America, N.A. for its payment of this letter
of credit on March 31, 2004. Our Secured Bank Debt Bancomext Loans. Our subsidiary, Grupo Pipsamex, borrowed an aggregate
principal amount of US$80.0 million (Ps 899.0 million) from Bancomext under a
loan agreement. This loan is payable in 14 semiannual installments beginning
in July 2002 and bears interest at a rate of LIBOR +7% payable semiannually.
This loan is secured by a first priority security interest in all of the assets
of Grupo Pipsamex and its subsidiaries. As of December 31, 2003, the aggregate
amount of due and unpaid principal under this loan agreement was US$5.7 million
(Ps 64.2 million) and the aggregate amount of due and unpaid interest under
this loan agreement was US$0.7 million (Ps 7.9 million). We are negotiating the
restructuring of this loan with Bancomext. As of December 31, 2003, the
aggregate principal amount outstanding under this loan agreement was US$62.9
million (Ps 706.3 million). As of December 31, 2003, the aggregate amount of
due and unpaid principal was US$5.7 million (Ps 64.2 million) and the aggregate
amount of due and unpaid interest was US$0.7 million (Ps 7.9 million). Our subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an
aggregate principal amount of US$15.4 million (Ps 173.1 million) from Bancomext
under a loan agreement. This loan is payable in 14 semiannual installments
beginning in March 2003 and bears interest at a rate of LIBOR +6.5% payable
semiannually (plus such additional amounts as are necessary for Bancomext to
receive interest at such rate after the payment of its income taxes). This
loan is secured by a second priority security interest in all of the assets of
Fábrica Mexicana de Papel, S.A. de C.V. and is guaranteed by CODUSA. We are
negotiating the restructuring of this loan with Bancomext. As of December 31, 2003,
the aggregate principal amount outstanding under this loan agreement was
US$10.8 million (Ps 121.2 million). Bank of Albuquerque Loan. Our subsidiary, Durango McKinley Paper Company,
borrowed an aggregate principal amount of US$24.0 million (Ps 269.7 million)
from the Bank of Albuquerque under a loan agreement. In addition, the Bank of
Albuquerque has issued letter of credits in an aggregate amount of US$10.5
million (Ps 118.0 million) under this loan agreement. This loan agreement was
used to refinance a credit facility that our former -61-




---



##### Table of Contents



subsidiary, Durango Paper
Company, had with the Bank of America, N.A. The principal on the term loan is
payable in 24 quarterly installments beginning August 2002 and bears interest
at a rate of LIBOR + 2.75%. The obligations of Durango McKinley Paper Company
under the Bank of Albuquerque loan agreement are secured by the accounts,
inventory and equipment of Durango McKinley Paper Company and its real property
located in Houston, Texas, Mesquite, Texas and Prewitt, New Mexico. In
addition, the obligations are guaranteed by Durango International, Inc. As of
December 31, 2003, the aggregate principal amount outstanding under this loan
agreement was US$18.0 million (Ps 202.3 million). Commerzbank Loan. Our subsidiary, Ponderosa, borrowed an aggregate
principal amount of 10.7 million (Ps 107.9 million) from AKA
Ausfuhrkredit-Gesellschaft m.b.H., or Commerzbank, under a loan agreement.
This loan is payable in 15 semi-annual installments beginning in January 2003
and bears interest at a rate of EUROLIBOR + 1.15%. The obligations of
Ponderosa under this loan agreement are secured by the certain equipment of
Ponderosa acquired with the proceeds of this loan. In addition, the
obligations are guaranteed by CODUSA. As of December 31, 2003, the aggregate
principal amount outstanding under this loan was 10.0 million (Ps 141.4
million). NAFIN Loan. Our subsidiary, Atenquique, borrowed an aggregate principal
amount of Ps 8.8 million (US$0.8 million) from Nacional Financiera, S.N.C., or
NAFIN, under a loan agreement. This loan is payable in 96 quarterly
installments beginning in August 1981 and bears interest at a rate of LIBOR+
0.8125%. This loan is secured by a first priority security interest in certain
equipment and fixtures of Atenquique. As of December 31, 2003, the aggregate
principal amount outstanding under this loan agreement was Ps 2.5 million
(US$0.2 million). For a description of the payment defaults on our bank debt, see Item 13.
Defaults, Dividend Arrearages and Delinquencies. Our Capital Leases Arrendadora Bank of America, N.A. Leases. We have entered into financial
lease agreements with Arrendadora Bank of America, S.A. for the acquisition of
certain machinery. We issued promissory notes in respect of the future minimum
lease payments under these financial lease agreements in an aggregate principal
amount of US$17.3 million (Ps 194.7 million) with maturities between February
2005 and August 2005. The promissory notes bear interest at rates ranging from
LIBOR +3.0% to LIBOR +3.5% payable quarterly and are secured by a pledge of
the leased machinery. We have sub-leased the machinery to certain of our
subsidiaries. As of December 31, 2003, the aggregate principal amount
outstanding under these promissory notes was US$9.1 million (Ps 101.7 million). GE Capital Leasing Leases. Our subsidiary, Titán, has entered into
financial lease agreements with GE Capital Leasing for the acquisition of
machinery. Titán issued two promissory notes in respect of the future minimum
lease payments under these financial lease agreements in an aggregate principal
amount of US$9.3 million (Ps 104.5 million) which are payable in 28 quarterly
installments with the final payments due in October 2008 and April 2009,
respectively. The promissory notes bear interest at a rate of LIBOR +3.25%.
The promissory notes are secured by a pledge of the leased machinery and are
guaranteed by CODUSA. As of December 31, 2003, the aggregate principal amount
outstanding under these promissory notes was US$8.3 million (Ps 93.0 million). Restrictive Covenants and Available Credit The instruments governing our indebtedness contain financial and other
covenants that restrict, among other things, the ability of our company and
most of our subsidiaries to:  
    
    incur additional indebtedness;
    
    incur liens;
    
    issue guarantees;
    
    issue or sell capital stock of subsidiaries; -62-




---



##### Table of Contents




    
    pay dividends or make certain other restricted payments;
    
    consummate certain asset sales;
    
    enter into certain transactions with affiliates, or
    
    merge or consolidate with any other person or sell or
otherwise dispose of all or substantially all of our assets. The indentures governing our 2006 notes, 2008 notes and 2009 notes also
require prepayments of the indebtedness from the proceeds from certain asset
sales, insurance, and incurrence of certain indebtedness. Our failure to
comply with the restrictions contained in these indentures constitutes an event
of default, which could result in an acceleration of such indebtedness. Such
acceleration may also constitute an additional event of default under some of
our unsecured debt. We must maintain minimum debt service, minimum net worth and maximum
leverage ratios under the Banamex loan agreement, the JPMorgan Chase Bank loan
agreement and the Bank of Albuquerque loan agreement. Our failure to comply
with the restrictions contained in these loan agreements constitutes an event
of default, which could result in an acceleration of such indebtedness. Such
acceleration may also constitute an additional event of default under the
indentures governing our 2003 notes, 2006 notes, 2008 notes and 2009 notes. The above covenants, together with our highly leveraged position, have
restricted, and will continue to restrict, our corporate activities, including
our ability to respond to market conditions, to provide for unanticipated
capital expenditures or to take advantage of business opportunities. Off-Balance Sheet Arrangements We have not entered into any transactions, agreements or other contractual
arrangements to which an entity unconsolidated with our company is a party,
under which we have:  
    
    any obligation under a guarantee contract that has any of the
characteristics identified in paragraph 3 of FASB Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
(November 2002), or FIN 45, as it may be modified or supplemented,
excluding the types of guarantee contracts described in paragraphs 6
and 7 of FIN 45;
    
    a retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such assets;
    
    any obligation under a derivative instrument that is both
indexed to our stock and classified in our stockholders equity, or
not reflected, in our statement of financial position; or
    
    any obligation, including a contingent obligation, arising
out of a variable interest (as referenced in FASB Interpretation No.
46, Consolidation of Variable Interest Entities (January 2003), as
it may be modified or supplemented, in an unconsolidated entity that
is held by, and material to, our company, where such entity provides
financing, liquidity, market risk or credit risk support to, or
engages in leasing, hedging or research and development services
with, our company. -63-




---



##### Table of Contents



Contractual Commitments and Capital Expenditures Contractual Commitments The following table summarizes significant contractual obligations and
commitments at December 31, 2003 that have an impact on our liquidity: 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalPs millionIndebtedness
    
    Ps
    8,611.6
    
    
    Ps
    88.1
    
    
    Ps
    90.5
    
    
    Ps
    89.9
    
    
    Ps
    67.4
    
    
    Ps
    55.0
    
    
    Ps
    9,002.5Capital leases
    
    
    75.1
    
    
    
    60.3
    
    
    
    17.8
    
    
    
    17.8
    
    
    
    17.8
    
    
    
    5.8
    
    
    
    194.7Operating leases
    
    
    23.6
    
    
    
    18.7
    
    
    
    18.7
    
    
    
    18.7
    
    
    
    13.2
    
    
    
    63.4
    
    
    
    156.3Purchase obligations (1)
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    53.0
    
    
    
    68.0Total contractual obligations
    
    Ps
    8,713.3
    
    
    Ps
    170.1
    
    
    Ps
    130.0
    
    
    Ps
    129.4
    
    
    Ps
    101.4
    
    
    Ps
    177.2
    
    
    Ps
    9,421.5
   (1)
    
    Consists of purchase commitments for electric power pursuant to binding
obligations which include all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Based upon the
applicable purchase prices at December 31, 2003. Our subsidiaries lease certain equipment under noncancelable operating
leases. Estimated future minimum lease payments under noncancelable operating
leases as of December 31, 2003 are included in operating leases in the table
above. Capital Expenditures Our capital expenditures on property, plant and equipment were Ps 106.7
million in 2003, Ps 459.6 million in 2002 and Ps 846.6 million in 2001. Our
principal capital expenditures projects during 2001 through 2003 included:  
    
    Ps 115.9 million for the installation of deinking equipment at
Fábrica Mexicana de Papel, S.A. de C.V.s plant, which was completed in
2001;  
    
    Ps 320.0 million for the expansion of Titáns corrugating plant in
Tepatitlan, Jalisco, which was completed in 2002;  
    
    Ps 249.5 million for the installation of a new particleboard press
at one of Ponderosas plant, which was completed in 2002; and  
    
    Ps 146.5 million for the installation of Durango McKinley Paper
Companys BHS corrugating plant in Dallas, Texas, which was completed
in 2003. We have instituted a capital investment program to help our overall
operations and have implemented a series of measures to improve efficiency and
to increase capacity at our paper mills. In addition, we have made capital expenditures to bring our plants into proper compliance with
environmental regulations with the latest technology. However, as a result of
our liquidity crisis, we have been required to reduce the scope of our planned
capital expenditures. The following table sets forth our capital expenditures for the periods
indicated and sets forth our capital expenditures and capital commitments for
environmental matters: -64-




---



##### Table of Contents



Years Ended December 31,2004
    
    20052001
    
    2002
    
    2003
    
    Estimated
    
    Estimated(in millions of constant pesos)Capital
expenditures (other
than environmental)
    
    Ps
    825.5
    
    
    Ps
    450.9
    
    
    Ps
    101.4
    
    
    Ps
    126.8
    
    
    Ps
    126.8Environmental
capital
expenditures
    
    
    21.1
    
    
    
    8.7
    
    
    
    5.3
    
    
    
    8.0
    
    
    
    8.8Total
    
    Ps
    846.6
    
    
    Ps
    459.6
    
    
    Ps
    106.7
    
    
    Ps
    134.8
    
    
    Ps
    134.8
 Our loan agreements and the indentures governing our debt securities
contain significant restrictions on our ability to make capital expenditures.
We currently are budgeting total capital expenditures of approximately Ps 134.8
million for 2004 and Ps 134.8 million for 2005. Our principal capital
expenditures for 2004 consist of maintenance projects, efficiency enhancement
projects and cost reduction projects. We expect to finance our capital expenditure plan with internally
generated cash and supplier financing. No assurance can be given that we will
be able to meet our capital expenditure budget. Differences between Mexican GAAP and U.S. GAAP Our consolidated financial statements are prepared in accordance with
Mexican GAAP. Mexican GAAP differs in significant respects from U.S. GAAP.
For more information about the differences between Mexican GAAP and U.S. GAAP
and a reconciliation to U.S. GAAP of our consolidated net income (loss) and
total stockholders equity as of December 31, 2003 and 2002 and for each of the
three years in the period ended December 31, 2003, see notes 24 and 25 to our
consolidated financial statements. It should be noted that our reconciliation
to U.S. GAAP does not include the reversal of the restatement of the financial
statements as required by Bulletin B-10, Reconocimiento de los Efectos de la
Inflacion en la Informacion Financiera (Recognition of the Effects of
Inflation in the Financial Information), of Mexican GAAP, since the application
of this bulletin represents a comprehensive measure of the effects of
price-level changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting in
Mexican pesos for both Mexican and U.S. accounting purposes. 
 Item 6. Directors, Senior Management and Employees. Directors and Senior Management Our board of directors is responsible for the management of our business.
Our bylaws (estatutos sociales)provide that the board of directors will
consist of the number of directors and alternate directors elected by our
stockholders at the annual ordinary general meeting, each of whom is elected
for a term of one year. Pursuant to our bylaws, alternate directors may be appointed by our
stockholders to serve on the board of directors in place of directors who are
unable to attend meetings. If a member of our board is absent from a meeting,
a specific alternate director is called to serve as a director for such
meeting. Even when alternate directors are not substituting for a director,
they are invited to attend all board meetings. Our board of directors includes 11 directors, of whom four are independent
directors. No alternate directors were elected by our stockholders at the most
recent ordinary general meeting. The table below sets forth the members of our board of directors: Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chairman of the Board of Directors and Chief
Executive Officer
    
    
    1982José Antonio Rincón(1)
    
    Vice-Chairman of the Board of Directors and Chief
Operating Officer
    
    
    1982
 -65-




---



##### Table of Contents



Name
    
    Current Title
    
    SinceMayela Rincón de Velasco(1)
    
    Director, Vice President and Chief Financial Officer
    
    
    1982Jesús Rincón(1)
    
    Director
    
    
    1987Wilfrido Rincón(1)
    
    Director
    
    
    1987Ignacio Rincón(1)
    
    Director
    
    
    1987Ángel Del Palacio
    
    Director
    
    
    2001Alfonso Fernández De Castro
    
    Director
    
    
    2001Buenaventura G. Saravia
    
    Director
    
    
    2001Roberto Isaac Hernández
    
    Director
    
    
    2001Martín Rincón(1)
    
    Director
    
    
    2003
   (1)
    
    Miguel Rincón, José A. Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio
Rincón, Martin Rincón and Mayela Rincón de Velasco are siblings. The following is a summary of the business experience, areas of expertise
and principal outside business interests of our current directors. The
business address of each of our current directors is Torre Corporativa Durango,
Potasio 150, Ciudad Industrial, Durango, 34220 Durango, Mexico. Miguel Rincónhas been Chairman of the Board of Directors and Chief
Executive Officer of our company since 1982. He has been an active member of a
number of organizations in Mexico related to our industry, such as the Mexican
National Chamber for the Pulp and Paper Industry, the Por México Group, an
association of business leaders from all sectors, and the National Commission
on Commercial Agriculture (Comisión Nacional Agropecuaría Comercial).He
currently serves on a number of corporate boards in Mexico, including Banamex
and El Universal Compañía Periodística Nacional, S.A. de C.V. Jose Antonio Rincónhas been Vice-Chairman of the Board of Directors and
Chief Operating Officer of our company since 1982. Since 1988, he has been a
member of the Mexican National Chamber for the Pulp and Paper Industry and he
was its President from 2002 to 2003. From 1990 to 1998, he served as director
of Banco Santander, S.A. He is currently the president of Sector Privado
Empresarial de Durango, A.C. Mayela Rincón de Velascohas been a Director, Vice-President and Chief
Financial Officer of our company since 1982. From 1987 to 1994, she worked as
a professor of international finance in the Durango State University
(Universidad Juárez del Estado de Durango).She is an active member of MIPA
and the Association of Public Accountants (Colegio de Contadores Públicos de
Durango, A.C.). She is also a member of the philanthropic board of the General
Hospital of Durango (Hospital General de Durango). Jesús Rincónhas been a Director of our company since 1987. Since 1997,
he has been the general manager of Porteadores de Durango as well as the
general manager of Ponderosa. From 1995 to 1997, he served as the development
manager of our company. He is an active member of the Mexican National
Association of Particleboard Manufacturers (Asociación Nacional de Productores de Tableros y Aglomerados) and the Mexican Forest Industry
Association (Asociación Mexicana de la Industria Forestal). Wilfrido Rincónhas been a Director of our company since 1987. Since
2002, he has been the general manager of the paper division of Grupo Durango
and is currently the logistics managing director for domestic and imported raw
materials for our company. From 1997 to 1998, he served as general manager of
Ponderosa S.A. From 1994 to 1996 he worked as development manager of our
company. He also serves as president of the Mexican National Chamber of the
Forestry Industry (Consejo Consultivo Forestal Nacional)and vice-president of the Mexican National Chamber for
the Pulp and Paper Industry. He is an active member of the Mexican National
Association for Forestry (Asociación Nacional de Forestales). Ignacio Rincónhas been a Director of our company since 1987. Since 1999,
he has been the general manager of Titán. From 1998 to 1999, he worked as the
marketing manager of Titán. From 1994 to 1997, he worked as the planning
manager of our company. He is currently an active member of the Association of
Technicians in Pulp and Paper (Asociación de Técnicos de la Celulosa y del
Papel). Martín Rincónhas been a Director of our company since 1987. Since 2002,
he has been the general manager of Grupo Pipsamex. From 1997 to 1998, he was
the finance manager of McKinley Paper Company and was the supply manager of
Grupo Durango from 1995 to 1997. In 1999, he was the Vice President of the
Mexican National -66-




---



##### Table of Contents



Chamber for the Pulp and Paper Industry. He is currently a
member of the council of directors of the Mexican National Association of Paper
Distributors (Asociación Nacional de Distribuidores de Papel)and of the
Mexican National Book Association (Asociación Nacional de el Libro). Independent Members of the Board Ángel Del Palaciois an entrepreneur in the services sector and the
general manager of several automobile dealerships in the north of Mexico. He
has a bachelors degree in business and an MBA from the Monterrey Institute of
Technology (ITESM). Alfonso Fernández de Castrois an entrepreneur in the Mexican forest
industry. He is the founder and general manager of Grupo Forestal Alfa, one of
the principal companies in the Mexican forest industry. BuenaventuraG.Saraviais an entrepreneur in the cattle breeding industry
and the general manager of Empresas la Punta one of the principal exporters of
cattle from Mexico to the United States. He has a bachelors degree in business
from the Monterrey Institute of Technology (ITESM). Roberto Isaac Hernándezis an entrepreneur in the services sector and the
general manager of a chain of gas stations and supermarkets in the north of
Mexico. He has a bachelors degree in economics from the Monterrey Institute of
Technology (ITESM) and an MBA from the Notre Dame University in France. Executive Officers Our executive officers are appointed by the board of directors and serve
until their successors have been appointed and take office. The table below sets forth our executive officers: Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chief Executive Officer
    
    
    1982José Antonio Rincón(1)
    
    Chief Operating Officer
    
    
    1982Mayela Rincón de Velasco(1)
    
    Chief Financial Officer
    
    
    1982Gustavo Peyro Medina
    
    Audit and IT Manager
    
    
    1996Arturo Díaz Medina
    
    Finance and Planning Managing Director
    
    
    1998Jesús Romo Carrasco
    
    Controller
    
    
    1988Gabriel Villegas Salazar
    
    Secretary of the Board and General Counsel
    
    
    1987
   (1)
    
    Miguel Rincón, José Antonio Rincón and Mayela Rincón de Velasco are
siblings. The following is a summary of the business experience and areas of
expertise of our current officers. Information regarding current officers who
are also directors is provided above. Except as otherwise set forth below, the business address of each of our current officers is Torre
Corporativa Durango, Potasio 150, Ciudad Industrial, Durango, Durango, Mexico
34220. Gustavo Peyro Medinawas Manager of the Controller and Audit Department of
our company from 1992 to 1999. He has also been Audit and IT Manager of our
company since 1996. From 1985 to 1989 he was a professor at Durango State
University (Universidad Juárez del Estado de Durango).Since 1983 he has been
an active member of the MIPA and also of the Association of Public Accountants
(Colegio de Contadores Públicos de Durango, A.C.).He is an active member of
the Institute of Internal Auditors, Inc. Arturo Díaz Medinahas been the Finance and Planning Managing Director of
our company since 1998. He had held other finance and operation positions from
1994 to 1998 in two of our paper mills. Prior to joining our company, he was
head of the finance and commercial areas of an auto parts company based in
Durango, Mexico. -67-




---



##### Table of Contents



Since 1990 he has been an active member of the Association of
Public Accountants (Colegio de Contadores Públicos de Durango, A.C.). Jesús Romohas been the Controller of our company since 1998. He is a
professor of accounting and statistics at Durango State University (Universidad
Juárez del Estado de Durango).Since 1978, he has been an active member of the
Association of Public Accountants (Colegio de Contadores Públicos de Durango,
A.C.).He has an MBA from the Monterrey Institute of Technology (ITESM). Gabriel Villegas Salazarhas been Secretary of the Board and Legal Counsel
of our company since 1987. In 1993 he was appointed General Counsel. He served
as member of the Legal Committee of the Mexican National Chamber for the Pulp
and Paper Industry from 1989 to 1996 and has studied American law at the
Iberoamericana University coordinated by the Georgetown University Law Center.
Mr. Villegas business address is World Trade Center, Montecito 38, Piso 22,
Oficina 15, Col. Napoles, 03810, Mexico D.F. Compensation of Directors and Officers Directors receive no compensation in their capacity as directors and there
are no service contracts providing for benefits upon termination of employment
of any of our directors. The aggregate amount of compensation paid by us to
our officers during 2003 was Ps 20.4 million. In 2004, we expect that the
aggregate amount of compensation paid to this group will total approximately Ps
21.0 million. Each subsidiary pays performance-based cash bonuses to its management.
The amount of the bonus is determined by a formula that weighs various factors,
including the performance of the operating subsidiary measured in terms of
earnings, market share and sales volume targets and the individual performance
of the manager. The bonus varies for each manager depending on the above
factors. Statutory Auditor Under our bylaws in accordance with Mexican law, our annual stockholders
meeting has to elect at least one statutory auditor (comisario)and a
corresponding alternate statutory auditor. The primary role of a statutory
auditor is to report to our stockholders at the annual ordinary general meeting
of stockholders regarding the accuracy of the financial information presented
to our stockholders by our board of directors. Subject to terms and
conditions, a statutory auditor is also authorized:  
    
    to call ordinary or extraordinary general meetings;
    
    to place items on the agenda for meetings of stockholders or our board of directors;
    
    to attend meetings of stockholders and of our board of directors; and
    
    generally to inspect the affairs of our company. Since 2000, the statutory auditor has been Raúl Guerra Rodríguez and since 2003
the alternate statutory auditor has been Héctor Ortiz Rosales. Audit Committee Our audit committee recommends the external auditors of our company to our
board of directors, suggests the terms and conditions of the auditors service,
supervises the auditors work, acts as intermediate between our board of
directors and the auditors, guaranties the independence of the auditors,
reviews the working plan, communications and audit reports and informs our
board of directors of its results, submits to our board of directors the
financial information basis, reviews such financial information and its
issuance process, contributes in the determination of the general outline of
the internal control system and evaluates its effectiveness, supports our board
of directors in the evaluation and coordination of the annual internal audit
programs, coordinates the internal, -68-




---



##### Table of Contents



external and statutory auditing work, and
verifies the compliance with such statutes and regulations as are applicable to
our company. Our audit committee acts and adopts any resolution by majority vote. In
case of conflict of interest, the members with conflicts do not participate.
The committee has such powers specifically granted by the stockholders and
participates in such studies, advisement, and additional matters submitted to
it by our board of directors. Our audit committee informs the board of directors of its activities at
least twice a year or at any other time that the audit committee deems
appropriate or becomes aware of any acts or facts material to our company. Our audit committee does not delegate any of its powers to anyone, but may
request advice from experts to adequately resolve such matters submitted to it
and, additionally, the president of the audit committee may invite such experts
and officers involved with the audit committees activities. The member of our audit committee are Alfonso Fernández de Castro, Roberto
Isaac Hernandez and Mayela Rincón de Velasco. Remuneration Committee Our remuneration committee recommends designations of our principal
officers, suggests evaluation criteria in accordance with the general outlines
of our board of directors and analyzes and submits to our board of directors
the structures and remuneration of our principal officers. Our remuneration committee acts and adopts any resolution by majority
vote. In case of conflict of interest, the members with conflicts do not
participate. The committee has such powers specifically granted by the
stockholders and participates in such studies, advisement, and additional
matters submitted to it by our board of directors. Our remuneration committee informs the board of directors of its
activities at least twice a year or at any other time that the remuneration
committee deems appropriate or becomes aware of any acts or facts material to
our company. Our remuneration committee does not delegate any of its powers to anyone,
but may request advice from experts to resolve adequately such matters
submitted to the remuneration committee and, additionally, the president of the
remuneration committee may invite such experts and officers involved with the
remuneration committees activities. The members of our remuneration committee are Ángel del Palacio E.,
Buenaventura G. Saravia and Mayela Rincón de Velasco. Employees At December 31, 2003, we had 7,587 employees (7,283 in Mexico and 304 in
the United States) and approximately 67% our work force was unionized. We have
not experienced any work stoppages in our facilities or those of our
subsidiaries, other than a strike at our Atenquique mill which lasted nine days
in July 1998 and which was resolved by contract renegotiations. We currently
have good relations with our employees at all our facilities. The table below shows the number of our employees in Mexico and the United
States in each of the past three years: Year Ended December 312003
    
    2002
    
    2001Mexico (1)
    
    
    7,283
    
    
    
    8,493
    
    
    
    8,478United States
    
    
    304
    
    
    
    342
    
    
    
    1,237Total
    
    
    7,587
    
    
    
    8,835
    
    
    
    9,715
 -69-




---



##### Table of Contents



(1)
    
    Includes 1,580, 1,124 and 1,453 temporary employees in the years ended
December 31, 2001, 2002 and 2003, respectively. 
 Item 7. Major Stockholders and Related Party Transactions. Major Stockholders We have a single class of common stock, represented by the Series A
Shares. The stockholders who are presently part of our management currently
own, directly, and indirectly through their ownership in Administradora
Corporativa y Mercantil, S.A. de C.V. approximately 95.1% of the issued and
outstanding Series A Shares and have the power to elect all directors and
control our company. On April 30, 2004, our stockholders voted to elect 11
directors, of which four are independent directors. Our total authorized and issued share capital as of December 31, 2003
consisted of Ps 1,378.6 million, represented by 91,832,122 Series A Shares,
with no par value. Each Series A Share is entitled to one vote at each meeting
of our stockholders. The following table sets forth current information with respect to the
beneficial ownership of our common stock as of July 15, 2004 by:  
    
    each person known by us to beneficially own more than 5%, in
the aggregate, of the outstanding shares of our common stock; and  
    
    all board members and executive officers as a group. Amount andNature of
    
    Percentage ofBeneficial Owner
    
    Beneficial Ownership
    
    Outstanding StockMiguel Rincón
    
    
    25,291,559
    
    
    
    27.5
    %José Antonio Rincón
    
    
    14,453,225
    
    
    
    15.7Jesús Rincón
    
    
    14,451,406
    
    
    
    15.7Wilfrido Rincón
    
    
    6,503,597
    
    
    
    7.1Ignacio Rincón
    
    
    6,503,553
    
    
    
    7.1Martin Rincón
    
    
    5,058,538
    
    
    
    5.5Administradora Corporativa y Mercantil, S.A. de CV. (ACM) (1)
    
    
    15,068,000
    
    
    
    16.4Banamex (2)
    
    
    15,068,000
    
    
    
    16.4Total of members of board of directors and executive officers as a group
    
    
    87,329,878
    
    
    
    95.1
    %
   (1)
    
    ACM is wholly owned by the Rincón family. No individual member of the
Rincón family has the power to vote or dispose the shares owned by ACM.(2)
    
    The Series A Shares owned by ACM are pledged to Banamex as security for
the obligations of ACM under a loan agreement between Banamex and ACM.
ACM is currently in default under the loan agreement and Banamex has the
right to accelerate the full amount of the outstanding principal under the
loan agreement and to seek to enforce its pledge over the Series A Shares
held by ACM. Related Party Transactions On October 7, 2002, we sold our subsidiary, Durango Paper Company, and
certain promissory notes to Operadora Omega Internacional, S.A. de C.V., or
Operadora Omega. At the time of this transaction, all of the capital stock of
Operadora Omega was owned by members of the Rincón family. 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 promissory notes
due to our company with an aggregate principal amount of US$128.8 million. -70-




---



##### Table of Contents



Prior to this sale, we had guaranteed certain obligations of Durango Paper
Companys subsidiaries, specifically the Bank of America, N.A. loan agreement,
the JPMorgan letters of credit, in an aggregate principal amount of US$25.2
million (Ps 283.2 million). In 2003, the creditors of these obligations called
these guarantees. As a result, we recorded Ps 253.4 million as due from
related parties in 2003 and recorded an allowance for doubtful accounts in the
full amount of this obligation. From time to time, Administradora Corporativa y Mercantil, S.A. de C.V.,
or ACM, a company owned and controlled by the Rincón family, borrows funds from
our company to fund principal and interest payments on its indebtedness. The
outstanding balance on these loans was Ps 175.3 million at December 31, 2003.
These loans bear interest at a rate of 15% per annum and mature on May 17,
2006. Because ACMs only source of funds is dividends of our company or loans
extended by our company, our liquidity crisis has placed ACMs ability to repay
our company in doubt. As a result, in 2003 we recorded an allowance for
doubtful accounts in the full amount of the obligations of ACM to our company. We obtain flight services from Líneas Aéreas Ejecutivas de Durango, S.A.
de C.V., or Líneas Aéreas, a company owned and controlled by the Rincón family.
In 2003 Líneas Aéreas borrowed Ps 14.0 million from our company. This loan
bears interest at a rate of 15% per annum and matures on December 31, 2006. On May 16, 2003, we sold the paper tube manufacturing business of Papelera
Heda, S.A. de C.V., now a division of Atenquique, to Tubos y Especialidades de
México, S.A. de C.V., or Tubos y Especialidades. All of the capital stock of
Tubos y Especialidades is owned by certain members of the Rincón family. The
sale was made for an aggregate amount of Ps 2.1 million. We purchase paper
tubes from Tubos y Especialidades de México. During the year ended December 31,
2003, we purchased products from Tubos y Especialidades de México with an
aggregate purchase price of Ps 7.1 million. During 2003, our subsidiaries, Centauro and Porteadores de Durango, S.A.
de C.V., sold 74 trailer trucks to Transportes Modernos de México, S.A. de
C.V., or Transportes Modernos. All of the capital stock of Transportes Modernos
is owned by certain members of the Rincón family. The sale was made for an
aggregate amount of Ps 9.0 million. We continue to us these trailer trucks to
transport wood from forests to our production facilities and to ship finished
products to our customers in Mexico. During the year ended December 31, 2003,
we paid Transportes Modernos Ps 42.3 million for the use of these trucks. 
 Item 8. Financial Information. See Item 18. Financial Statements. Legal Proceedings We are party to the following significant lawsuits: Voluntary Concurso
Mercantil petition (Solicitud de Concurso Mercantil Presentada por el Propio
Comerciante), Case No. 3/2004 On May 18, 2004, we filed a voluntary petition for concurso mercantil
under the LCR with the First Federal District Court in Durango, Mexico. As of
the date hereof, the court has not yet been declared the concurso mercantil
effective. For a discussion of the LCR and concurso mercantilproceedings, see
Item 4. Information on Our CompanyMexican Law of Commercial
Reorganizations. In re: Petition of Gabriel Villegas Salazar, as Foreign Representative of
Corporación Durango, S.A. de C.V., Debtor in Foreign Proceeding, Case No.:
04-13487(RDD). On May 20, 2004, our foreign representative, Gabriel Villegas Salazar,
filed the 304 Proceeding with the United States Bankruptcy Court for the
Southern District of New York, commencing a case in the United States ancillary
to the concurso mercantilproceeding currently underway in Durango, Mexico.
The 304 Proceeding is being administered under the case caption In re:
Petition of Gabriel Villegas Salazar, as foreign representative of Corporación
Durango, S.A. de C.V., Debtor in Foreign Proceeding. -71-




---



##### Table of Contents



Pursuant to sections 105(a) and 304(b) of the United States Bankruptcy
Code and in furtherance of the concurso mercantilproceeding, on June 4, 2004,
the United States Bankruptcy Court for the Southern District of New York
entered a preliminary injunction preliminarily enjoining the commencement or
continuation of any action against our company, its officers and directors, and
four of our operating subsidiaries, Titán, Centauro, Atenquique, and Ponderosa.
At a hearing on June 30, 2004, the United States Bankruptcy Court for the
Southern District of New York extended the preliminary injunction through and
including August 16, 2004. HG Estate, LLC v. Corporación Durango, S.A. de C.V., United States District
Court, Southern District of New York, Case No. 02 CV 10059 (CSH) On December 19, 2002, HG Estate, LLC filed a complaint in the Southern
District of New York seeking to accelerate and enforce the HG Estate notes. HG
Estate, LLC also asserted a claim for indemnification pursuant to an
indemnification agreement entered into by our company and HG Estate, LLC in
connection with and contemporaneously to a stock purchase agreement dated
December 9, 1999, by and among Durango Paper Company, HG Estate, LLC St. Marys
Railroad Corporation and W.O. Corporation. HG Estate, LLC alleges damages of
approximately US$53 million. We have submitted a statement of claims in
arbitration against HG Estate, LLC challenging the validity of the HG Estate
notes. On January 7, 2003, we filed a motion to stay this litigation pending
completion of the arbitration. On January 22, 2003, HG Estate, LLC filed a
motion to stay or dismiss the arbitration proceeding. On July 21, 2003, the
court granted our motion. Accordingly, this litigation has been stayed while
the arbitration proceeds. Compass Income Master Fund, Inc. et al. v. Corporación Durango, S.A. de C.V.,
Index No.: 600621/03, Supreme Court of the State of New York, County of New
York. On February 25, 2003, Compass Income Master Fund, Inc., Compass Renta Fija
America Latina F.I.I. and Interbank Overseas, Ltd. filed suit against our
company in New York state court for breach of contract seeking payment of
US$3.5 million, plus interest at 9% per annum from February 13, 2003. The
plaintiffs breach of contract action is based upon commercial paper we issued
on or about August 13, 2002. We deny the plaintiffs claim and are vigorously
defending this action. Currently, the parties are engaged in discovery. Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V. On December 16, 2003, the Mexican government through the National Water
Commission (Comisión Nacional del Agua) made demand upon Pronal, a former
subsidiary of Grupo Pipsamex, for payment of Ps 159 million (US$14.5 million)
for water consumed during the calendar years 2000 and 2001. On March 4, 2004,
Pronal filed a declaratory action with the Mexican Federal Tribunal (Tribunal
Fiscal de la Federación) asking that the court find that Pronal is not liable
for any amounts to the National Water Commission and that, as a result, the
demand be nullified. In the event Pronal is unsuccessful in having the demand
nullified and required to pay the National Water Commission, Pronal could seek
to assert indemnification rights against Grupo Pipsamex under the terms of the
Stock Purchase Agreement executed on November 14, 2003, pursuant to which Grupo
Pipsamex, as seller, agreed to indemnify Pronal and the buyer for certain
debts. In addition, in the event Pronal is unable to recover in full from
Grupo Pipsamex, Pronal could also made demand against Corporacion Durango under
the guaranty dated November 14, 2003. The Official Committee of Unsecured Creditors of Durango Georgia Paper Company,
et al. v. Corporación Durango, S.A. de C.V., et al, United States Bankruptcy
Court, Southern District of Georgia, Adv. No. 04-2070 On April 2, 2004, The Official Committee of Unsecured Creditors in the
chapter 11 cases of Durango Georgia Paper Company, Durango Georgia Converting
Corp. and Durango Georgia Converting, LLC, which we refer to as the Durango
Georgia Entities, commenced an adversary proceeding in the Durango Georgia
Entities chapter 11 cases, which we refer to as the Durango Georgia Action, by
filing a complaint which seeks: (1) recovery of alleged fraudulent and
preferential transfers from the Durango Georgia Entities to CODUSA; (2) damages
for fraudulent representations and breach of oral and written guaranty in
connection with CODUSAs alleged agreement to guarantee the debts of the
Durango Georgia Entities; (3) estoppel; (4) equitable subordination of CODUSAs
claims against the Durango Georgia Entities; (5) substantive consolidation of
CODUSA and the Durango Georgia Entities; -72-




---



##### Table of Contents



and (6) a determination that the
Durango Georgia Entities are the alter-ego of CODUSA. We deny any liability on
these claims and intend to vigorously defend the Durango Georgia Action. Tax Litigation We have initiated a proceeding requesting an injunction against the
Mexican tax authorities regarding the methodology used to determine our
employee statutory profit sharing liability. We have initiated a proceeding requesting an injunction against the
Mexican tax authorities with respect to the assessment against our company of
Ps 16.7 million with respect to the Substitutive Tax of the Wage Credit. We
have asserted in this action that the assessment of the Substitutive Tax of the
Wage Credit is unconstitutional. Management believes that the outcome of this
proceeding will be favorable to our company, which represents a contingent
asset of Ps 12,196. In addition, we are party to various legal proceedings in the ordinary
course of our business. We do not expect any of these proceedings, if
determined adversely to us, individually or in the aggregate, to have a
material adverse effect on the results of our operations or on our financial
condition. Dividend Policy We do not intend to pay dividends on our capital stock, including the
Series A Shares. We have not paid any dividends in the past five years. The
declaration, amount and payment of dividends are determined by a majority vote
of the stockholders, including holders of the Series A Shares, at our annual
ordinary stockholders meeting, generally on the recommendation of the board of
directors, and will depend on our results of operations, financial condition,
cash requirements, the ability of our subsidiaries to pay cash dividends to us,
future prospects and other factors deemed relevant by our stockholders. Our
ability to declare and pay dividends is currently restricted under the terms of
our 2003 notes, 2006 notes, 2008 notes and 2009 notes. Significant Changes Other than as otherwise disclosed in this annual report, no significant
change has occurred since the date of the audited consolidated financial
statements included in the annual report. 
 Item 9. The Offer and Listing. General The Series A Shares are listed on the Mexican Stock Exchange. Since July
21, 1994, our American Depositary Shares, or ADSs, have been listed on the New
York Stock Exchange. The ADSs are issued by The Bank of New York, as
depositary. Each ADS represents two CPOs issued by NAFIN, as trustee of the
CPO Trust. Each CPO represents a financial interest in one Series A Share held
in the CPO Trust. It is not practicable for us to determine the proportion of ADSs
beneficially owned by U.S. persons. On February 13, 2003, we were notified by the New York Stock Exchange that
the distribution of our ADSs did not meet the New York Stock Exchanges
continued listing requirements. We notified the New York Stock Exchange of our
intention to achieve compliance. On May 25, 2004, following our filing of concurso mercantil, the New York
Stock Exchange announced the trading of our companys ADSs, 2006 notes and 2008
notes would be suspended immediately. At such time the New York Stock Exchange
applied to the Securities and Exchange Commission to delist the ADSs, the 2006
notes and the 2008 notes. Delisting from the New York Stock Exchange would
have an adverse effect on the liquidity of our ADSs, the 2006 notes and the
2008 notes and on our ability to raise capital through the issuance of ADSs or
securities convertible into ADSs. -73-




---



##### Table of Contents



Trading on the Mexican Stock Exchange and New York Stock Exchange The Mexican Stock Exchange, located in Mexico City, is the only stock
exchange in Mexico. Founded in 1894, it ceased operation in the early 1900s
and was reestablished in 1907. The Mexican Stock Exchange is organized as a
corporation, the shares of which are held by 27 brokerage firms. The firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.
Trading on the Mexican Stock Exchange takes place principally through an
automated system known as the Electronic Exchange System for Registered or
Assigned Transactions (Sistema Electrónico de Negociación de Transacciones,
Registro y Asignación), or SENTRA, between the hours of 8:30 a.m. and 3:00
p.m., Mexico City time. Trades in securities listed on the Mexican Stock
Exchange may, subject to certain requirements, also be effected off the Mexican
Stock Exchange. Due primarily to tax considerations, however, most
transactions in listed Mexican securities are effected through the Mexican
Stock Exchange. The Mexican Stock Exchange operates a system of automatic
suspension of trading in shares of a particular issuer as a means of
controlling excessive price volatility. Under current regulations, such
suspension procedures do not apply to securities, such as the Series A Shares,
that are directly or indirectly (for example, through ADSs) quoted on a stock
exchange or market quotation system outside Mexico. Settlement takes place two business days after a transaction involving the
purchase or sale of shares is completed on the Mexican Stock Exchange.
Deferred settlement, even if by mutual agreement, is not permitted without the
approval of the CNBV. Most securities traded on the Mexican Stock Exchange are
on deposit with S.D. Indeval, S.A. de C.V. (Institución para el Depósito de
Valores), or Indeval, a privately-owned central securities depositary that acts
as a clearinghouse, depositary, custodian, settlement, transfer and
registration institution for Mexican Stock Exchange transactions, thereby
eliminating the need for physical transfer of securities. The Mexican Stock Exchange is one of Latin Americas two largest exchanges
by market capitalization, but it remains relatively small and illiquid compared
to major world markets. In December 2003, the five largest traded equity
issues (measured by market capitalization) represented approximately 48% of the
total value of equity issues traded on the Mexican Stock Exchange. Although
there is substantial participation by the public in the trading of securities,
a major part of the activity of the Mexican Stock Exchange reflects
transactions by approximately 50 institutional investors. There is no formal
over-the-counter market for securities in Mexico. Holders of ADSs have no voting rights with respect to the underlying CPOs
or Series A Shares. Voting rights with respect to the Series A Shares held in
the CPO Trust will be exercised by the CPO Trustee, which is required to vote
the underlying Series A Shares in the same manner as the majority of the Series
A Shares that are not so held and that are voted at the relevant stockholders
meeting. Our ADSs were listed on the New York Stock Exchange on July 21, 1994. The
tables below set forth the high and low closing sales prices (in nominal pesos)
for our Series A Shares on the Mexican Stock Exchange and the high and low
closing sales prices for the ADSs on the New York Stock Exchange for the
periods indicated. Mexican Stock Exchange
    
    New York Stock ExchangePesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low1999
    
    Ps
    58.00
    
    
    Ps
    38.00
    
    
    US$
    11.88
    
    
    US$
    7.002000
    
    
    48.00
    
    
    
    31.00
    
    
    
    6.06
    
    
    
    5.942001
    
    
    24.00
    
    
    
    24.00
    
    
    
    5.55
    
    
    
    5.152002
    
    
    14.00
    
    
    
    14.00
    
    
    
    5.55
    
    
    
    1.012003
    
    
    10.70
    
    
    
    3.00
    
    
    
    1.70
    
    
    
    0.40
 -74-




---



##### Table of Contents



Mexican Stock Exchange
    
    New York Stock ExchangePesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low2002First Quarter
    
    Ps
    23.50
    
    
    Ps
    23.50
    
    
    US$
    5.35
    
    
    US$
    5.16Second Quarter
    
    
    24.00
    
    
    
    16.58
    
    
    
    5.28
    
    
    
    1.40Third Quarter
    
    
    16.58
    
    
    
    14.00
    
    
    
    2.98
    
    
    
    2.20Fourth Quarter
    
    
    14.00
    
    
    
    14.00
    
    
    
    2.31
    
    
    
    1.152003First Quarter
    
    
    14.00
    
    
    
    3.00
    
    
    
    1.34
    
    
    
    0.40Second Quarter
    
    
    5.80
    
    
    
    3.00
    
    
    
    1.60
    
    
    
    0.44Third Quarter
    
    
    6.30
    
    
    
    5.80
    
    
    
    1.50
    
    
    
    0.80Fourth Quarter
    
    
    10.70
    
    
    
    16.30
    
    
    
    1.70
    
    
    
    0.972004First Quarter
    
    
    19.98
    
    
    
    11.80
    
    
    
    3.85
    
    
    
    1.55Second Quarter
    
    
    14.50
    
    
    
    10.98
    
    
    
    2.40
    (1)
    
    
    0.95
    (1)
   (1)
    
    Through May 25, 2004. Source: Mexican Stock Exchange; New York Stock Exchange. Mexican Stock Exchange
    
    New York Stock ExchangePesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    LowJanuary 2004
    
    Ps
    19.50
    
    
    Ps
    11.80
    
    
    US$
    3.85
    
    
    US$
    1.55February 2004
    
    
    19.98
    
    
    
    19.00
    
    
    
    3.25
    
    
    
    2.20March 2004
    
    
    18.00
    
    
    
    14.50
    
    
    
    2.40
    
    
    
    2.30April 2004
    
    
    14.50
    
    
    
    13.95
    
    
    
    2.40
    
    
    
    2.00May 2004
    
    
    13.95
    
    
    
    10.98
    
    
    
    1.91
    (1)
    
    
    0.95
    (1)June 2004
    
    
    10.98
    
    
    
    10.98July 2004 (through July 14)
    
    
    10.98
    
    
    
    10.98
   (1)
    
    Through May 25, 2004. Source: Mexican Stock Exchange; New York Stock Exchange. On July 14, 2004, the closing sales price of our Series A Shares on the
Mexican Stock Exchange was Ps 10.98 per share. Trading of our ADSs on the New York
Stock Exchange has been suspended since May 25, 2004. 
 Item 10. Additional Information. Organizational Documents Set forth below is a summary of the material provisions of our bylaws
(estatutos sociales) and applicable Mexican law. This description does not
purport to be complete and is qualified by reference to Mexican law and to the
bylaws of our company, incorporated by reference herein. Registration and Transfer The Series A Shares are evidenced by share certificates in registered
form. Our stockholders may hold their Series A Shares in the form of physical
certificates or indirectly through institutions that have an account with
Indeval. Accounts may be maintained at Indeval by brokers, banks or other
entities approved by the CNBV. We maintain a stock registry of stockholders
who have either deposited their shares at our offices or are holding -75-




---



##### Table of Contents



certificates issued by Indeval, an institution with an account at Indeval or a
Mexican bank. Any person that presents a receipt from any such institution
indicating ownership by such person will be admitted to our stockholders
meetings. Voting Rights Each of our shares entitles the holder thereof to one vote at any general
meeting of our stockholders. Currently, only Series A Shares are outstanding. General stockholders meetings may be ordinary meeting or extraordinary
meetings. Extraordinary general meetings are those called to consider certain
matters specified in Article 182 of the Mexican Companies Law (Ley General de
Sociedades Mercantiles), including:  
    
    amendments to our bylaws;  
    
    anticipated dissolution of our company;
    
    merger and transformation of our company from one type of company to another; and  
    
    increases or decreases affecting the fixed portion of our capital stock. General meetings called to consider all other matters, including increases and
decreases affecting the variable portion of our capital stock, are ordinary
meetings. An annual ordinary general meeting must be held at least once a
year, within four months after the end of the preceding fiscal year. The annual ordinary general meeting of stockholders is held to consider
the approval of the annual report of our board of directors and for companies
in which we have an investment that exceeds 20% of our net worth, including the
approval of the financial statements for the preceding fiscal year, the
election of directors and our statutory auditor and the allocation of our
profits, if any, from the preceding year. The quorum for an ordinary general meeting convened on the first call is
at least 50% of all outstanding shares and action may be taken by holders of a
majority of the shares represented at such meeting. If a quorum is not
present, a subsequent meeting may be called at which a quorum shall exist
regardless of the number of shares present, and action may be taken by a
majority of the shares represented at such meeting. The quorum for an
extraordinary general meeting convened on the first call is 75% of all
outstanding shares. If a quorum is not present, a subsequent meeting may be
called at which 50% of all outstanding shares constitute a quorum. Whether on
first or subsequent call, actions at an extraordinary general meeting may be
taken only by holders of a majority of the outstanding shares. Stockholders meetings may be called by:  
    
    our board of directors;  
    
    our statutory auditor;  
    
    stockholders representing at least 10% of our outstanding shares by requesting our board of directors or our statutory auditor
to issue such a call;  
    
    a Mexican court in the event our board of directors or our
statutory auditor do not comply with a valid request of our
stockholders; and  
    
    any stockholder when no meeting has been held for two
consecutive years or when any of the following matters has not been
dealt with at such a meeting: -76-




---



##### Table of Contents




    
    the annual report of our board of directors regarding our financial statements;  
    
    the appointment of directors and our statutory auditor; or  
    
    the compensation of our directors and statutory auditor. Notices of meetings must be published in a newspaper of major circulation
in the city of Durango, Mexico at least 15 days prior to a meeting. Only
stockholders who have either (1) deposited their shares at our offices, or (2)
are holding certificates issued by Indeval, an institution with an account at
Indeval or a Mexican bank and present a receipt from such institution
indicating ownership by such person will be admitted as such to stockholders
meetings. A stockholder may be represented by an attorney-in-fact who holds a
duly granted proxy or a power-of-attorney. Dividends At the annual ordinary meeting of stockholders, our board of directors
submits our financial statements for the previous fiscal year, together with a
report thereon from our board of directors, to the stockholders for approval.
The stockholders, after they have approved the financial statements, determine
the allocation of our distributable earnings for the preceding year. Five percent of our
net income must be allocated to a legal reserve fund until such fund reaches an
amount equal to at least 20% of our then current capital stock. As of April
30, 2004, our legal reserve was Ps 193.3 million. Allocation to the legal
reserve is determined without reference to inflation adjustment under Mexican
GAAP. Thereafter, the remainder of our net income is allocated as determined
by the stockholders meeting and may be distributed as dividends. All shares
which are fully paid and outstanding at the time a dividend or other
distribution is declared are entitled to share equally in such dividend or
other distribution. Shares which are only partially paid participate in a
dividend or distribution in the same proportion that such shares have been paid
at the time of the dividend or distribution. We have not paid any dividends in the past five years. The declaration,
amount and payment of dividends will depend on our results of operations,
financial condition, cash requirements, the ability of our subsidiaries to pay
cash dividends to us, future prospects and other factors deemed relevant by our
stockholders. Our ability to declare and pay dividends is currently restricted
under the terms of our 2006 notes, 2208 notes and 2009 notes. Liquidation Rights Upon our dissolution, one or more liquidators must be appointed by an
extraordinary general meeting of our stockholders to wind up our affairs. All
fully paid and outstanding shares of capital stock will be entitled to
participate equally in any distribution upon liquidation. Partially paid
shares participate in a liquidation distribution in the same manner as they
would in a dividend distribution. Changes in Share Capital The fixed portion of our capital stock may be increased or decreased at an
extraordinary general meeting of stockholders. The variable portion of our
capital stock may be increased or decreased in the manner and on the terms
authorized by an ordinary stockholders meeting, unless such increase or
decrease is derived from our repurchase of our shares for treasury and,
subsequent to such repurchase, such shares are sold in the public market, in
which case resolution of our board of directors authorizing such action would
be sufficient. Capital increases and decreases must be inscribed in our book
of capital variations. Pre-Emptive Rights In the event of a capital increase, a holder of issued and outstanding
shares of our capital stock has a preferential right to subscribe for a
sufficient number of shares to maintain such holders existing proportional
holdings of shares. Pre-emptive rights must be exercised within 15 days
following the publication of notice of the capital increase in the Official
Gazette of the State of Durango (Periodico Oficial de la Estado de Durango) and
in a -77-




---



##### Table of Contents



newspaper of major circulation in the city of Durango, Mexico. Under
Mexican law, pre-emptive rights cannot be represented by an instrument that is
negotiable separately from the corresponding share. Repurchase Obligation In accordance with our bylaws, and as prescribed by the CNBV, the our
majority stockholders are obligated to make a public offer for the purchase of
stock held by our minority stockholders in the event that the listing of our
stock with the Mexican Stock Exchange is cancelled either by resolution of our
company or by an order of the CNBV. The price at which the stock must be
purchased by our majority stockholders is the greater of:  
    
    the average quotation price for the 30 days prior to the date
of the offer; or  
    
    the book value, as reflected in the last report filed with
the CNBV and the Mexican Stock Exchange. The majority stockholders are not bound to make such public offer if the
cancellation of the listing is adopted by resolution of all of our
stockholders. This provision, contained in our bylaws may not be amended
without the consent of holders of at least 95% of our capital stock and the
prior approval of the CNBV. Other Provisions Variable Capital and Withdrawal Rights. The outstanding variable portion
of our capital stock may be fully or partially withdrawn by our stockholders.
The minimum fixed portion of our capital stock specified in our bylaws cannot
be withdrawn. A stockholder who wishes to effect a total or partial withdrawal
of its shares must notify us in an authenticated written notice to that effect.
If notice of withdrawal is received prior to the last quarter of any fiscal
year, the withdrawal becomes effective at the end of the fiscal year in which
the notice is given. Otherwise, the withdrawal becomes effective at the end of
the following fiscal year. Because our fixed capital cannot be withdrawn,
requests for withdrawals are satisfied only to the extent of our available
variable capital and in the order in which they are received. Requests which
are received simultaneously would be satisfied pro ratato the extent of our
available variable capital. Reimbursement of withdrawn shares is made at the lesser of:  
    
    95% of the average share price quoted on the Mexican Stock
Exchange during the 30 business days prior to the date on which the
withdrawal becomes effective; and  
    
    the book value per share as calculated from our financial
statements (as approved at the annual ordinary general meeting) for
the fiscal year at the end of which the withdrawal becomes
effective. Any such amount to be paid by us becomes due on the day following the annual
ordinary general meeting referred to above. Right of Dissenting Stockholders to Tender Their Shares. The Mexican
Companies Law provides that upon the adoption at an extraordinary general
meeting of stockholders of resolutions approving changes in our companys
business purpose, nationality or its form of corporate organization, dissenting
stockholders acquire the right to withdraw from a Mexican company and to compel
such company to reimburse their shares, subject to the fulfillment of certain
terms and conditions. The amount of the reimbursement is determined by the
proportion of the tendered shares to the net worth of such company as set forth
in the financial statements approved at the then most recent stockholders
meeting. Dissenting stockholders must perfect their withdrawal rights by making
a request to this effect within 15 days following the date on which the meeting
adopting the relevant resolution adjourns. Holders of CPOs, who cannot vote,
are not entitled to this right. Restrictions on Foreign Investment. The bylaws provide that Series A
Shares may only be acquired by Mexican investors and that Series A Shares shall
at all times represent at least 51% of our companys capital stock. The bylaws
also provide that Series B Shares may be acquired either by Mexican or
non-Mexican investors and that Series B Shares shall in no event represent no
more than 49% of the capital stock of our company. -78-




---



##### Table of Contents



Forfeiture of Shares. As required by Mexican law, our bylaws provide that
every non-Mexican that at the moment of incorporation of the company or at any
subsequent time acquires an interest or participation in the capital stock of
the company, shall be considered by virtue of such acquisition, as a Mexican
national with respect to such interest or participation, and it shall be deemed
that such non-Mexican shall agree not to invoke the protection of its
government under the penalty, in case it does not comply with such agreement,
of losing such interest or participation to the benefit of the Mexican Nation.
Under this provision, a non-Mexican stockholder of our company is deemed to
have agreed not to ask such stockholders government to impose a diplomatic
claim against the Mexican government with respect to such stockholders rights
as a stockholder. If the stockholder should invoke such governmental
protection in violation of this agreement, its shares could be forfeited to the
Mexican government. Mexican law requires that such a provision be included in
the bylaws of any Mexican corporation admitting non-Mexican stockholders. Duration. Our existence under our bylaws continue until 99 years from the
date of our incorporation and can be extended by resolution of an extraordinary
general meeting of stockholders. Conflict of Interest. A stockholder of our company that votes on a
business transaction in which its interest conflicts with that of our company
may be liable for losses and damages only if the transaction would not have
been approved without its vote. Additionally, a member of our board of
directors or of any committee thereof whose interests conflict with those of
our company must disclose the conflict to the other members of our board or
directors or the respective committee and abstain from any deliberation or vote
in connection therewith. Failure by a director or member of the respective
committee to comply with such obligations may result in such director or member
being liable for damages and losses. Purchase by our company of its Shares. In accordance with the provisions
of Article 14 Bis3 of the Mexican Securities Market Law (Ley del Mercado de
Valores), we may purchase our shares for cancellation pursuant to a decision of
an extraordinary general meeting of stockholders. An ordinary general meeting
of stockholders may authorize, for any fiscal year, the repurchase of our
shares for cancellation or for treasury, specifying the maximum amount of funds
available, provided that the total amount of funds authorized for such purpose
cannot exceed the retained earnings of our company. Upon any repurchase of our
shares, our share capital would be reduced accordingly. Shares Without Voting Rights. With the prior consent of the CNBV, we can
issue shares without voting rights or restricted voting rights, and with
restrictions to other corporate rights in addition to those restrictions set
forth in Article 113 of the Mexican Companies Law. Any issuance of shares,
other than common shares, must not exceed 25% of our issued and outstanding
capital stock, unless issued with the prior approval of the CNBV. For
calculation of the percentage, shares (or the corresponding CPOs) with
restrictions on voting based on the nationality of the related holders, will
not be considered. We do not currently have shares without voting rights, bur
the voting rights of our shares deposited in the CPO Trust are limited. Purchase of Shares by Subsidiaries of our Company. Companies or other
entities controlled by us may not purchase, directly or indirectly, shares of
our capital stock or shares of companies or entities that are our stockholders. Material Contracts Our company has not entered into any other material contracts other than
those entered into in the ordinary course of business or those disclosed
elsewhere within this Form 20-F. For a brief discussion of certain terms of our significant debt
agreements, see Item 5. Operating and Financial Review and Prospects 
Indebtedness and for a discussion of other transactions and agreements with
our affiliates and associated companies, see Item 7. Major Stockholders and
Related Party Transactions  Related Party Transactions -79-




---



##### Table of Contents



Exchange Controls The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert pesos into dollars or other
currencies, and vice versa. However, in the past, the Mexican economy has
experienced balance of payment deficits and shortages in foreign exchange
reserves, and the Mexican government has responded by restricting the ability
of Mexican or foreign persons or entities to convert pesos to foreign
currencies generally, and dollars in particular. The Mexican government may
institute a restrictive currency exchange control policy in the future. Any
restrictive currency exchange control policy could prevent or restrict our
access to dollars to meet our dollar-denominated obligations, including our debt obligations, when and if issued, and could also have a
material adverse effect on our business, financial condition and results of
operations. Mexican Income Taxation The following is a description of the material Mexican income tax
consequences of the purchasing, owning and disposing of Series A Shares, ADSs
and CPOs. The tax treatment of a holder of the Series A Shares, the Series A
Shares represented by ADSs and CPOs may vary depending upon the particular
situation of the holder. The following summary of the principal consequences under Mexican law, as
currently in effect, and of the Treaty (defined below) is limited to an
investment in Series A Shares, CPOs and ADSs by a holder who is not a resident
of Mexico and who will not hold Series A Shares, CPOs and ADSs or a beneficial
interest therein in connection with a permanent establishment (establecimiento
permanente) in Mexico, or Foreign Holder. For purposes of Mexican taxation, an
individual or corporation that does not satisfy the necessary requirements to
be considered a Mexican resident for tax purposes as described below is deemed
to be a Foreign Holder. For purposes of Mexican taxation, an individual is a
resident of Mexico if such person has established his or her home in Mexico,
unless such person has resided in another country for more than 183 days,
whether consecutive or not, during a calendar year and can demonstrate that
such person has become a resident of that country for tax purposes. A legal
entity is a resident of Mexico if (i) it was incorporated under Mexican law, or
(ii) it has its main management or its principal administrative office located
in Mexico. A Mexican citizen is presumed to be a resident of Mexico unless
such person can demonstrate the contrary. A permanent establishment of a
non-resident will be required to pay taxes in Mexico with respect to income
attributable to such permanent establishment in accordance with applicable law. This summary is based upon the federal tax laws, regulations and treaty
obligations of Mexico as in effect on July 15, 2004, which are subject to
change. Such tax laws, their regulations and treaty obligations of Mexico are
also subject to various interpretations, and the Ministry of Finance and Public
Credit (Secretaría de Hacienda y Crédito Público) or the Mexican competent
courts could later disagree with the explanations or conclusions set out below.
The discussion below does not address all Mexican tax considerations that may
be relevant to particular investors, nor does it address the special tax rules
applicable to certain categories of investors or any tax consequences under the
tax laws of any state or municipality of Mexico. Prospective purchasers of
Series A Shares, CPOs and ADSs are urged to consult their own tax advisors as
to the Mexican or other tax consequences of the purchase, ownership and
disposition of Series A Shares, Series A Shares represented by ADSs and CPOs,
2006 notes or 2008 notes including, in particular, the effect of any foreign,
state or local tax laws. The United States and Mexico have entered into a Convention for the
Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to
Income Taxes and accompanying protocol, or the Treaty, that generally became
effective on January 1, 1994. In general, the Treaty does not have adverse
effects on holders of ADSs, Series A Shares and CPOs. The United States and Mexico have also entered into an agreement that
regulates the exchange of information regarding tax matters. -80-




---



##### Table of Contents



Series A Shares, ADSs, CPOs Taxation of Dividends Under the Mexican Income Tax Law (Ley del Impuestos Sobre la Renta),
dividends, either in cash or in kind, paid with respect to Series A Shares
underlying the CPOs and ADSs to a Foreign Holder will not be subject to any
withholding tax. On the other hand, during 2003 Mexican companies paying dividends with
profits that have not yet been subject to the corporate income tax, are
obligated to pay a tax of 34% of the amount resulting from the increase to the amount of the dividend multiplied by a factor of 1.5152,
as if the distributed profits would have been a profit after the payment of the
tax. Such tax rate will decrease 1% in each of the subsequent years of 2004
and 2005, to a minimum rate of 32%, while the applicable factor will be 1.4925
during 2004 and 1.4706 as of 2005. However, Mexican companies will not be subject to any income tax in
addition to the corporate tax as long as the amount maintained in its after tax
profits account (cuenta de utilidad fiscal neta, or CUFIN) exceeds or equals
the dividend payment to be made. In addition, up to December 31, 2001, Mexican companies were authorized to
defer a portion of their taxes, case in which a company was obligated to
maintain a reinvested after tax profits account (cuenta de utilidad fiscal neta
reinvertida, or CUFINRE). In this regard, companies that had elected to defer
their income taxes are required to pay such deferred taxes when distributing
their profits that were partially taxed; therefore, any dividend coming from
their CUFINRE balances will be taxed by applying a rate of 3% (in case those
profits were obtained during 1999) or of 5% (in case those profits were
obtained during 2000 and 2001) to the amount of distributed dividends already
grossed-up by the 1.5385 factor. Mexican companies that maintain a CUFINRE account set up under the
provisions in full force and effect during the tax years prior to 2002, must
first exhaust the balance in their CUFINRE account before they can utilize
CUFIN balances. Disposition of Series A Shares, ADSs and CPOs The sale or other disposition of shares or securities that represent the
ownership of assets by nonresidents are subject to income taxation in Mexico as
long as (i) they are issued by a Mexican resident, or (ii) the accounting value
of said shares or securities comes, in more than 50%, from immovable property
located in Mexico. However, deposits of CPOs in exchange for ADSs and withdrawals of CPOs in
exchange for ADSs will not give rise to Mexican taxation. The sale or other
disposition of ADSs by a Foreign Holder will not be subject to Mexican tax. The sale or other disposition of Series A Shares or CPOs by a Foreign
Holder will be:  
    
    Subject to Mexican income tax assessed at the rate of 25% on
the total amount of the transaction, without any deduction. The
purchaser of Series A Shares is obligated to withhold the tax only
if he is a Mexican resident or has a permanent establishment in
Mexico; in any other cases, the Foreign Holder will be obligated to
pay the tax directly to the Mexican tax authorities; or  
    
    Subject to Mexican income tax assessed at the optional rate
of 34% on the gains obtained (if any) as long as the Foreign Holder
(i) has a representative in Mexico that meets certain requirements,
and is appointed before the actual sale or disposition takes place,
(ii) is not a resident of a country considered as a tax haven or of
a country with territorial taxation system in terms of the
provisions of the Income Tax Law, and (iii) files an audited opinion
of the transaction prepared by a public accountant authorized for
such purposes with the Mexican Ministry of Finance and Public
Credit. In this case, the Foreign Holder will be obligated to pay
the tax through the appointed representative to the Mexican tax
authorities. Such tax rate will decrease 1% in each of the
subsequent years of 2004 and 2005, to a minimum rate of 32%; or -81-




---



##### Table of Contents




    
    Exempt from Mexican income tax as long as (i) the transaction
is carried out through the Mexican Stock Exchange, (ii) the Foreign
Holder is an individual, and (iii) the income from the sale or other
disposition would have been exempt if obtained by a Mexican resident
individual. However, under the Treaty, a Foreign Holder that is eligible to claim the
benefits of the Treaty will be exempt from Mexican tax on gains realized on a
sale or other disposition of Series A Shares or CPOs, so long as such Foreign
Holder did not own, directly or indirectly, 25% or more of the outstanding
shares of our company (including those represented by ADSs) within the 12-month
period preceding such sale or other disposition. Estate and Gift Taxes A Foreign Holder will not be liable in Mexico for estate, gift,
inheritance or similar taxes with respect to its holdings of Series A Shares,
CPOs or ADSs; provided, however, that gifts or any gratuitous transfers of
Series A Shares or CPOs may in certain circumstances result in the imposition
of a Mexican federal income tax upon the recipient. There are no Mexican
stamp, issue, registration or similar taxes payable by a Foreign Holder with
respect to the Series A Shares, CPOs or ADSs. United States Federal Income Taxation The following is a description of the material U.S. federal income tax
consequences of owning and disposing of Series A Shares, CPOs or ADSs. This
description addresses only the United States federal income tax considerations
of holders that will hold Series A Shares, CPOs or ADSs as capital assets.
This description is based on the Internal Revenue Code of 1986, as amended, or
the Code, United States Treasury Regulations (temporary, proposed and final)
issued under the Code, and administrative and judicial interpretations of the
Code and regulations, each as in effect and available as of July 15, 2004. These income tax laws, regulations, and interpretations, however, may
change at any time, and any change could be retroactive to the issuance date of
the Series A Shares, CPOs or ADSs as the case may be. These income tax laws
and regulations are also subject to various interpretations, and the U.S.
Internal Revenue Service, or the IRS, or the U.S. courts could later disagree
with the explanations or conclusions set out below. This description does not address all of the tax consequences that may be
relevant to a holder. This description does not address, except as stated
below, any of the tax consequences to:  
    
    holders that may be subject to special tax treatment, such as
financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, tax-exempt organizations,
grantor trusts or dealers or traders in securities or currencies,  
    
    persons whose functional currency for U.S. federal income tax
purposes is not the dollar, and  
    
    persons that will hold Series A Shares, CPOs or ADSs as part
of a position in a straddle or as part of a hedging, conversion or
other integrated investment transaction for U.S. federal income tax
purposes. This description does not address, except as stated below, any of the tax
consequences to persons that received Series A Shares CPOs or ADSs as
compensation for the performance of services, persons that will hold Series A
Shares CPOs or ADSs or holders that own (or are deemed to own) 10% or more (by
voting power or value) of the stock of our company. Moreover, this summary
does not address the U.S. federal estate and gift or alternative minimum tax
consequences of the acquisition, ownership and disposition of Series A Shares
CPOs or ADSs. For purposes of this description, a U.S. Holder is a beneficial owner of
Series A Shares, CPOs or ADSs who for U.S. federal income tax purposes is:  
    
    a citizen or resident of the United States, including some
former citizens or residents of the United States; -82-




---



##### Table of Contents




    
    a corporation or partnership created or organized in or under
the laws of the United States or any state thereof, including the
District of Columbia;  
    
    an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or  
    
    a trust (1) that validly elects to be treated as a United
States person for U.S. federal income tax purposes or (2)(a) the
administration over which a U.S. court can exercise primary
supervision and (b) all of the substantial decisions of which one or
more United States persons have the authority to control. In general, this discussion does not address the tax consequences
applicable to holders that are treated as partnerships or other pass-through
entities for U.S. federal income tax purposes. Such an entity, a partner of a
partnership, a member in a limited liability company that is treated as a
partnership for U.S. federal income tax purposes, and other owners of a
pass-through entity that holds Series A Shares, CPOs or ADSs should consult its
own tax advisor as to such consequences. A non-U.S. Holder is a beneficial owner of the Series A Shares, CPOs or
ADSs, other than a U.S. Holder. ADSs This description is based in part on the representations of the Depositary
and the assumption that each obligation in the Deposit Agreement and any
related agreement will be performed in accordance with its terms. The United
States Treasury Department has expressed concern that depositaries for American
depositary receipts, or other intermediaries between the holders of shares of
an issuer and the issuer, may be taking actions that are inconsistent with the
claiming of United States foreign tax credits by U.S. Holders of such receipts
or shares. Accordingly, the analysis regarding the sourcing rules described
below for United States foreign tax credit purposes could be affected by future
actions that may be taken by the United States Treasury Department. Ownership of CPOs or ADSs in General For United States federal income tax purposes, a holder of CPOs or ADSs
generally will be treated as the owner of the Series A Shares represented by
such CPOs or ADSs. Distributions Subject to the discussion below under Passive Foreign Investment Company
Considerations, the gross amount of any distribution by our company of cash or
property (other than certain distributions, if any, of Series A Shares, CPOs or
ADSs distributed pro rata to all stockholders of our company, including holders
of CPOs or ADSs) with respect to Series A Shares, CPOs or ADSs, before
reduction for any Mexican taxes withheld therefrom, will be includible in
income by a U.S. Holder as dividend income to the extent such distributions are
paid out of the current or accumulated earnings and profits of our company as
determined under United States federal income tax principles. Such dividends
will not be eligible for the dividends received deduction generally allowed to
corporate U.S. Holders. Subject to the discussion below under Passive Foreign
Investment Company Considerations, non-corporate U.S. Holders generally will
be taxed on such distributions at the lower rates applicable to long-term
capital gains for taxable years beginning on or before December 31, 2008,
(i.e., gains from the sale of capital assets held for more than one year).
Subject to the discussion below under Passive Foreign Investment Company
Considerations, to the extent, if any, that the amount of any distribution by
our company exceeds our companys current and accumulated earnings and profits
as determined under United States federal income tax principles, it will be
treated first as a tax-free return of the U.S. Holders adjusted tax basis in
the Series A Shares, CPOs or ADSs and thereafter as capital gain. Our company
does not maintain calculations of our companys earnings and profits under
United States federal income tax principles. Any such dividend paid in pesos will be included in the gross income of a
U.S. Holder in an amount equal to the dollar value of the pesos on the date of
receipt. The amount of any distribution of property other than cash will be
the fair market value of such property on the date of distribution. -83-




---



##### Table of Contents



Dividends received by a U.S. Holder with respect to Series A Shares, CPOs
or ADSs will be treated as foreign source income, which may be relevant in
calculating such holders foreign tax credit limitation. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by our
company generally will constitute passive income, or, in the case of certain
U.S. Holders, financial services income. Subject to the discussion below under Backup Withholding Tax and
Information Reporting Requirements, a Non-U.S. Holder of Series A Shares, CPOs
or ADSs generally will not be subject to United States federal income or
withholding tax on dividends received on Series A Shares, CPOs or ADSs, unless
such income is effectively connected with the conduct by such Non-U.S. Holder
of a trade or business in the United States. Sale or Exchange of Series A Shares or ADSs Subject to the discussion below under Passive Foreign Investment Company
Considerations, a U.S. Holder generally will recognize gain or loss on the
sale or exchange of Series A Shares, CPOs or ADSs equal to the difference
between the amount realized on such sale or exchange and the U.S. Holders
adjusted tax basis in the Series A Shares, CPOs or ADSs. Such gain or loss
generally will be capital gain or loss. Currently, in the case of a
noncorporate U.S. Holder, the maximum marginal United States federal income tax
rate applicable to such gain will be lower than the maximum marginal United
States federal income tax rate applicable to ordinary income (other than
certain dividends) if such U.S. Holders holding period for such Series A
Shares, CPOs or ADSs exceeds one year (i.e., long-term capital gains). Gain or
loss, if any, recognized by a U.S. Holder generally will be treated as United
States source income or loss for United States foreign tax credit purposes.
The deductibility of capital losses is subject to limitations. The initial tax basis of Series A Shares to a U.S. Holder will be the
dollar value of any peso-denominated purchase price determined on the date of
purchase. If the Series A Shares are treated as traded on an established
securities market, a cash basis U.S. Holder (or, if it elects, an accrual
basis U.S. Holder) will determine the dollar value of the cost of such Series A
Shares by translating the amount paid at the spot rate of exchange on the
settlement date of the purchase. The conversion of dollars to pesos and the
immediate use of that currency to purchase Series A Shares generally will not
result in taxable gain or loss for a U.S. Holder. With respect to the sale or exchange of Series A Shares, the amount
realized generally will be the dollar value of the payment received determined
on (i) the date of receipt of payment in the case of a cash basis U.S. Holder
and (ii) the date of disposition in the case of an accrual basis U.S. Holder.
If the Series A Shares are treated as traded on an established securities
market, a cash basis taxpayer (or, if it elects, an accrual basis taxpayer)
will determine the dollar value of the amount realized by translating the
amount received at the spot rate of exchange on the settlement date of the
sale. Subject to the discussion below under Backup Withholding Tax and
Information Reporting Requirements, a Non-U.S. Holder of Series A Shares, CPOs
or ADSs generally will not be subject to United States federal income or
withholding tax on any gain realized on the sale or exchange of such Series A
Shares, CPOs or ADSs unless (i) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United States or
(ii) in the case of any gain realized by an individual Non-U.S. Holder, such
holder is present in the United States for 183 days or more in the taxable year
of such sale or exchange and certain other conditions are met. Passive Foreign Investment Company Considerations A Non-United States corporation will be classified as a passive foreign
investment company, or a PFIC, for U.S. federal income tax purposes in any
taxable year in which, after applying certain look-through rules, either (i) at least 75% of its gross income is passive
income or (ii) at least 50% of the gross value of its assets is attributable
to assets that produce passive income or are held for the production of
passive income. Passive income for this purpose generally includes dividends,
interest, royalties, rents and gains from commodities and securities
transactions. Based on certain estimates of our companys gross income and gross assets
and the nature of our companys business, our company believes that it will not
be classified as a PFIC for the taxable year ended December 31, -84-




---



##### Table of Contents



2003. Our
companys status in future years will depend on our companys assets and
activities in those years. Our company has no reason to believe that its
assets or activities will change in a manner that would cause our company to be
classified as a PFIC, but there can be no assurance that our company will not
be considered a PFIC for any taxable year. If our company were a PFIC, a U.S.
Holder of Series A Shares, CPOs or ADSs generally would be subject to imputed
interest charges and other disadvantageous tax treatment (including the denial
of the taxation of certain dividends at the lower rates applicable to long-term
capital gains, as discussed above under Distributions) with respect to any
gain from the sale or exchange of, and certain distributions with respect to,
the Series A Shares, CPOs or ADSs. If our company were a PFIC, a U.S. Holder of Series A Shares, CPOs or ADSs
could make a variety of elections that may alleviate certain of the tax
consequences referred to above, and one of these elections may be made
retroactively. However, it is expected that the conditions necessary for
making certain of such elections will not apply in the case of the Series A
Shares, CPOs or ADSs. U.S. Holders should consult their own tax advisors
regarding the tax consequences that would arise if our company were treated as
a PFIC. U.S. Backup Withholding Tax and Information Reporting U.S. backup withholding tax and information reporting requirements
generally will apply to certain payments to certain noncorporate holders of
stock. Information reporting generally will apply to payments of dividends on,
and to proceeds from the sale or redemption of, Series A Shares, CPOs or ADSs,
in each case, made within the United States to a holder of Series A Shares,
CPOs or ADSs (other than an exempt recipient, including a corporation, a payee
that is not a United States person who provides appropriate certification and
certain other persons). A payor will be required to withhold backup
withholding tax from any such payments within the United States to a holder
(other than an exempt recipient) if such holder fails to furnish its correct
taxpayer identification number or otherwise fails to comply with, or establish
an exemption from, such backup withholding tax requirements. The backup
withholding tax rate is 28% for years through 2010. In the case of such
payments made within the United States to a foreign simple trust, a foreign
grantor trust or a foreign partnership (other than payments to a foreign simple
trust, a foreign grantor trust or foreign partnership that qualifies as a
withholding foreign trust or a withholding foreign partnership within the
meaning of the applicable U.S. Treasury Regulations and payments to a foreign
simple trust, a foreign grantor trust or a foreign partnership that are
effectively connected with the conduct of a trade or business in the United
States), the beneficiaries of the foreign simple trust, the persons treated as
the owners of the foreign grantor trust or the partners of the foreign
partnership, as the case may be, will be required to provide the certification
discussed above in order to establish an exemption from backup withholding tax
and information reporting requirements. Moreover, a payor may rely on a
certification provided by a payee that is not a United States person only if
such payor does not have actual knowledge or a reason to know that any
information or certification stated in such certificate is incorrect. THE ABOVE DESCRIPTION OF MEXICAN INCOME TAXATION AND UNITED STATES FEDERAL
INCOME TAXATION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX
CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SERIES A
SHARES, CPOs OR ADSs. PROSPECTIVE PURCHASERS OF SERIES A SHARES, CPOs OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR
PARTICULAR SITUATIONS. Documents on Display We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file
reports and other information with the United States Securities and Exchange
Commission. You may read and copy any reports, statements or other information
filed by us, including this annual report and the exhibits hereto, at the
United States Securities and Exchange Commissions public reference facilities
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, or at one of the United States Securities and Exchange Commissions
public reference facilities in New York, New York and Chicago, Illinois.
Please call the United States Securities and Exchange Commission at
1-800-SEC-0330 for further information on the public reference facilities. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy statements and other information regarding registrants that file
electronically with the Commission. -85-




---



##### Table of Contents



Enforceability of Civil Liabilities We are a corporation (sociedad anónima de capital variable)organized
under the laws of Mexico. In addition, most of our directors, officers and
controlling persons, as well as experts named in this annual report reside
outside the United States, and all or a substantial portion of their assets and
the assets of our company are located in Mexico. As a result, it may be
difficult for investors to effect service of process within the United States
upon these persons or to enforce against them, either inside or outside the
United States, judgments obtained against these persons in U.S. courts, or to
enforce in U.S. courts judgments obtained against these persons in courts in
jurisdictions outside the United States, in each case, in any action predicated
upon civil liabilities under the U.S. federal securities laws. Our company has
been advised by Mexican counsel, Javier Perez Rocha, that there is doubt as to
the enforceability against these persons in Mexico, whether in original actions
or in terms for enforcement of judgments of U.S. courts, of liabilities
predicated solely upon the U.S. federal securities laws. 
 Item 11. Quantitative and Qualitative Disclosure about Market Risk. We are exposed to a number of market risks arising from our normal
business activities. Such market risks principally involve the possibility
that changes in interest rates, exchange rates or commodity prices will
adversely affect the value of our financial assets and liabilities or future
cash flows and earnings. Market risk is the potential loss arising from
adverse changes in market rates and prices. We periodically review our
exposure to risks arising from fluctuations in interest rates and foreign
exchange and determine at the senior management level how to manage these
risks. We do not have a derivatives trading portfolio. We have not entered
into market risk sensitive instruments for speculative purposes. See note 11
to our audited consolidated financial statements. Interest Rate Risk We face primary market risk exposure due to interest rate risk. All of
our long-term interest-bearing debt at December 31, 2003 was variable rate.
Substantially all of our long-term debt is denominated in dollars. As a
result, depreciation of the peso will result in increases in our interest
expense in peso terms. Variable rate long-term debt denominated in dollars
bears interest at rates tied to the London interbank offered rate, or LIBOR,
the rate that banks in the London interbank market offer for dollar deposits of
varying maturities. Although we have from time to time entered into a
derivative contracts for the purpose of hedging interest rate risk on this
long-term debt, we had no open contracts at December 31, 2003. Our notes and bank loans contain covenants, obligations and restrictions
with which we and/or our subsidiaries must comply, mainly in respect of
incurring other indebtedness, paying dividends and making other distributions,
engaging in transactions with related parties and the maintenance of certain
financial ratios, as well as paying interest and principal when due. Since
November 29, 2002, we have failed to pay interest and principal on our
unsecured notes and bank loans and were consequently in default with respect to
such obligations. According to the terms of the governing agreements, the
holders of such indebtedness may accelerate the entire amount of principal of
such debt. Therefore, according to Bulletin C-9, such indebtedness has been
classified as short-term debt. -86-




---



##### Table of Contents



The table below summarizes our debt obligations, which include notes, bank
loans and leases, at December 31, 2003. The table presents payment obligations
in millions of pesos by maturity date and the related weighted-average interest
rates. Dollar-denominated liabilities and notional amounts have been converted
to pesos based on the exchange rate at December 31, 2003, which was Ps 11.24 = US 1.00. Liabilities
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair Value(1)(millions of constant pesos)Long-Term DebtVariable Rate:US$-denominated
    
    
    
    
    
    
    148.4
    
    
    
    108.3
    
    
    
    107.7
    
    
    
    85.2
    
    
    
    61.0
    
    
    
    510.7Weighted average
interest rate
    
    
    
    
    
    
    4.65
    %
    
    
    4.64
    %
    
    
    4.63
    %
    
    
    4.64
    %
    
    
    4.41
    %
    
    
    4.61
    %Short-Term DebtFixed Rate:US$- denominated
    
    
    6,407.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,407.1Weighted average
interest rate
    
    
    12.89
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12.89
    %Variable Rate:US$- denominated
    
    
    2,279.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,279.4Weighted average
interest rate
    
    
    5.29
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.29
    %
   (1)
    
    As of December 2003, due to the financial situation of our company, the
comparable market information required to determine the estimated fair
value of long-term debt was not attainable. As such, we were not able to
calculate a reasonable estimate of the fair value of our long-term debt at
December 31, 2003. Foreign Currency Exchange Rate Risk Since substantially all of our long-term interest-bearing debt is
denominated in dollars, the interest expense varies with exchange rate
movements between the peso and the dollar. We have not entered into any
derivative contracts to limit our exposure to exchange rate fluctuations.
Although prices for our products in Mexico are quoted in pesos, prices are
linked to dollars. We believe that this link mitigates in part the effect of
exchange rate fluctuations between the dollar and the peso. However, because
the majority of our costs of production are paid in pesos, in periods in which
the peso appreciates against the dollar, our operating margins are reduced. The table set forth above summarizes our debt obligations that are
sensitive to foreign currency exchange rates at December 31, 2003. The table
presents principal payment obligations in millions of pesos by maturity date
for dollar-denominated debt. 
 Item 12. Description of Securities Other than Equity Securities. Not applicable. 
 PART II 
 Item 13. Defaults, Dividend Arrearages and Delinquencies. As discussed under Item 4. Information on Our Company  Significant
Developments During 2003 and 2004 and Recent Developments, on November 29,
2002, we suspended payment of principal and interest on our unsecured debt
instruments. As of July 15, 2004, our creditors have the right to require
immediate payment on Ps 7,025.6 million (US$673.0 million) of our indebtedness.
In an ongoing arbitration proceeding, have challenged the validity of the
three notes issued to HG Estate, LLC which, in the aggregate, represent Ps
501.9 million (US$48.1 million) of our outstanding indebtedness. Our notes,
which accounted for 70.6% of our long-term debt before they were reclassified
as a short-term liability, require annual debt service payments of Ps 714.2
million (US$68.4 million), including additional amounts required to be paid in
connection with withholding taxes. -87-




---



##### Table of Contents



In December 2002, we retained financial advisors to advise us in
evaluating debt-restructuring alternatives and the sale of non-strategic assets
to implement a long-term solution to our capital structure and debt service
requirements and began discussions with our bank creditors and bondholders. Our company currently is in default on payments of principal and/or
interest under the following indebtedness: Notes issued under an issuing and paying agency agreement, dated as of
October 4, 2001, among our company, JPMorgan Chase Bank (f/k/a Chase Manhattan
Bank) and JPMorgan Chase Bank, London Branch (f/k/a Chase Manhattan Bank,
London Branch). The US$5.0 million in principal amount of the notes issued
under this Issuing and Paying Agency Agreement matured on February 12, 2003.
As of July 15, 2004, the total unpaid principal is US$5.0 million. Notes issued under an indenture, dated as of July 25, 1996, among our
company and Wells Fargo Bank, National Association, as amended and
supplemented. The US$18.2 million in outstanding principal amount of the notes
issued under this indenture matured on August 1, 2003. As of July 15, 2004,
the total accrued and unpaid interest on the 2003 notes was US$4.5 million. Notes issued under an indenture, dated as of February 5, 2001, among our
company and Wells Fargo Bank, National Association, as amended and
supplemented. The US$301.7 million in principal amount of the notes issued
under this indenture mature on August 1, 2006. As of July 15, 2004, the total
accrued and unpaid interest on the 2006 notes was US$77.6 million. Notes issued under an indenture, dated as of September 13, 2001, among our
company and Wells Fargo Bank, National Association, as amended and
supplemented. The US$10.4 million in principal amount of the notes issued
under this indenture mature on August 1, 2008. As of July 15, 2004, the total
accrued and unpaid interest on the 2008 notes was US$2.7 million. Notes issued under an indenture, dated as of June 24, 2002, among our
company and Wells Fargo Bank, National Association, as amended and
supplemented. The US$175.0 million in principal amount of the notes issued
under this indenture mature on August 1, 2009. As of July 15, 2004, the total
accrued and unpaid interest on the 2009 notes was US$49.6 million. A promissory note issued on May 28, 2002 to HG Estate, LLC and St. Marys
Railroad Corporation in exchange for a subordinated promissory note issued by
Durango Paper Company in connection with our acquisition of Durango Paper
Company. The US$30.0 million principal amount of this note matures on December
17, 2004. As of July 15, 2004, the total accrued and unpaid interest on this
note was US$7.5 million. We are currently engaged in arbitration with HG
Estate, LLC challenging the validity of this note. A promissory note issued on May 28, 2002 to HG Estate, LLC in exchange for
a subordinated promissory note issued by Durango Paper Company in connection
with our acquisition of Durango Paper Company. The US$6.0 million principal
amount of this note matured on April 1, 2003. As of July 15, 2004, the total
principal amount in default was US$6.0 million and the total accrued and unpaid
interest on this note was US$1.6 million. We are currently engaged in
arbitration with HG Estate, LLC challenging the validity of this note. A promissory note issued on May 28, 2002 to HG Estate, LLC in exchange for
a subordinated promissory note issued by Durango Paper Company in connection
with our acquisition of Durango Paper Company. The US$12.1 million principal
amount on this note matured on December 17, 2002. As of July 15, 2004, the
total principal amount in default was US$12.1 million and the total accrued and
unpaid interest on this note was US$3.0 million. We are currently engaged in
arbitration with HG Estate, LLC challenging the validity of this note. A bank loan issued under a credit agreement, dated as of May 25, 2001,
between our company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and Banamex.
As of July 15, 2004, the total principal amount in default was US$75.3 million
and the total accrued and unpaid interest was US$23.5 million. -88-




---



##### Table of Contents



A promissory note issued on July 22, 2002 to Banamex by our company (f/k/a
Grupo Industrial Durango, S.A. de C.V.). The US$5.1 million principal amount
on this note matured on December 10, 2002. As of July 15, 2004, the total
principal amount in default was US$5.1 million and the total accrued and unpaid
interest was US$1.7 million. A bank loan issued under a business loan agreement, dated as of January 4,
2001, between our company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and
California Commerce Bank. As of July 15, 2004, the total principal amount in
default was US$11.7 million and the total accrued and unpaid interest was
US$1.8 million. A bank loan issued under a business loan agreement, dated as of May 18,
2001, between our company (f/k/a Grupo Industrial Durango, S.A. de C.V.) and
California Commerce Bank. As of July 15, 2004, the total principal amount in
default was US$12.5 million and the total accrued and unpaid interest was
US$2.0 million. A bank loan issued under a trade finance facility agreement, dated as of
December 17, 1997, between our company (f/k/a Grupo Industrial Durango, S.A. de
C.V.), JPMorgan Chase Bank (f/k/a Chase Manhattan Bank), Deutsche Bank AG and
Banc of America Securities Limited. As of July 15, 2004, the total principal
amount in default was US$10.0 million and the total accrued and unpaid interest
was US$1.9 million. A bank loan issued under a loan agreement, dated as of July 26, 2002,
between Durango Georgia Receivables Company, our company and Bank of America,
N.A. We guaranteed this loan. Durango Georgia Receivables Company filed for
protection from its creditors under chapter 11 of the U.S. bankruptcy code in
November 2002. Bank of America, N.A. called our guarantee in February 2003.
As a result, our guarantee of the obligations under this loan is in default.
As of July 15, 2004, the total principal amount in default was US$17.0 million
and the total accrued and unpaid interest was US$2.3 million. A letter of credit issued by JPMorgan Chase Bank (f/k/a Chase Manhattan
Bank) to SunTrust Leasing Corporation for the benefit of our former subsidiary,
Durango Georgia Paper Company, in the aggregate principal amount of US$2.6
million (Ps 29.4 million). This letter of credit was drawn on April 19, 2000.
We guaranteed Durango Georgia Paper Companys reimbursement obligation under
this letter of credit. Durango Georgia Paper Company filed for protection from
its creditors under chapter 11 of the U.S. bankruptcy code in November 2002.
JPMorgan Chase Bank called our guarantee on January 15, 2003. As a result, our
guarantee of the reimbursement obligations under this letter of credit is in
default. Under the terms of the reimbursement agreement, past due obligations
under the reimbursement agreement bear interest at a rate of 7.25% per annum.
As of July 15, 2004, the aggregate amount of due and unpaid principal under
this reimbursement obligation was US$2.6 million (Ps 29.4 million) and the
aggregate amount of due and unpaid interest under this reimbursement obligation
was US$0.1 million (Ps 1.1 million). A letter of credit issued by JPMorgan Chase Bank (f/k/a Chase Manhattan
Bank) to Pitney Bowes Credit Corporation for the benefit of our former
subsidiary, Durango Georgia Paper Company, in the aggregate principal amount of
US$3.1 million (Ps 34.8 million). This letter of credit was drawn on April 19,
2000. We guaranteed Durango Georgia Paper Companys reimbursement obligation
under this letter of credit. Durango Georgia Paper Company filed for
protection from its creditors under chapter 11 of the U.S. bankruptcy code in
November 2002. JPMorgan Chase Bank called our guarantee on January 15, 2003.
As a result, our guarantee of the reimbursement obligations under this letter
of credit is in default. Under the terms of the reimbursement agreement, past
due obligations under the reimbursement agreement bear interest at a rate of
7.25% per annum. As of July 15, 2004, the aggregate amount of due and unpaid
principal under this reimbursement obligation was US$2.4 million (Ps 26.6
million) and the aggregate amount of due and unpaid interest under this reimbursement obligation was
US$0.1 million (Ps 1.1 million). A bank loan issued under a loan agreement, dated as of December 17, 1999,
between Grupo Pipsamex, our subsidiary, and Bancomext. This loan is secured by
a first priority security interest in all of the assets of Grupo Pipsamex and
its subsidiaries. As of December 31, 2003, the aggregate principal amount
outstanding under this loan agreement was US$62.9 million (Ps 706.3 million).
As of July 15, 2004, the total principal amount in default is US$11.4 million
and the total accrued and unpaid interest is US$3.6 million. -89-




---



##### Table of Contents



A bank loan issued under a loan agreement, dated as of December 17, 1999,
between Fábrica Mexicana de Papel, S.A. de C.V., our subsidiary, and Bancomext.
This loan is secured by a second priority security interest in all of the
assets of Fábrica Mexicana de Papel, S.A. de C.V. and is guaranteed by CODUSA.
As of December 31, 2003, the aggregate principal amount outstanding under this
loan agreement was US$10.8 million (Ps 121.2 million). As of July 15, 2004,
the total principal amount in default is US$1.1 million and the total accrued
and unpaid interest is US$0.4 million. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds. Wells Fargo Bank, National Association (f/k/a Wells Fargo Bank Minnesota,
National Association) replaced JPMorgan Chase Bank (f/k/a Chase Manhattan Bank)
as trustee for our companys 2003 notes, 2006 notes, 2008 notes and 2009 notes
under the terms of the instrument of resignation, appointment and acceptance,
dated February 5, 2003. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank)
continues to act as security registrar and paying agent for our companys 2003
notes, 2006 notes, 2008 notes and 2009 notes. Wells Fargo Bank, National
Associations business address is Wells Fargo Bank, National Association, MAC
N9303-120, Sixth and Marquette, Minneapolis, Minnesota 55479, Attention:
Corporate Trust Services. 
 Item 15. Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of December 31, 2003, we carried out an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their control objectives. Based upon our evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December
31, 2003, our disclosure controls and procedures are effective in providing
reasonable assurance that information relating to us that is required to be
included in our periodic filings with the United States Securities and Exchange
Commission is recorded, processed, summarized and reported as and when
required.
In connection with the preparation of this annual report on Form 20-F, it has
come to the attention of our Chief Executive Officer and Chief Financial
Officer that our disclosure controls and procedures should be modified to
provide for earlier submission of our financial statements to the independent
registered public accounting firms reviewing these financial statements in
order to permit them to timely complete their review of our financial
statements. We are undertaking measures to ensure that this modification to
our disclosure controls and procedures is made during our current fiscal year.
There has been no change in our internal control over financial
reporting during the last fiscal year that has materially affected, or is
reasonable likely to materially affect, our internal control over financial
reporting. Change in Internal Controls Over Financial Reporting There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken, including
corrective actions with regard to significant deficiencies and material
weakness. 
 Item 16. [Reserved]. Not applicable. 
 Item 16A. Audit Committee Financial Expert. The audit committee members are Alfonso Fernández de Castro, Roberto Isaac
Hernandez and Mayela Rincón de Velasco. Our Board of Directors has determined
that Mayela Rincón de Velasco is our audit committee financial expert within
the meaning of applicable law. 
 Item 16B. Code of Ethics. We have adopted a Code of Conduct and Business Ethics Policy that applies
to our principal executive officer, principal financial officer and principal
accounting officer as well as all our directors, other officers and employees.
This Code of Conduct and Business Ethics Policy can be found at our website,
www.corpdgo.com.mx. -90-




---



##### Table of Contents



Item 16C. Principal Accountant Fees and Services. Audit Fees The following table summarizes the aggregate fees billed to us by our
principal accounting firm, Galaz, Yamazaki, Ruiz Urquiza, S.C., a member firm
of Deloitte Touche Tohmatsu, or DTT, and other member firms of DTT,
collectively, the DTT Member Firms, for the fiscal year ended December 31, 2003
and the aggregate fees billed to us by our prior principal accounting firm,
PricewaterhouseCoopers, for the fiscal year ended December 31, 2002: At and for the year ended December 31,2003
    
    2002(in millions of constant pesos)Audit Fees
    
    Ps
    10.024
    
    
    Ps
    7.563Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    0.719
    
    
    
    0.978Other Fees
    
    
    
    
    
    
    6.180Total Fees
    
    Ps
    10.743
    
    
    Ps
    14.721
 Audit fees and audit-related fees.Audit fees in the above table, which
include all audit-related fees, for the year ended December 31, 2003 are the
aggregate fees billed or expected to be billed by DTT Member Firms in
connection with the audit of our annual financial statements and regulatory
audits. Audit fees in the above table, which include all audit-related fees,
for the year ended December 31, 2002 are the aggregate fees billed by
PricewaterhouseCoopers in connection with the audit of our annual financial
statements, financial accounting and reporting consultations. Additionally,
the audit fees include review of our companys annual financial statements and
our companys annual report to be filed with the United States Securities and
Exchange Commission and the CNBV. Tax Fees.Tax fees in the above table for the year ended December 31, 2003
are fees billed or expected to be billed by DTT Member Firms for tax
consultations and tax return preparation for our U.S. subsidiaries. Tax fees
in the above table for the year ended December 31, 2002 are fees billed by
PricewaterhouseCoopers for tax return preparation, assistance to obtain
government approval for amounts included in tax filings such as value-added tax
return assistance and requests for technical advice from taxing authorities. Other Fees.Other fees in the above table for the year ended December 31,
2002 are fees billed by PricewaterhouseCoopers for non-audit services related
to the financial restructuring of our company. As a percentage of total fees
billed to our company, other fees represent 42.0% for 2002. Audit Committees Pre-Approval Policy and Procedures Our audit committee is charged with the responsibility of pre-approving
all audit and non-audit services provided to us and our subsidiaries by our
independent auditor and any other auditing firm. In performing this duty, the
audit committee is guided by the following pre-approval policies and
procedures:  
    
    the audit committee must pre-approve services performed by
our independent auditor for us or our subsidiaries, which may
include audit, review, attest and non-audit services permitted under
applicable -91-




---



##### Table of Contents



law, such as the rules and regulations of the United
States Securities and Exchange Commission, the Public Company
Accounting Oversight Board and any other regulatory or
self-regulatory body, collectively, the covered services;  
    
    the audit committee must pre-approve all covered services
provided by other firms besides our independent auditor to the
extent our independent auditor expressly relies on the audit report
of these other firms in preparing its own audit report; and  
    
    the audit committee may delegate its authority to pre-approve
the covered services to one or more members of the audit committee. In considering whether to grant approval, the audit committee considers
the nature and scope of the service as proposed in light of applicable law, as
well as the principles and other guidance of the United States Securities and
Exchange Commission and the Public Company Accounting Oversight Board with
respect to auditor independence. The audit committee also considers whether the
overall level of non-audit services is compatible with the independence of the
independent auditor. In general, predictable and recurring services are
approved by the audit committee on an annual basis at or about the start of
each fiscal year. While our policies and procedures acknowledge the de minimusexception
granted by United States Securities and Exchange Commission regulations, which
allows certain services to be exempt from pre-approval, we do not normally rely
on this exception. Our chief financial officer is responsible for bringing to
the audit committees attention any instance in which services may have been
provided without prior approval. Substantially all of the above fees paid to
Galaz, Yamazaki, Ruiz Urquiza, S.C. and PricewaterhouseCoopers were subject to
our pre-approval policies and procedures. 
 Item 16D. Exemptions from the Listing Standards for Audit Committees. Not applicable. 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers. Not applicable. 
 PART III 
 Item 17. Financial Statements. Not applicable. 
 Item 18. Financial Statements. See
pages F-1 to F-119, incorporated herein by reference. 
 Item 19. Exhibits. Documents filed as exhibits to this annual report: 1.1
    
    Bylaws of our company, as amended (English translation)2.1
    
    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
 -92-




---



##### Table of Contents



(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 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 Subsidiaries12.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002(1)12.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002(1)13.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)13.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002(1)
    -93-




---



##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. CORPORACIÓN DURANGO, S.A. DE C.V.By:
    
    /s/ Mayela Rincón de VelascoName: Mayela Rincón de VelascoTitle:   Chief Financial Officer
 Date: July 15, 2004




---



##### Table of Contents



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-3Consolidated statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    F-5Consolidated statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    F-7Consolidated statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    F-8Notes to combined and consolidated financial statements
    
    F-10
 COMPANIA PAPELERA DE ATENQUIQUE, S.A. DE C.V. INDEX TO 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-59Balance sheets as of December 31, 2002 and 2003
    
    F-61Statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    F-63Statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    F-64Statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    F-65Notes to the consolidated financial statements
    
    F-67
 INDUSTRIAS CENTAURO, S.A. DE C.V. INDEX TO 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-91Balance sheets as of December 31, 2002 and 2003
    
    F-93Statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    F-94Statements of changes in stockholders equity for the years ended
December 31, 2001, 2002 and 2003
    
    F-95Statements of changes in financial position for the years ended
December 31, 2001, 2002 and 2003
    
    F-96Notes to the financial statements
    
    F-97
 EXPLANATORY NOTE We have not included the
reports of the independent registered public accounting
firms with respect to the financial statements of (i) Corporación Durango, S.A.
de C.V as of December 31, 2003 and 2002 and for the years ended
December 31, 2003, 2002 and 2001, (ii) Industrias Centauro, S.A. de C.V. as of
December 31, 2003 and 2002 and for
the years ended December 31, 2003, 2002 and 2001 and, (iii) Compania Papelera de
Atenquique, S.A. de CV. as of December 31, 2003 and 2002 and for the years ended
December 31, 2003, 2002 and 2001 as the independent registered
public accounting firms
that will provide such reports have not completed their respective
reviews of these
financial statements. We believe that no material changes to these financial
statements will be required as a result of such reviews and anticipate that such
reviews will be concluded in the near future. We intend to file an amendment to
this annual report on Form 20-F, which will include such report, as soon as
practicable.




---



##### Table of Contents



Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V. [INTENTIONALLY LEFT BLANK] F-1




---



##### Table of Contents



[INTENTIONALLY LEFT BLANK] F-2




---



##### Table of Contents



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-3




---



##### Table of Contents



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-4




---



##### Table of Contents



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-5




---



##### 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-6




---



##### 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-7




---



##### 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-8




---



##### 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-9




---



##### 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-10




---



##### 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-11




---



##### 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-12




---



##### 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-13




---



##### Table of Contents



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-14




---



##### 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-15




---



##### 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-16




---



##### 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-17




---



##### 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-18




---



##### 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-19




---



##### 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-20




---



##### 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-21




---



##### 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-22




---



##### 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-23




---



##### 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-24




---



##### 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-25




---



##### 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-26




---



##### 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-27




---



##### 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-28




---



##### 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-29




---



##### 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-30




---



##### 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-31




---



##### 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-32




---



##### 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-33




---



##### 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-34




---



##### 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-35




---



##### 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-36




---



##### 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-37




---



##### 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-38




---



##### 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-39




---



##### 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-40




---



##### 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-41




---



##### 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-42




---



##### 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-43




---



##### 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-44




---



##### 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-45




---



##### 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-46




---



##### 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-47




---



##### 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
    
    
    
    (9,492,043
    )
    
    
    1,533,037Minority stockholders equity in
consolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,776
    
    
    
    67,776Total stockholders equity
    
    
    1,533,037
    
    
    
    1,698,387
    
    
    
    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-48




---



##### 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-49




---



##### 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
    
    
    
    (4,360,863
    )
    
    
    1,559,409Changes in operating assets and
liabilities
    
    
    2,541,695
    
    
    
    81,930
    
    
    
    (1,251,476
    )
    
    
    (883,514
    )
    
    
    367,443
    
    
    
    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
    )
    
    
    (36,586
    )
    
    
    (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
    )
    
    
    
    
    
    
    (106,719
    )Sale of (investment in) subsidiaries
    
    
    (2,026,698
    )
    
    
    
    
    
    
    1,094,841
    
    
    
    719,986Revenues from sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    612,582
    
    
    
    312,038
    
    
    
    
    
    
    
    924,620Other investing activities
    
    
    123,432
    
    
    
    (869
    )
    
    
    (498
    )
    
    
    (66,465
    )
    
    
    36,586
    
    
    
    92,171Net resources generated by (used
in) investing activities
    
    
    (1,903,266
    )
    
    
    38,967
    
    
    
    1,676,115
    
    
    
    932,289
    
    
    
    36,586
    
    
    
    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-50




---



##### 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
    )
    
    
    211,871
    
    
    
    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-51




---



##### 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-52




---



##### 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
    )
    
    
    (233,082
    )
    
    
    (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.
    (233,082
    )
    
    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-53




---



##### 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-54




---



##### 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-55




---



##### 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-56




---



##### 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-57




---



##### 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-58




---



##### 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. [INTENTIONALLY LEFT BLANK] F-59




---



##### Table of Contents



[INTENTIONALLY LEFT BLANK] F-60




---



##### Table of Contents



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-61




---



##### Table of Contents



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-62




---



##### Table of Contents



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-63




---



##### Table of Contents





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-64




---



##### Table of Contents



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-65




---



##### Table of Contents



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-66




---



##### Table of Contents





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-67




---



##### Table of Contents



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-68




---



##### Table of Contents



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-69




---



##### Table of Contents



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-70




---



##### Table of Contents



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-71




---



##### 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-72




---



##### 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-73




---



##### 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-74




---



##### 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-75




---



##### 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-76




---



##### 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-77




---



##### 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-78




---



##### 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-79




---



##### 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-80




---



##### 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-81




---



##### 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-82




---



##### 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,
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-83




---



##### 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-84




---



##### 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-85




---



##### 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-86




---



##### 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
    )
    
    
    (298,956
    )Income (loss) from operations
    
    
    (32,398
    )
    
    
    35,538
    
    
    
    18,120Net 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
    
    
    
    88,560Income (loss) before
extraordinary loss
    
    
    (158,679
    )
    
    
    (11,125
    )
    
    
    137,264Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (164,203
    )Net 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-87




---



##### 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:Income (loss) before
extraordinary loss
    
    Ps.
    (158,679
    )
    
    Ps.
    (11,125
    )
    
    Ps.
    137,264Items that did not require
(generate) resources
    
    
    154,980
    
    
    
    11,699
    
    
    
    (128,012
    )Changes in operating assets
and liabilities
    
    
    23,529
    
    
    
    29,403
    
    
    
    159,118Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    (164,203
    )Net 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-88




---



##### 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-89




---



##### 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-90




---



##### 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. [INTENTIONALLY LEFT BLANK] F-91




---



##### Table of Contents



[INTENTIONALLY LEFT BLANK] F-92




---



##### 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-93




---



##### 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-94




---



##### 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-95




---



##### 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-96




---



##### Table of Contents



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-97




---



##### Table of Contents



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-98




---



##### Table of Contents



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-99




---



##### Table of Contents



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-100




---



##### Table of Contents



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-101




---



##### Table of Contents



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-102




---



##### Table of Contents



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-103




---



##### Table of Contents



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-104




---



##### Table of Contents



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-105




---



##### Table of Contents



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-106




---



##### 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-107




---



##### 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-108




---



##### 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-109




---



##### 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-110




---



##### 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-111




---



##### 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-112




---



##### 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-113




---



##### 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-114




---



##### 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-115




---



##### 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-116




---



##### 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-117




---



##### 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-118




---



##### 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-119