##### 



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
ORþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
ORo 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 34208
+52 (618) 829-1000 (Address and telephone
number of principal executive offices)
 Securities registered or to be registered pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act: Series A Common Stock, without par value, or Series A Shares *
Ordinary Participation Certificates, or CPOs, each representing one Series A Share *
American Depositary Shares, or ADSs, each representing two CPOs 
 *
    
    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 for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None   Yes þ             No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o       Item 18 þ




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INTRODUCTION In this annual report, our company, we, us and our refer to Corporación Durango, S.A.
de C.V. and its consolidated subsidiaries, as the context may require. We are a corporation
organized under the laws of the United Mexican States, or Mexico. Presentation of Financial Information Currency and Exchange Rates All references herein to peso, pesos, and Ps are to Mexican pesos, the official currency
of Mexico. All references to dollars, and US$ are to United States dollars. On
October 24, 2005, the exchange rate for pesos into dollars was Ps
10.8560 to US$1.00, based on
the official exchange rate published by the Mexican Central Bank (Banco de Mexico). The
peso/dollar exchange rate was Ps 11.1495 to US$1.00 as of December 31, 2004, Ps 11.2372 to US$1.00
as of December 31, 2003 and Ps 10.4393 to US$1.00 as of December 31, 2002. The peso/dollar
exchange rate fluctuates, and the peso/dollar exchange rate at
October 24, 2005 may not be indicative
of future exchange rates. See Item 3: Key InformationExchange Rate Information for information
regarding the noon buying rate for the purchase of dollars, expressed in nominal pesos per dollar,
since January 1, 2000, as reported by the Federal Reserve Bank of New York. Financial Statements We report our financial statements in pesos and prepare our financial statements in accordance
with generally accepted accounting principles in Mexico, or Mexican GAAP, which differ in
significant respects from generally accepted accounting principles in the United States, or U.S.
GAAP. Note 24 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, 2004 and 2003 and for each of the three years in the period ended December 31,
2004. We have a fiscal year end of December 31. Pursuant to Bulletin B-10, Recognition of the Effects of Inflation in Financial Information,
and Bulletin B-12, Statement of Changes in Financial Position, issued by the Mexican Institute of
Public Accountants (Instituto Mexicano de Contadores Públicos), or MIPA, our audited consolidated
financial statements are reported in period-end pesos to adjust for the effects of inflation. The
presentation of financial information in period-end, or constant, currency units is intended to
eliminate the distorting effect of inflation on the financial statements and to permit comparisons
across comparable periods in comparable monetary units. Consequently, under Mexican GAAP,
non-monetary assets, with the exception of inventories and fixed assets of non-Mexican origin and
those of our non-Mexican subsidiaries, are restated using the National Consumer Price Index (Indice
Nacional de Precios al Consumidor), or the NCPI. Inventories are restated at current replacement
costs while fixed assets of non-Mexican origin are restated by the inflation of the country of
origin prior to translation to pesos at the period-end exchange rate. We use Bulletin B-15, Foreign Currency Transactions and Translation of Financial Statements
of Foreign Operations, which prescribes the methodology for the translation and recognition of
inflation of the financial information of non-Mexican subsidiaries. Therefore, the peso amounts of
our revenues and expenses of our U.S. based subsidiaries may be impacted by the foreign exchange
rate fluctuations and inflation rates in the United States. Except as otherwise indicated, financial data for all periods throughout this annual report
have been restated in constant pesos as of December 31, 2004.




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##### 



Rounding We have made rounding adjustments to reach some of the figures included in this annual report.
As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation
of the figures that preceded them. Market Data The Mexican government does not publish definitive data regarding the pulp and paper industry
on a regular basis. Accordingly, information contained in this annual report regarding national
production, imports, exports, apparent demand, market share and market position has been computed
by us and is based on our estimates which are derived from statistics accumulated by us and our
analysis of certain data obtained from the Mexican National Chamber for the Pulp and Paper Industry
(Cámara Nacional de la Industria de la Celulosa y el Papel), and certain assumptions made by us
based on our knowledge of the market and experience in the Mexican paper industry. Although we
believe that the data taken from third parties and used in this annual report is reliable, we have
not independently verified such data and take no responsibility for the accuracy of such data.
Similarly, while we believe our internal research and estimates to be reliable, they have not been
verified by any independent source and we cannot assure you as to their accuracy. Special Note Regarding Forward-Looking Statements This annual report contains forward-looking statements that involve substantial risks and
uncertainties, including, in particular statements about our plans, strategies and prospects under
the captions Item 5. Operating and Financial Review and Prospects and Item 4. Information on
Our Company. You can identify these statements by forward-looking words such as anticipate,
believe, could, estimate, expect, intend, may, should, will, and would or similar
words. You should read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or of our financial
position or state other forward-looking information. We believe that it is important to
communicate our future expectations to our investors. However, there may be events in the future
that we are not able to accurately predict or control. The factors listed below under the caption
Item 3. Key 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 substantial debt and significant debt service obligations;
    
    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;
    
    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;
    
    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; -3-




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##### 




    
    limitations on our access to sources of financing on competitive terms;
    
    our need for substantial capital; and
    
    interest rate levels. We do not intend to update or otherwise revise the forward-looking statements herein to
reflect circumstances existing after the date when made or to reflect the occurrence of future
events even in the event that any or all of the assumptions underlying the forward-looking
statements are shown to be in error, except as may be required under applicable securities laws. -4-




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##### 



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, 2003 and 2004 and for the years ended December
31, 2002, 2003 and 2004, including the notes thereto. The financial information at December 31,
2000, 2001 and 2002 and for the years ended December 31, 2000 and 2001, has been derived from
audited combined and consolidated financial statements as restated that are not included in this annual report. The audited consolidated financial statements have been prepared in accordance with Mexican
GAAP, which differs in certain significant respects from U.S. GAAP. Note 24 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, 2004 and 2003 and
for each of the three years in the period ended December 31, 2004. 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, 2004, 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. At and for the year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in millions of constant pesos, except per share data)Statement of Income Data:Mexican GAAP (6):Net sales
    
    Ps
    7,852.4
    
    
    Ps
    7,150.5
    
    
    Ps
    8,475.4
    
    
    Ps
    11,220.5
    
    
    Ps
    13,585.5Cost of sales
    
    
    6,733.6
    
    
    
    6,151.0
    
    
    
    7,287.8
    
    
    
    9,362.0
    
    
    
    11,270.9Gross profit
    
    
    1,118.8
    
    
    
    999.5
    
    
    
    1,187.6
    
    
    
    1,858.5
    
    
    
    2,314.6Selling, general and administrative
expenses
    
    
    676.2
    
    
    
    678.6
    
    
    
    659.5
    
    
    
    785.9
    
    
    
    845.9Income from operations
    
    
    442.7
    
    
    
    320.9
    
    
    
    528.0
    
    
    
    1,072.6
    
    
    
    1,468.8Other income (expense)
    
    
    (404.2
    )
    
    
    (1,588.3
    )
    
    
    (3,262.9
    )
    
    
    486.8
    
    
    
    1,667.0Net comprehensive financing cost (result):Interest expense
    
    
    (1,121.6
    )
    
    
    (1,247.4
    )
    
    
    (1,185.8
    )
    
    
    (1,171.6
    )
    
    
    (1,174.6
    )Interest income
    
    
    40.2
    
    
    
    44.1
    
    
    
    41.9
    
    
    
    73.5
    
    
    
    135.6Exchange (gain) loss, net
    
    
    60.5
    
    
    
    (864.0
    )
    
    
    (1,050.1
    )
    
    
    345.0
    
    
    
    (111.2
    )Monetary position gain
    
    
    451.8
    
    
    
    386.3
    
    
    
    427.2
    
    
    
    325.4
    
    
    
    640.4Total net comprehensive financing cost
(result)
    
    
    (569.0
    )
    
    
    (1,681.0
    )
    
    
    (1,766.8
    )
    
    
    (427.7
    )
    
    
    (509.8
    )
 -5-




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##### 



At and for the year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in millions of constant pesos, except per share data)Income (loss) from continuing
operations before income taxes,
employee statutory profit sharing, and
equity in income of associated
companies
    
    
    (530.5
    )
    
    
    (2,948.4
    )
    
    
    (4,501.6
    )
    
    
    1,131.7
    
    
    
    2,626.0Asset tax
    
    
    (14.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax benefit (expense)
    
    
    501.0
    
    
    
    0.7
    
    
    
    707.2
    
    
    
    (48.1
    )
    
    
    (689.9
    )Employee statutory profit sharing
expense
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.1
    )
    
    
    (5.2
    )
    
    
    (8.3
    )Income (loss) from continuing
operations before equity in income of
associated companies
    
    
    (44.1
    )
    
    
    (2,949.5
    )
    
    
    (3,795.6
    )
    
    
    1,078.4
    
    
    
    1,927.8Equity in income of associated companies
    
    
    2.6
    
    
    
    2.0
    
    
    
    2.1
    
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    (41.5
    )
    
    
    (2,947.5
    )
    
    
    (3,793.5
    )
    
    
    1,078.4
    
    
    
    1,927.8Discontinued operations
    
    
    102.1
    
    
    
    (577.7
    )
    
    
    (108.2
    )
    
    
    160.8
    
    
    
    85.5Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (330.5
    )
    
    
    Consolidated net income (loss)
    
    Ps
    60.6
    
    
    Ps
    (3,525.2
    )
    
    Ps
    (3,901.7
    )
    
    Ps
    908.7
    
    
    Ps
    2,013.3Basic and diluted earnings per share (1)
    
    Ps
    0.66
    
    
    Ps
    (37.86
    )
    
    Ps
    (41.51
    )
    
    Ps
    9.61
    
    
    Ps
    19.35Basic and diluted earnings per share
from continuing operations (1)
    
    Ps
    (0.45
    )
    
    Ps
    (31.64
    )
    
    Ps
    (40.36
    )
    
    Ps
    11.42
    
    
    Ps
    18.44Weighted-average number of shares
outstanding
    
    
    91,834,192
    
    
    
    92,942,916
    
    
    
    94,072,122
    
    
    
    94,072,122
    
    
    
    94,072,122U.S.
GAAP:(2) (3) (4)Net sales
    
    Ps
    7,852.4
    
    
    Ps
    7,185.6
    
    
    Ps
    6,849.2
    
    
    Ps
    7,995.4
    
    
    Ps
    9,998.1Operating income (loss)
    
    
    457.7
    
    
    
    (111.1
    )
    
    
    (115.3
    )
    
    
    1,174.1
    
    
    
    1,578.4Income (loss) before provisions for
income and asset taxes, minority
interest, special items and
discontinued operations
    
    
    304.0
    
    
    
    (2,254.3
    )
    
    
    (1,672.8
    )
    
    
    367.2
    
    
    
    1,064.2Net income
(loss)
    
    
    732.1
    
    
    
    (2,669.1
    )
    
    
    (2,033.9
    )
    
    
    360.5
    
    
    
    (327.2
     )Basic and
diluted earnings per share (5)
    
    
    7.97
    
    
    
    (28.72
    )
    
    
    (21.62
    )
    
    
    3.83
    
    
    
    (3.48
    )Basic and diluted earnings per share
from continuing operations (5)
    
    
    6.75
    
    
    
    (27.66
    )
    
    
    (15.92
    )
    
    
    2.99
    
    
    
    11.31Balance Sheet Data:Mexican GAAP (6):Cash and temporary investments
    
    Ps
    834.9
    
    
    Ps
    680.6
    
    
    Ps
    247.3
    
    
    Ps
    560.9
    
    
    Ps
    892.7Total current assets
    
    
    3,841.0
    
    
    
    3,844.4
    
    
    
    3,880.3
    
    
    
    4,681.0
    
    
    
    6,131.2Property, plant and equipment, net
    
    
    11,100.9
    
    
    
    11,905.8
    
    
    
    12,628.7
    
    
    
    16,463.6
    
    
    
    17,656.3Total assets
    
    
    15,531.1
    
    
    
    16,749.8
    
    
    
    18,973.2
    
    
    
    23,418.2
    
    
    
    26,071.5Short-term debt, including current
portion of long-term debt
    
    
    178.1
    
    
    
    9,104.5
    
    
    
    8,276.1
    
    
    
    678.8
    
    
    
    953.7Long-term debt
    
    
    6,952.0
    
    
    
    415.8
    
    
    
    1,074.5
    
    
    
    7,841.7
    
    
    
    8,325.4Capital stock
    
    
    4,988.5
    
    
    
    4,988.4
    
    
    
    5,110.1
    
    
    
    5,110.1
    
    
    
    2,539.4Total majority stockholders equity
    
    
    1,564.7
    
    
    
    1,593.4
    
    
    
    4,787.9
    
    
    
    8,644.9
    
    
    
    7,303.2Total minority stockholders equity
    
    
    77.5
    
    
    
    71.3
    
    
    
    74.8
    
    
    
    45.8
    
    
    
    1,729.5Total stockholders equity
(net assets)
    
    
    1,642.1
    
    
    
    1,664.6
    
    
    
    4,862.7
    
    
    
    8,690.7
    
    
    
    9,032.6U.S.
GAAP:(2)(4)Total assets
    
    Ps
    15,185.3
    
    
    Ps
    15,495.7
    
    
    Ps
    18,478.6
    
    
    Ps
    19,866.3
    
    
    Ps
    22,047.2Total stockholders equity (net assets).
    
    
    472.5
    
    
    
    (241.2
    )
    
    
    2,501.6
    
    
    
    5,412.3
    
    
    
    3,846.7Other Financial Data:Mexican GAAP:
 -6-




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At and for the year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in millions of constant pesos, except per share data)Resources generated by (used in)
operating activities
    
    Ps
    819.2
    
    
    Ps
    (465.0
    )
    
    Ps
    (166.7
    )
    
    Ps
    1,085.4
    
    
    Ps
    1,574.3Resources generated by (used in)
financing activities
    
    
    (605.6
    )
    
    
    (58.7
    )
    
    
    892.7
    
    
    
    (578.5
    )
    
    
    2,046.9Resources generated by (used in)
investing activities
    
    
    (59.4
    )
    
    
    957.1
    
    
    
    (1,039.7
    )
    
    
    (838.7
    )
    
    
    (3,738.2
    )Capital expenditures
    
    
    (207.3
    )
    
    
    (111.8
    )
    
    
    (479.1
    )
    
    
    (890.8
    )
    
    
    (1,240.1
    )U.S.
GAAP: (4)Cash flow provided by (used in)
operating activities
    
    Ps
    781.2
    
    
    Ps
    (330.4
    )
    
    Ps
    409.6
    
    
    Ps
    1,309.0
    
    
    Ps
    753.0Cash flow provided by (used in)
financing activities
    
    
    (466.6
    )
    
    
    (427.0
    )
    
    
    1,443.6
    
    
    
    (1,080.5
    )
    
    
    356.0Cash flow provided by (used in)
investing activities
    
    
    (54.5
    )
    
    
    957.3
    
    
    
    (1,523.5
    )
    
    
    (553.2
    )
    
    
    (1,382.9
    )
 
 (1)
    
    See note 3r to our audited consolidated financial statements.(2)
    
    Amounts of sales and long-term debt under Mexican GAAP do not differ materially from these
amounts under U.S. GAAP. See Note 24 to our audited consolidated financial statements.(3)
    
    The difference between net income (loss) under Mexican GAAP and U.S. Mexican GAAP primarily
reflects differing accounting treatment for minority interest, negative goodwill, deferred
income tax, employees statutory profit sharing and the effects of inflation on fixed assets.
See Note 24 to our audited consolidated financial statements.(4)
    
    As described in Note 24 to our audited consolidated financial statements, we have restated the U.S.
GAAP reconciliation of our consolidated stockholders equity at December 31, 2003, 2002 and 2001
and the reconciliation of our consolidated results of operations for the years then ended, for the
accounting for deferred income taxes as further described in Note 24.(5)
    
    See note 24 to our audited consolidated financial statements.(6)
    
    2004 information restated from that previously
reported. See Note 1c to our audited financial statements.


Dividends

Please see Item 8. Financial Information  Dividend Policy.

Exchange Rate Information

The following table sets forth, for the periods indicated, the high, low, average and
period-end noon buying rate for the purchase of dollars, expressed in nominal pesos per dollar, as
reported by the Federal Reserve Bank of New York.

Noon Buying RatePeriodHigh
    
    
    Low
    
    
    Average(1)
    
    
    EndYear ended December 31,2000
    
    Ps
    10.09
    
    
    Ps
    9.19
    
    
    Ps
    9.48
    
    
    Ps
    9.622001
    
    
    9.97
    
    
    
    9.03
    
    
    
    9.34
    
    
    
    9.162002
    
    
    10.42
    
    
    
    9.00
    
    
    
    9.67
    
    
    
    10.432003
    
    
    11.41
    
    
    
    10.11
    
    
    
    10.79
    
    
    
    11.242004
    
    
    11.64
    
    
    
    10.81
    
    
    
    11.31
    
    
    
    11.15


-7-



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##### 



Noon Buying RatePeriodHigh
    
    
    Low
    
    
    Average(2)
    
    
    EndMonth EndedApril 30, 2005
    
    
    Ps 11.23
    
    
    
    Ps 11.04
    
    
    
    Ps 11.11
    
    
    
    Ps 11.08May 31, 2005
    
    
    11.03
    
    
    
    10.89
    
    
    
    10.98
    
    
    
    10.91June 30, 2005
    
    
    10.88
    
    
    
    10.76
    
    
    
    10.82
    
    
    
    10.77July 31, 2005
    
    
    10.80
    
    
    
    10.59
    
    
    
    10.67
    
    
    
    10.60August 31, 2005
    
    
    10.90
    
    
    
    10.58
    
    
    
    10.69
    
    
    
    10.79September 30, 2005
    
    
    10.81
    
    
    
    10.68
    
    
    
    10.78
    
    
    
    10.81October (through
October 24)
    
    
    10.90
    
    
    
    10.69
    
    
    
    10.83
    
    
    
    10.86
 
 (1)
    
    Average of month-end rates.(2)
    
    Average of daily rates. Source: Federal Reserve Bank of New York. On October 24, 2005, the
noon buying rate was Ps 10.86 per US$1.00. Risk Factors We are subject to various risks resulting from changing economic, political, industry and
business and financial conditions that may affect our results of operations or financial condition,
including, but not limited to, the risks described below. Risks Related the Paper and Packaging Industry and Our Business We have substantial debt and may be unable to generate sufficient cash to service our debt. At December 31, 2004, we had Ps 7,130.1 million (US$639.5 million) of total debt, excluding Ps
1,081.9 million (US$97.0 million) of liabilities to be capitalized, substantially all of which was
denominated in dollars. Our ability to make scheduled interest payments or to refinance our obligations with respect
to our indebtedness will depend on the financial and operating performance of our subsidiaries.
This performance, in turn, is subject to prevailing economic conditions in Mexico and the United
States and to financial, business and other factors beyond our control, including but not limited
to, fluctuations in international prices of our products as well as conditions in the paper and
packaging industry conditions. If our cash flow and capital resources are insufficient to fund our
debt service obligations, we may be forced to delay capital expenditures, or sell material assets
or operations, obtain additional capital or restructure our debt. Our operating performance, cash
flow, and capital resources may not always be sufficient to service our debt in the future. In the
event that we are required to dispose of material assets or operations or restructure our debt to
meet our debt service and other obligations, we cannot assure you as to the terms of any
transaction or how soon any transaction could be completed. Our operations are and will continue to be restricted by covenants in our debt agreements. In connection with our financial restructuring, we entered into a common agreement, which we
refer to as the Common Agreement, for the benefit of the holders of our Series B Step Up Rate
Senior Secured Guaranteed Notes Due 2012, or 2012 notes, and the creditors under the Restructured
Credit Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de C.V., the
Guarantors named therein, the Tranche A Holders named therein, and The Bank of New York, as
Administrative Agent, or the Restructured Credit Agreement. The Common Agreement, as well as some
of our other debt agreements, have negative covenants and other restrictions that will limit our
ability and the ability of our subsidiaries to:  
    
    incur additional debt;
    
    pay dividends, acquire shares of stock of our company or certain of our
subsidiaries, make payments on subordinated debt or make investments;
    
    make distributions from our subsidiaries;
    
    issue or sell capital stock of our company or certain of our subsidiaries;
    
    issue guarantees; -8-




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##### 




    
    sell or exchange assets;
    
    enter into sale and lease-back transactions;
    
    enter into transactions with stockholders and affiliates of our company;
    
    create liens on assets of our company or certain of our subsidiaries; and
    
    effect mergers. These negative covenants may have important consequences for our operations, including:  
    
    our ability to adjust to rapidly changing market conditions, thus making us more
vulnerable in the event the downturn in general economic conditions or our business
continues; and
    
    our ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes. We are vulnerable to cyclicality and fluctuations in pricing. Our business is affected by trends in international prices and demand for paper and packaging
products. Prices for containerboard and, to a lesser extent, converted products such as corrugated
containers and multi-wall sacks 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 in Mexico and the United States from producers of paper and packaging products with substantial resources. We face increasing competition in Mexico from international producers of paper and packaging
due in part to significantly enhanced market access for imported products. Actions by our
competitors, including any future increases in their capacity, may make it increasingly difficult
for us to maintain our domestic market share in paper and packaging products. Increased
competition from imports may have a material adverse effect on our company by driving down our
prices and decreasing our revenues. Many of our competitors in Mexico are large international
paper producers with substantial resources at their disposal. We face substantial competition in the United States from a variety of producers of paper and
packaging products. Many of our competitors in the United States are substantially larger and have
substantially greater financial, manufacturing, technological and marketing resources than our
company. We anticipate that we may experience increasingly intense competition from international
producers of paper and packaging products, both in Mexico and in the United States. There are no
assurances that we will be able to avoid lower pricing as a result of competitive pressure. Lower
pricing, changes made in response to competition and changes in consumer preferences may have an
adverse effect on our financial performance. Our operations may be adversely affected by increases in the price of raw materials. The cost of our supply of recycled fiber is directly affected by trends in international and
domestic prices of old corrugated containers, or OCC, and old newsprint, or ONP, which stem from
market fluctuations caused by factors beyond our control. Generally, demand and prices for
finished paper vary directly with demand and prices for these raw materials. In addition, the cost
of OCC in Mexico is affected both by inflation and exchange rates. -9-




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We might not be able to recoup any future increases in the costs of raw materials through
increases in sales prices for our products, which would adversely affect our operating income. We
cannot assure that raw material prices will not further increase in the future. Increases in the
prices of raw materials would increase our cost of sales and adversely affect our business results.
Our operations may be adversely affected by increases in the price of raw materials. Fluctuations in energy costs may adversely affect our costs of operations and our revenues. The price and supply of energy is unpredictable and fluctuates based on events beyond our
control, including, among others, geopolitical developments, supply and demand for oil and gas,
actions by OPEC and other oil and gas producers, war and unrest in oil producing countries and
regional production patterns. Because our plants and facilities use significant amounts of
electricity, natural gas and other forms of energy, increases in the cost of energy will increase
our operating expenses and may have a material adverse effect upon our business, financial
condition and results of operations. Lack of water availability may adversely affect us. Water is an essential raw material in the paper production process. Some of our plants
satisfy their water requirements through water wells licensed by the Mexican National Water
Commission (Comisión Nacional del Agua). The Mexican government has the power to limit our water
consumption and the volume of water that we may use according to our licenses, and it also has the
power to revoke such licenses, in the event of our breach of the licenses terms. Although we believe that we are in compliance with our obligations under the licenses, we
cannot assure you that the licenses will not be revoked. We also cannot be certain that the terms
of any renewal of these licenses will be favorable, or that the volume of water that is currently
available for use in manufacturing our products will be sufficient to satisfy our production
requirements in the future. If our licenses are revoked, or the water that we may consume under our
licenses is not sufficient to satisfy our production requirements, it may have an adverse effect on
our cash flow, financial condition and operations. We may be adversely affected by the imposition and enforcement of more stringent environmental and safety requirements. We are subject to strict environmental regulations in Mexico and in the United States.
Changes in environmental regulations, or changes in the policy of enforcement of existing
environmental regulations, could adversely affect us. Our Mexican operations are supervised by the
Mexican Ministry of the Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos
Naturales)and our U.S. operations are supervised by the U.S. Environmental Protection Agency and
other federal, state and local regulatory agencies. These agencies are responsible for the
implementation of pollution control laws and regulations and could take action against us by
shutting down plants, revoking licenses, imposing fines or obligating us to clean up waste that we
produced, if we fail to comply with environmental regulations. It is also possible that the
relevant governmental agencies could issue additional regulations, could seek a more stringent
interpretation of existing regulations or could exercise stricter enforcement actions that would
require us to spend additional funds on environmental matters. In addition, the enactment of new
environmental laws or regulations in Mexico or the United States may cause us to spend additional
funds, which may be material, in order to comply with the new laws or regulations. If we lose key members of our management team and are unable to attract other qualified personnel, our business could be adversely affected. Our success largely depends on the continuing contributions of our management team. Our
managers have been with our company for an average of 19 years. In particular, our chief executive
officer, chief operations officer, and chief financial officer have been with our company since our
founding. The loss of key personnel or our potential inability to attract and retain other
qualified managers could adversely affect us. -10-




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Our principal stockholders own 79.0% of our shares and may take actions not in the interest of other holders of our shares We are controlled by the Rincón family, which indirectly owns 79.0% of our outstanding voting
stock. See Item 7. Major Stockholders and Related Party Transactions. As a result, the Rincón
family has the power to elect the majority of our directors and determine the outcome of any action
requiring stockholder approval, including transactions with related parties, corporate
reorganizations and the timing and payment of any future dividends. The interests of the Rincón
family as stockholders may differ from the interests of other holders of our shares. Risks Relating to Mexico Political developments in Mexico may adversely affect our business. Political events in Mexico may significantly affect our business. In the Mexican federal
elections held on July 2, 2000, Vicente Fox of the Partido Acción Nacional(the National Action
Party) or PAN, won the presidency. Although his victory ended more than 70 years of presidential
rule by the Partido Revolucionario Institucionalor PRI, neither the PRI nor the PAN succeeded in
securing a majority in the Mexican congress. In elections in 2003 and 2004, the PAN lost additional
seats in the Mexican congress and state governorships. The resulting legislative gridlock, which is
expected to continue at least until the Mexican presidential elections in 2006, has impeded the
progress of structural reforms in Mexico, which may adversely affect economic conditions in Mexico,
and consequently, our business results. Economic 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. Mexican gross domestic
product, or GDP, grew by 0.9% in 2002, contracted by 1.2% in 2003 and grew by 4.4% in 2004. If the
Mexican economy experiences a slow rate of growth, our business, financial condition and results of
operations may be adversely affected because our customers may reduce their consumption of our
products. -11-




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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 and 7.6% in 2003. In 2004, the peso appreciated by 0.8%. 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 increased by Ps
4,810.4 million as compared to 2001, partially due to our exchange loss of Ps 1,050.1 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 864.0 million which was one of the factors leading to our net
loss of Ps 3,525.2 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. An increase in inflation may increase our operating costs but not our revenues. During most of the 1980s and through 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 5.7%
in 2002, 4.0% in 2003 and 5.2% in 2004. 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. -12-




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Risks Relating to Our Series A Shares, CPOs and ADSs The market for the ADSs and the Series A Shares is limited The Series A Shares are listed on the Mexican Stock Exchange, which is Mexicos only stock
exchange. There is no public market outside of Mexico for the Series A Shares. The Mexican
securities market is not as large or as active as securities markets in the United States and
certain other developed market economies. As a result, the Mexican securities market has
experienced less liquidity and more volatility than has been experienced in such other markets. Prior to July 15, 2004, the ADSs were listed on the New York Stock Exchange, or the NYSE. On
May 25, 2004, following our filing of concurso mercantil, the NYSE announced the trading of our
ADSs would be suspended immediately. On July 15, 2004, our ADSs were delisted from the NYSE. Our
ADSs are presently being quoted, and have been quoted since May 27, 2004, on the Pink Sheets
Electronic Quotation Service, or the Pink Sheets, maintained by Pink Sheets LLC for the National
Quotation Bureau, Inc. The ticker symbol CDURQ has been assigned to our ADSs for over-the-counter
quotations. Shares traded on the Pink Sheets generally experience lower trading volume than those traded
on the organized exchanges. The trading volume of the ADSs has decreased substantially since the
NYSE delisting and the transfer of the ADSs to the Pink Sheets. In addition, companies listed on
the Pink Sheets are not subject to the corporate governance standards adopted by the organized
exchanges. We have no plans to list our ADSs on any organized exchange in the United States.
There is no assurance that a significant trading market for the ADSs will develop on the Pink
Sheets. If an active trading market does not develop, holders of ADSs may be unable to sell their
ADSs. In addition, these market characteristics may adversely affect the market price of the ADSs. Future sales of our Class A Shares directed by Banamex may affect the stock prices of our Series A Shares and ADSs Administradora Corporativa y Mercantil, S.A. de C.V., or ACM, and a trust organized for the
benefit of certain members of the Rincón family have pledged Series A Shares representing
approximately 28.0% of our issued and outstanding capital stock in favor of Banco Nacional de
México, S.A., or Banamex. Under the terms of the pledge agreements, Banamex has the right to cause
ACM and the trust to sell all or part of the Series A Shares held by ACM or the trust if the price
of the Series A Shares on the Mexican Stock Exchange meets or exceeds the peso equivalent of
US$1.50. Banamex may exercise this right at any time whether or not an event of default under
these pledge agreements has occurred. Any such sales could adversely affect the market price of
the Series A Shares and the ADSs. Because our accounting standards are different from those in other countries, investors may find it difficult to accurately assess our business and financial operations. We prepare our financial statements in accordance with Mexican GAAP. These principles differ
in significant respects from U.S. GAAP as further discussed in note 24 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, or the Exchange Act. -13-




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The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States. Under Mexican law, the protections afforded to minority shareholders are different from, and
may be less than, those afforded to minority shareholders in the United States. Mexican laws
concerning duties of directors are not well developed, there is no procedure for class actions as
such actions are conducted in the United States and there are different procedural requirements for
bringing shareholder lawsuits for the benefit of companies. Therefore, it may be more difficult
for minority shareholders to enforce their rights against us, our directors or our controlling
shareholders than it would be for minority shareholders of a United States company. Holders of ADSs are not able to vote at our shareholder meetings. Holders of our ADSs may not vote at our shareholders meetings. Each of our ADSs represents
two CPOs. Holders of CPOs are not entitled to exercise any voting rights with respect to the
Series A Shares held in the CPO Trust. Such voting rights are exercisable only by the trustee,
which is required by the terms of the trust agreement to vote such Series A Shares in the same
manner as the majority of the Series A Shares that are not held in the CPO Trust that are voted at
any shareholders meeting. Currently the Rincón Family Trust owns a majority of the shares of Series
A Shares that are not held in the CPO Trust. Holders of ADSs may not be entitled to participate in any future preemptive rights offering, which may result in a dilution of such holders equity interest in our company. Under Mexican law, if we issue new shares for cash as a part of a capital increase, we
generally must grant our stockholders the right to purchase a sufficient number of shares to
maintain their existing ownership percentage in our company. Rights to purchase shares in these
circumstances are commonly referred to as preemptive rights. We may not be legally permitted to
allow holders of ADSs in the United States to exercise preemptive rights in any future capital
increase unless (1) we file a registration statement with the United States Securities and Exchange
Commission with respect to that future issuance of shares or (2) the offering qualifies for an
exemption from the registration requirements of the U.S. Securities Act of 1933, as amended. At
the time of any future capital increase, we will evaluate the costs and potential liabilities
associated with filing a registration statement with the United States Securities and Exchange
Commission, as well as the benefits of preemptive rights to holders of ADSs in the United States
and any other factors that we consider important in determining whether to file a registration
statement. We cannot make any assurances that we will file a registration statement with the United
States Securities and Exchange Commission to allow holders of ADSs in the United States to
participate in a preemptive rights offering or that an exemption from the registration requirements
of the U.S. Securities Act of 1933, as amended, will be available. As a result, the equity
interests of holders of ADSs would be diluted to the extent that ADS holders cannot participate in
a preemptive rights offering. The price of our Series A Shares and ADSs may be affected by economic developments in other emerging market countries. The market value of securities of Mexican companies is, to varying degrees, affected by
economic and market conditions in other emerging market countries. Mexican securities markets are,
to varying degrees, influenced by economic and market conditions in other emerging market
countries, especially those in Latin America. Although economic conditions are different in each
country, investors reaction to developments in one country may affect the securities markets and
the securities of issuers in other countries, including Mexico. We cannot assure you that the
market for Mexican securities will not continue to be affected negatively by events elsewhere,
particularly in emerging markets, or that such developments will not have a negative impact on the
market value of the Series A and ADSs. Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons. -14-




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We are organized under the laws of Mexico, and most of our directors, officers and controlling
persons reside outside the United States. In addition, a substantial portion of our assets are
located outside the United States. As a result, it may be difficult for investors to effect
service of process within the United States on such persons or to enforce judgments against them,
including in any action based on civil liabilities under the U.S. federal securities laws. There
is doubt as to the enforceability against such persons in Mexico, whether in original actions or in
actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal
securities laws. Item 4. Information on Our Company. We are a vertically integrated producer of paper and packaging products with a distribution
network that links our strategically located facilities with our customers. We believe that these
factors, as well as our investment in modern manufacturing technology and our access to raw
materials as 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 2004, our
total sales volume was 1,304.5 thousand 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 that 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. In Mexico, we are the largest domestic producer of newsprint with an estimated 35.1% market
share in 2004, 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 Pepsico, Sara Lee, Vitro, El Universal, Cemex and Minsa.
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 net sales were Ps 7,852.4 million in 2004. In 2004, approximately 28.0% of our sales were
made in dollars, with the balance primarily dollar-linked. In 2004, 76.2% of our total sales were
made in Mexico and 23.8% were made in and into the United States. We are a corporation (sociedad anónima de capital variable) operating under the laws of
Mexico. Our corporate domicile and principal executive offices are located at Torre Corporativa
Durango, Potasio 150, Ciudad Industrial, Durango, Durango, United Mexican States 34208, and our
telephone number is +52 (618) 829-1000. Our agent for service of process in the United States is Durango McKinley Paper Company, 700
Sam Houston Rd., Mesquite, Texas 75149, Attention: Prudencio Calderón. Paper and Packaging Industry Overview There are four major groups of paper products produced by the paper industry:  
    
    packaging paper, which includes linerboard, corrugating medium, kraft paper, and
tubing and folding cartons; -15-




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
    
    printing and writing paper, which includes newsprint, bond paper, business and
writing forms and other papers used for photocopying and commercial printing;
    
    sanitary paper; and
    
    specialty paper. We produce products within the packaging paper and printing and writing paper categories. 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 2004. 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 Industry Based on installed capacity, Mexicos paper industry is one of the largest in Latin America,
according to the 2004 annual report of the Mexican National Chamber for the Pulp and Paper
Industry. The total size of Mexicos paper industry in 2004, based on apparent demand, was
6,710.6 million short tons including temporary imports, according to the 2004 annual report of the
Mexican National Chamber for the Pulp and Paper Industry. Mexican production is distributed among
64 plants. Apparent demand consists of domestic production, as reported by manufacturers, plus
imports, minus exports. Apparent demand is a concept similar to consumption, but does not reflect increases and
reductions in inventories by customers. Apparent demand may not match consumption in any given
year; however, over a period of years, the two measures should tend to approximate one another. Over the past decade, levels of apparent demand for paper have fluctuated according to changes
in gross domestic product. Thus, as gross domestic product increases, apparent demand also
increases. Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages) Aggregate
    
    
    
    
    
    
    
    
    
    
    Apparent
    
    
    %
    
    
    % GDPYear
    
    Production
    
    
    Imports
    
    
    Exports
    
    
    Demand
    
    
    Change
    
    
    Change2000
    
    
    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
    )%2004
    
    
    4,766
    
    
    
    2,227
    
    
    
    282
    
    
    
    6,711
    
    
    
    5.0
    %
    
    
    4.4
    %
 
  -16-




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The dominant portion of the total market for paper products is the market for packaging paper.
The table below shows Mexican apparent demand from 2000 to 2004 for packaging paper in short tons.
In 2004, packaging paper accounted for 44.0% of Mexicos total paper production and 41.7% 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
    
    
    Change2000
    
    
    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
    %2004
    
    
    2,788
    
    
    
    1,061
    
    
    
    111
    
    
    
    3,738
    
    
    
    5.4
    %
 
  The table below shows Mexican apparent demand in short tons from 2000 to 2004 for newsprint in
short tons. In 2004, newsprint accounted for 5.8% of Mexicos total paper production and 6.9% 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
    
    
    Change2000
    
    
    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
    %2004
    
    
    278
    
    
    
    188
    
    
    
    1
    
    
    
    465
    
    
    
    4.5
    %
 
  The table below shows Mexican apparent demand in short tons from 2000 to 2004 for printing and
writing paper. In 2004, printing and writing paper accounted for 16.0% of Mexicos total paper
production and 18.3% 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
    
    
    Change2000
    
    
    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
    %2004
    
    
    761
    
    
    
    489
    
    
    
    20
    
    
    
    1,230
    
    
    
    2.5
    %
 
  Pricing -17-




---



##### 



In the past three years, prices in Mexico for the types of paper that we make have been
influenced by a combination of factors, including:  
    
    the rate of growth of the Mexican economy and the demand for packaging;
    
    prevailing inflation rates in Mexico;
    
    U.S. paper price levels;
    
    prevailing international prices for paper and packaging; and
    
    fluctuations in the peso/dollar exchange rate. Containerboard, newsprint and uncoated free sheet are commodities priced in relation to
international prices for paper, recycled fiber and pulp. Because the paper industry is highly
capital intensive, prices may also be affected by industry capacity utilization rates, by additions
of new capacity and by plant closures. Prevailing international prices for containerboard decreased by 3.0% during 2002, decreased by
1.3% during 2003 and increased by 26.0% during 2004. Prevailing international prices for
newsprint declined by 19.7% during 2002, increased by 5.2% in 2003 and increased by 7.7% during
2004. Prevailing international prices for uncoated free sheet declined by 14.2% during 2002,
increased by approximately 8% in 2003 and increased by approximately 2% during 2004. With generally low prices for containerboard in the United States over the last three years,
competition in Mexico from imports has increased. Our prices for containerboard over the last
three years have declined in the face of competition from imports. 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). With 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. Under NAFTA, most of Mexicos tariffs were eliminated during or prior to 2003. Tariffs on all
of our products were eliminated prior to the beginning of 2002. As a result of an antidumping complaint brought by the Mexican National Chamber for the Pulp
and Paper Industry, in August 2004 Mexico imposed provisional antidumping duties on one international producer of
newsprint of 18.2% and on another international producer of newsprint of 5.5%. Both of these
producers prevailed in this proceeding and the provisional antidumping duties were eliminated in May
2005. As a result of an earlier complaint filed by the Mexican National Chamber for the Pulp and
Paper Industry, in October 1998 Mexico imposed definitive antidumping duties on U.S. cut-size free
sheet paper. The duties ranged from 5.3% to 17.7%. In October 2003, Mexico initiated a review
proceeding to determine whether the antidumping duties should be continued or revoked. Pursuant to
that review proceeding, Mexico decided to continue the antidumping duties, at the previously
established rates, until October 2008. -18-




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##### 



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. On October 8, 2001, our company, which was then named Grupo Industrial Durango, S.A. de C.V.,
merged with Corporación Durango, S.A. de C.V., or CODUSA. Our company, the surviving entity, was
subsequently renamed Corporación Durango, S.A. de C.V. Prior to the merger, CODUSA owned 59% of
our capital stock and all of the outstanding capital stock of Grupo Pipsamex, S.A. de C.V., or
Grupo Pipsamex, and Durango Paper Company. In connection with the merger, shares of our company
were issued to members of the Rincón family in exchange for their shares of CODUSA. Significant Developments During 2004 and Recent Developments Financial Restructuring In November 2002, we defaulted on payments of principal and interest under our unsecured
indebtedness. In December 2002, we retained financial advisors to advise us in evaluating
debt-restructuring alternatives to implement a long-term solution to our capital structure and debt
service requirements. We also began discussions with our bank creditors and certain holders of our
debt securities. On 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 upon dates and certain
participating creditors terminated the plan support agreement on May 17, 2004. On May 18, 2004, we filed a voluntary petition under Mexicos Business Reorganization Act (Ley
de Concursos Mercantiles, or the LCM) with the First Federal District Court in Durango, Mexico, or
the Mexican court. On May 20, 2004, our foreign representative, Gabriel Villegas Salazar,
commenced a proceeding under section 304 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New York (the 304 Proceeding) on our behalf and on behalf of guarantors of our existing unsecured financial indebtedness.
None of our other subsidiaries filed for concurso mercantilor other bankruptcy protection. On
May 25, 2004, following our filing under the LCM (the concurso mercantil
proceeding), the New York Stock Exchange announced that the trading of our companys ADSs, 2006
notes and 2008 notes would be suspended immediately. On July 15, 2004, our companys ADSs, 2006
notes and 2008 notes were delisted from the New York Stock Exchange. On August 13, 2004, we reached an agreement in principle with creditors collectively holding
approximately 68% of our unsecured debt regarding the terms of a proposed plan of reorganization
and a proposed new plan support agreement. On August 25, 2004, the Mexican court declared that we had satisfied all of the requirements to be a debtor under the
LCR. On November 17, 2004, the Mexican court certified the list of recognized claims in our
concurso mercantil proceeding. -19-




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##### 



On December 23, 2004, the conciliator (conciliadora) appointed by the Mexican Federal
Institute of Commercial Reorganization Specialists (Instituto Federal de Especialistas de Concursos
Mercantiles) in our concurso mercantil proceeding submitted our plan of reorganization to the holders of
recognized claims and the plan was executed by us and the holders of recognized claims representing
approximately 65% of the total number of recognized claims. The plan of reorganization provided that, in exchange for their debt, our unsecured financial
creditors would receive new debt equal to approximately 85% of the aggregate outstanding principal amount of
our unsecured debt. In addition to the new debt, the plan of reorganization provided that our
unsecured financial creditors would receive shares of our series B common stock, no par value, or
Series B Shares, representing an aggregate of approximately 17% of our capital stock on a fully
diluted basis. On January 11, 2005, the conciliator submitted the executed plan of reorganization to the
Mexican court, and on February 7, 2005, the Mexican court approved the plan of reorganization. On January 19, 2005, the U.S. bankruptcy court overseeing our 304 Proceeding entered an order
permanently enjoining our creditors from taking action against our company in respect of their
claims that were restructured in the concurso mercantilproceeding, as well as recognizing and giving effect
to our plan of reorganization and the order from the Mexican court confirming the same. On February 23, 2005, our plan of reorganization was consummated. As a result:  
    
    Bank creditors of our company with claims against our company in the aggregate amount of
US$136.6 million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares,
representing 2.16% of our issued and outstanding capital stock, and the principal amount of
the debt outstanding with respect to these claims was amended and restated under the
Restructured Credit Agreement. Under the Restructured Credit Agreement, notes in an
aggregate principal amount of US$116.1 million (Ps 1,294.6 million) were issued to the
holders of these claims. These notes bear interest at a rate of LIBOR plus 2.75% per
annum, payable quarterly in arrears, and the principal amount of these notes will be
amortized quarterly until the maturity of these notes on December 30, 2012.
    
    Unsecured creditors of our company with claims against our company in the aggregate
amount of US$510.3 million (Ps 5,689.9 million) related to our
125/8% Senior Notes due 2003, or
2003 notes, our 131/8% Senior Notes due 2006, or 2006 notes, our 131/2%
Senior Notes due 2008, or 2008 notes, our 133/4% Senior Notes due 2009, or 2009 notes, and
the note issued under our Euro Commercial Paper Program, or ECP note, received 16,412,961
of our Series B Shares, representing 14.84% of our issued and outstanding capital stock,
and an aggregate principal amount of US$433.8 million (Ps 4,836.5 million) of our 2012
notes in respect to these claims. The 2012 notes bear interest at a rate of 7.50% per
annum until December 31, 2005, 8.50% per annum from January 1, 2006 through December 31,
2006, and 9.50% per annum thereafter, payable quarterly in arrears, and mature on December
30, 2012. Bancomext Restructuring Our subsidiary, Grupo Pipsamex, borrowed an aggregate principal amount of US$80.0 million (Ps
892.0 million) from Banco Nacional de Comercio Exterior S.N.C., or Bancomext, under a loan
agreement. In 2004, we defaulted under this loan agreement and negotiated the restructuring of
this loan agreement with Bancomext. This loan agreement was restructured on September 29, 2004.
In connection with the restructuring, we applied US$28.0 million of the proceeds of our sale of our
subsidiary, Productora Nacional de Papel, S.A. de C.V., or Pronal, and Grupo Pipsamex warehouse in
Mexico City to the principal amount and accrued interest under this loan agreement. The
restructured loan is payable in 40 quarterly installments beginning in December 2004 and bears
interest at a rate of LIBOR +5.1535%, payable quarterly. This loan agreement is secured by a
first priority security interest in substantially all of the assets of Grupo Pipsamex and certain
of its subsidiaries and is guaranteed by CODUSA. As of December 31, 2004, the aggregate principal
amount outstanding under this loan agreement was US$56.3 million (Ps 627.5 million). -20-




---



##### 



Our subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an aggregate principal
amount of US$15.4 million (Ps 171.7 million) from Bancomext under a loan agreement. In 2004, we
defaulted under this loan agreement and negotiated the restructuring of this loan agreement with
Bancomext. This loan agreement was restructured on September 29, 2004. In connection with the
restructuring, we applied US$12.0 million of the proceeds of our sale of our subsidiary, Pronal,
and Grupo Pipsamex warehouse in Mexico City to the principal amount and accrued interest under
this loan agreement. The restructured loan is payable in 40 quarterly installments beginning in
December 2004 and bears interest at a rate of LIBOR +5.153%, payable quarterly. This loan is
secured by a second priority security interest in substantially all of the assets of Fábrica
Mexicana de Papel, S.A. de C.V. and certain other subsidiaries of Grupo Pipsamex and is guaranteed
by CODUSA. As of December 31, 2004, the aggregate principal amount outstanding under this loan
agreement was US$8.6 million (Ps 95.6 million). Acquisition of Empaques del Norte On April 11, 2005, our company entered into an agreement to acquire all of the capital stock
of Empaques del Norte, S.A. de C.V. for US$5.8 million. The
purchase price will be made in five
installments between April 2005 and May 2006. Payment of
the first four installment payments has
been made. Under the purchase agreement, the seller retains title to these shares until all
installment payments have been made. Empaques del Norte, S.A. de C.V. owns a corrugated container
plant with an annual production capacity of 25,000 short tons. Acquisition of Líneas Aéreas On April 18, 2005, our company purchased substantially all of the capital stock of Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for Ps 100.0 thousand from certain
members of the Rincón family and some of their children. Líneas Aéreas owns two business jets and
provides transportation services to our subsidiaries and third parties. In connection with this
transaction, we assumed a financial lease agreement with GE Capital Leasing with respect to one of
the business jets. Sale of Chihuahua Particleboard Plant
  Subsidiaries and Operating Divisions The
following chart sets forth our organizational structure as of
October 24, 2005. -21-




---



##### 



Organizational Structure (ORGANIZATIONAL STRUCTURE FLOW CHART) * CONICEPA =
    
    Compañia Norteamericana de Inversiones
en Celulosa y Papel, S.A. de C.V.
    
    (1)
    
    19.80% is controlled through Empaques de Cartón Titán
27.24% is controlled through Corporación Durango(2)
    
    4.92% is controlled through Empaques de Cartón Titán(3)
    
    16.19% is controlled through Compañia Papelera de Atenquique(4)
    
    Title to these shares of Empaques del Norte, S.A. de C.V.
will be retained by the seller until the full purchase price
is paid. See  Significant Developments During 2004 and
Recent DevelopmentsAcquisition of Empaques del Norte.
 -22-




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##### 



We are comprised of various operating divisions that are distinguished by product type as
follows:  
    
    Paper: the Grupo Durango division, the Grupo Pipsamex division and Durango McKinley
Paper Company
    
    Packaging: Titán and its subsidiaries, or the Titán Group, and Durango McKinley Paper Company
    
    Other: Ponderosa Our operating divisions are:  
    
    Grupo Durango.The Grupo Durango division produces containerboard. In 2004,
approximately 83% of the 638.6 thousand short tons of linerboard and corrugating medium
shipped by the Grupo Durango division was used to supply the Titán Group. The
remainder of its production was sold to third party manufacturers in Mexico and the
United States.
    
    Grupo Pipsamex.The Grupo Pipsamex division produces newsprint and bond paper. In
2004, the Grupo Pipsamex division sold 158.1 thousand short tons of newsprint and 121.1
thousand short tons of uncoated free sheet. The Grupo Pipsamex divisions sales are
predominantly to the Mexican market with the balance primarily sold in the United
States.
    
    Durango McKinley. Durango McKinley Paper Company is a recycled linerboard
manufacturer located in the southwestern United States that serves the maquiladora
region. Durango McKinley Paper Company is a significant collector of OCC material,
which is processed to create recycled fiber. In 2004, approximately 80% of the paper
needs of our packaging operations in Texas were supplied by other paper producers that
supplied this paper in exchange for paper produced by Durango McKinley Paper Company.
    
    Packaging.Our packaging division, which includes the packaging operations of
Durango McKinley Paper Company and the Titán Group, is a large paper-based packaging
manufacturer. The packaging divisions 2004 sales of 672.1 thousand short tons
consisted of corrugated containers and multi-wall sacks and bags. The Grupo Durango
division supplies approximately 97% of the Titán Groups containerboard requirements.
Waste material generated in production of corrugated containers is sold back to the
Grupo Durango division for recycling and to produce pulp. The Titán Group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 2004, Ponderosas continuing operations sold 11.7 thousand short tons of
plywood. The Grupo Durango division, Durango McKinley Paper Company and the Titán Group are vertically
integrated with the Grupo Durango division and Durango McKinley Paper Company supplying
substantially all of the containerboard used by our packaging division. This integration enables
us to limit purchases from external suppliers and reduce costs. Our Products General Our main product groups are:  
    
    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 -23-




---



##### 




    
    Otherplywood and particleboard. The total capacity of our continuing operations by product and number of mills and plants as
of December 31, 2004, and our actual production for the periods indicated, is as follows: Production at December 31,Installed Capacity at
    
    
    Mills/Product Type
    
    December 31, 2004
    
    
    Plants
    
    
    2004
    
    
    2003
    
    
    2002(in thousands of short tons peryear)
    
    
    
    
    
    
    (in thousands of short tons)Paper:Containerboard
    
    
    900.0
    
    
    
    6
    
    
    
    891.8
    
    
    
    859.9
    
    
    
    831.4Newsprint
    
    
    160.0
    
    
    
    1
    
    
    
    160.4
    
    
    
    131.0
    
    
    
    125.4Uncoated free sheet
    
    
    155.0
    
    
    
    1
    
    
    
    133.1
    
    
    
    143.5
    
    
    
    145.5Kraft paper (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56.8Coated bleached board (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137.5Total Paper
    
    
    1,215.0
    
    
    
    8
    
    
    
    1,185.4
    
    
    
    1,134.3
    
    
    
    1,296.5Packaging:Corrugated containers
    
    
    892.0
    
    
    
    18
    
    
    
    632.5
    
    
    
    627.6
    
    
    
    581.9Multi-wall sacks and bags
    
    
    66.0
    
    
    
    3
    
    
    
    39.2
    
    
    
    36.9
    
    
    
    44.6Paper tubes (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.4
    
    
    
    4.3Total Packaging
    
    
    958.0
    
    
    
    21
    
    
    
    671.6
    
    
    
    666.0
    
    
    
    630.9Other products (3)
    
    
    58.0
    
    
    
    3
    
    
    
    10.5
    
    
    
    10.2
    
    
    
    15.4Total Production
    
    
    2,231.0
    
    
    
    32
    
    
    
    1,867.5
    
    
    
    1,810.5
    
    
    
    1,942.8
 
 (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.(2)
    
    In April 2003, we sold our paper tube manufacturing operation to Tubos y Especialidades de
México, S.A. de C.V., a related party, eliminating our production of paper tubes.(3)
    
    Does not include the capacity or production of our Chihuahua particleboard mill as we include
the results of our Chihuahua particleboard mill in discontinued operations. The total sales volume of our continuing operations to third-parties and net sales by product
for the periods indicated is as follows: December 31,Product Type
    
    2004
    
    
    2003
    
    
    2002Sales volume
    
    
    Net Sales
    
    
    Sales volume
    
    
    Net Sales
    
    
    Sales volume
    
    
    Net Sales(in thousands
    
    
    (in millions of
    
    
    (in thousands
    
    
    (in millions of
    
    
    (in thousands
    
    
    (in millions ofof short tons)
    
    
    constant pesos)
    
    
    of short tons)
    
    
    constant pesos)
    
    
    of short tons)
    
    
    constant pesos)Paper:Containerboard
    
    
    341.6
    
    
    Ps
    1,573.4
    
    
    
    312.7
    
    
    Ps
    1,250.7
    
    
    
    273.6
    
    
    Ps
    1,160.2Newsprint
    
    
    158.1
    
    
    
    924.6
    
    
    
    130.8
    
    
    
    710.5
    
    
    
    127.4
    
    
    
    730.4Uncoated free sheet
    
    
    121.1
    
    
    
    990.2
    
    
    
    124.4
    
    
    
    968.6
    
    
    
    117.0
    
    
    
    931.7Kraft paper (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57.2
    
    
    
    418.3Coated bleached board (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136.2
    
    
    
    994.9Total Paper
    
    
    620.7
    
    
    
    3,488.3
    
    
    
    567.9
    
    
    
    2,929.8
    
    
    
    711.4
    
    
    
    4,235.4Packaging:Corrugated containers
    
    
    632.2
    
    
    
    3,921.2
    
    
    
    615.6
    
    
    
    3,822.6
    
    
    
    586.3
    
    
    
    3,734.9Multi-wall sacks and bags
    
    
    39.9
    
    
    
    336.0
    
    
    
    35.9
    
    
    
    309.3
    
    
    
    45.5
    
    
    
    399.1
 -24-




---



##### 



Paper tubes (2)
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    3.0
    
    
    
    1.0
    
    
    
    7.5Total Packaging
    
    
    672.1
    
    
    
    4,257.2
    
    
    
    652.0
    
    
    
    4,134.9
    
    
    
    632.8
    
    
    
    4,141.4Other products
    
    
    11.7
    
    
    
    107.0
    
    
    
    10.8
    
    
    
    85.8
    
    
    
    15.9
    
    
    
    98.5Total Sales Volume
    
    
    1,304.5
    
    
    Ps
    7,852.4
    
    
    
    1,230.7
    
    
    Ps
    7,150.5
    
    
    
    1,360.1
    
    
    Ps
    8,475.4
 
 (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.(2)
    
    In April 2003, we sold our paper tube manufacturing operation to Tubos y Especialidades de
México, S.A. de C.V., a related party, eliminating our production of paper tubes. 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. -25-




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Other Products Below is a description of our other products and their usage. 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.
 In 2003 and 2004, all of particleboard sold by our company was manufactured at our Chihuahua
particleboard mill, which is being held for sale and the operations of which are classified as
discontinued operations. 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 remained
depressed in 2002 and 2003. Demand for our other products began to recover in 2004. Customers We primarily sell our products in Mexico and the United States. In 2004, 76.2% of our total
sales were made in Mexico and 23.8% were made in and into the United States. Our major customers in Mexico and the United States include: Paper
    
    Packaging
    
    Other ProductsMexico:
El Universal
Papel Carton y Derivados
Pack to Pack
Duro BagsComisión Nacional de Libros
de Texto Gratuito
Servicarton Comercializadora
    
    Mexico:Vitro
Allen
Pepsico
Apasco
Cemex
Minsa
    
    Mexico:
Mexicana Pacific
Triplay Alameda
Aglomerados y Triplay VIC
Triplay y Maderas NacionalesUnited States:
Weyerhauser
Corru Kraft
Independent Paperboard
Georgia-Pacific
Temple-Inland
    
    United States:
Sweetheart Cup
Sara Lee
Victor Pkg  Dallas
Iris
Bronco Packaging
Malena Produce
 Sales and Marketing In 2004, sales to our 10 largest customers accounted for approximately 28% of our net sales.
None of our customers accounted for a material amount of our revenues. We do not believe that the
loss of any single customer would have a material adverse effect on our business. 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 -26-




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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, 2004, we
had approximately 197 employees involved in direct sales. We make substantially all of our sales
directly to our clients. We use brokers only in limited circumstances. Our sales strategy involves targeting niche markets, such as the maquiladora sector, growing
manufacturing regions in central and southern Mexico, Mexican export markets and lightweight
markets. A core element of our sales strategy is to establish long-term customer relationships by
ensuring that we satisfy our customers specific requirements. The customized service we provide
and the strategic relationships we have developed ensure we retain our existing customers while
attracting new ones. To enable us to maintain the advantages of strategically located facilities,
we continue to update our distribution network to accommodate the trends of our important
manufacturing customers. To support our direct sales efforts and to actively promote our products, we engage in a
variety of marketing activities. These activities include regular meetings with our entire sales
force and educational seminars and social outings with customers. Customer service is an important factor in maintaining and gaining market share and customers.
We deliver products to our customers in a manner that addresses individual technical
specifications, delivery methods, timing constraints and other customer specific requirements. Our
sales force has established customer complaint procedures and undergoes customer retention reviews
to ensure that the level of our service is maintained and constantly improved. Our advertising and
promotional campaigns are carried out in specialized industry publications and industry trade
shows. With respect to corrugated containers, by engaging in sales on both sides of the Mexican-U.S.
border, we continuously evaluate the pricing levels for our products in both the U.S. and Mexican
markets. While pricing is generally negotiated on a yearly basis, our contracts normally include
price adjustment provisions to compensate for market movements as published in reputable trade
publications. Raw Materials We believe we have a flexible raw material mix. The principal raw materials used in our
production processes are recycled fiber and virgin pulp. Recycled fiber is obtained by processing
OCC material, ONP material, magazines and office waste paper material. We also use virgin pulp,
which is made by processing wood chips, which we mix with recycled fiber to produce a variety of
semi-recycled grades of other packaging and paper products. In the case of newsprint and printing
grades, we produce a high quality product with a high content of recycled fiber. Recycled Fiber Our business is affected by trends in international and domestic prices of OCC and ONP
material. In Mexico, the price differential between domestic and imported OCC and ONP material
fluctuates in peso terms, due to demand and currency fluctuations, and at any given time we may
supply ourselves from either market, depending on the then current price differential. In 2004,
approximately 71% of the fiber we used in our Mexican operations was recycled and approximately 42%
of this recycled fiber was imported from third party producers. In the United States, our McKinley mill uses only recycled fiber. In 2004, our recycling
centers in Albuquerque, Phoenix and El Paso provided approximately 40% 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 -27-




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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. In Mexico, we buy our wood, the raw material from which we produce virgin kraft pulp, from
small property owners and ejidos,which are small plots of land granted by the Mexican government
to small groups of land workers. The wood is purchased from sellers located in the states of
Durango, Jalisco, Oaxaca and Michoacán. In total we have access to approximately 600,000 hectares
of forestry land. We have traditionally managed our supply of resources through direct
negotiations with landowners. In general, we believe that our existing wood supply arrangements
are sufficient to provide for our currently anticipated rates of consumption for the foreseeable
future. We also have a strong presence in the Mexican forestry sector that allows us to
effectively source our wood supply. Water Other than at our Atenquique and Mexpape pulp and paper mills, which use treated river water,
we obtain our water requirements for both our Mexican and U.S. operations from wells located at our
production facilities. We believe that our water supply is sufficient for all existing and
contemplated activities. We believe that our McKinley mill is one of only three zero-effluent paper mills in the
world. Water is initially obtained from wells, and after using it in the papermaking process, it
is then treated and recycled through the plant. Accordingly, the ongoing water supply requirements
at our McKinley mill are significantly less than for conventional paper mills. Electric Power Our Atenquique mill generates its own electric power from an on-site power plant, while the
other mills of the Grupo Durango division 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 85 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. -28-




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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 2004, approximately 63% of our net sales of paper to third parties were to customers in
Mexico and the remainder was to customers in the United States. In 2004, approximately 86% of our
net sales of packaging products to third parties were to customers in Mexico and the remainder was
to customers in the United States. In 2004, approximately 8% 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. In Mexico, we compete with a number of Mexican paper producers and packaging producers and
with major international integrated paper and packaging producers, who are primarily importers from
the United States. In addition, as an integrated paper and packaging producer, we compete not only
with other integrated paper and packaging producers, but also with companies that produce only
paper, converted products, or packaging. Many of our competitors have greater financial resources
than we do. We compete primarily on customer service, product quality differentiation and price. In the United States, we compete with a number of paper producers and packaging producers,
including Boise Cascade Corp., Smurfit Corp., Stone Container Corp., International Paper, Abitibi
Consolidated, Inc., Packaging Corporation of America, Bowater Incorporated, and Weyerhaeuser
Company, many of which have greater financial resources than we do. Constant review and benchmarking of competitive factors is necessary to remain competitive in
our industry. We monitor the paper industry through market publications, and through our
participation in many industry-related events. While pricing is normally negotiated on an annual
basis for the majority of our products, our contracts normally include price adjustment provisions
to compensate for market movements as published in reputable trade publications. We produce, distribute and sell different paper grades and paper products, which we believe
gives us, unlike our Mexican competitors, the flexibility to reduce the impact of cyclically
occurring in the market. We can increase paper production for export opportunities, as conditions
warrant, such as changes in raw material prices, without interrupting a steady supply of paper to
our internal converting operations and our existing customers. While the phased reduction in
Mexican tariffs under NAFTA has increased 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. Environmental Matters Our Mexican operations are subject to federal, state and local laws and regulations, including
the Mexican General Law of Ecological Stabilization and Environment Protection (Ley General del
Equilibrio Ecológico y de Protección al Ambiente)and the rules and regulations published under
this law. Under this law, companies engaged -29-




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in industrial activities are subject to the regulatory jurisdiction of the Mexican Ministry of
the Environment and Natural Resources. In 1988, we agreed with Mexican environmental regulatory authorities on a compliance plan that
we proceeded to implement. Today, our paper mills are in compliance with general standards
established by law and with specific standards promulgated by the Mexican regulatory authorities.
In 1995, we purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint
venture of industrial water users in Monterrey, Nuevo León. The venture processes and recycles
water used by plants in the industrial park where our Monterrey paper mill is located. Our paper
mills in Mexico are subject to periodic environmental audits by the Mexican Ministry of the
Environment and Natural Resources. We have frequently been recognized for our environmental record
and our role in implementing modern forest management techniques. However, there can be no
assurance that relevant Mexican authorities will continue to find our environmental procedures
adequate, or that more stringent environmental laws will not be enacted by Mexico in the future.
Were enforcement of existing laws to increase, or new environmental laws to be enacted, we could
incur material compliance costs. Our U.S. operations are subject to federal, state, and local provisions regulating the
discharge of materials into the environment and otherwise related to the protection of the
environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water
Act, Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, 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. 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, 2004: short tons per yearPaper:ContainerboardCentauro Mill (Durango)
    
    
    275,000Atenquique Mill (Jalisco)
    
    
    145,000McKinley Mill (New Mexico, U.S.) (1)
    
    
    210,000Monterrey Mill (Nuevo León)
    
    
    138,000Guadalajara Mill (Jalisco)
    
    
    55,000Texcoco Mill (Edo. de México)
    
    
    27,000Tuxtepec Mill (Oaxaca) (2)
    
    
    50,000Total
    
    
    900,000NewsprintTuxtepec Mill (Oaxaca) (2)
    
    
    160,000Uncoated Free SheetMexpape Mill (Veracruz)
    
    
    155,0001,215,000
 -30-




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short tons per yearPulp:Unbleached Softwood PulpAtenquique Mill (Jalisco)
    
    
    80,000Bleached Chemical Thermomecanical PulpPipsamex Pulp Mill (Durango) (3)
    
    
    79,000Thermomecanical Pulp (TMP)Tuxtepec Pulp Mill (Oaxaca)
    
    
    52,000Bleached Bagasse PulpMexpape Pulp Mill (Veracruz) (3)
    
    
    79,000Bleached Deinking PulpTuxtepec DIP Mill (Oaxaca)
    
    
    92,000Mexpape DIPHB Mill (Veracruz)
    
    
    105,000Total
    
    
    197,000487,000Packaging: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)
    
    
    22,000Total
    
    
    66,000958,000Other:Particleboard Chihuahua Mill (Chihuahua) (4)
    
    
    200,000Plywood Anahuac Mill (Chihuahua) (3)
    
    
    26,000Particleboard Durango Mill (Durango) (3)
    
    
    17,000Plywood Durango Mill (Durango)
    
    
    15,000Total
    
    
    258,000
 
 (1)
    
    Leased facility. -31-




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(2)
    
    This mill has a total capacity of 210,000 short tons of newsprint; however, as this mill has
the ability to produce 50,000 short tons of containerboard per year on one of its newsprint
machines and we used this machine principally to produce containerboard during the year ended
December 31, 2004, we have reflected this amount as containerboard capacity as of December 31,
2004.(3)
    
    These facilities are not currently in operation.(4)
    
    These facilities were sold on July 15, 2005
and the operations of these facilities were
classified as discontinued operations during the years ended
December 31, 2003 and 2004. On April 11, 2005, our company entered into an agreement to acquire all of the capital stock
of Empaques del Norte, S.A. de C.V. for US$5.8 million. The
purchase price will be made in five
installments between April 2005 and May 2006. Payment of
the first four installment payments has
been made. Under the purchase agreement, the seller retains title to these shares until all
installment payments have been made. Empaques del Norte, S.A. de C.V. owns a corrugated container
plant with an annual production capacity of 25,000 short tons. In addition to our facilities described above, our headquarters are located in Durango,
Mexico, approximately 900 kilometers (560 miles) north of Mexico City. We maintain sales offices
in Mexico City, Guadalajara, Jalisco and Monterrey, Nuevo León and representative offices in
Dallas, Texas. Our various production facilities in Mexico are located in the states of Durango,
Nuevo León, Jalisco, Baja California, Sonora, Estado de México, Hidalgo, Querétaro, Sinaloa,
Chihuahua and Chiapas, as well as in Mexico City. In the United States, we operate facilities in
the states of New Mexico, Texas and Arizona. We own our headquarters and all of our operating
facilities, except as noted in the table above. Item 5. Operating and Financial Review and Prospects. The following discussion of our financial condition and results of operations should be read
in conjunction with our audited consolidated financial statements at December 31, 2004 and 2003 and
for the three years ended December 31, 2004 included in this annual report, as well as with the
information presented under IntroductionPresentation of Financial and Other Information and
Item 3: Key InformationSelected Combined and Consolidated Financial Data. The following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including those set forth in
IntroductionSpecial Note Regarding Forward-Looking Statements and Item 3: Key InformationRisk
Factors. 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 and
liquidity;
    
    a discussion of developments since the end of 2004 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, 2004,
2003 and 2002;
    
    a discussion of our liquidity and capital resources, including our changes in
financial position for the years ended December 31, 2004, 2003 and 2002, and our
short-term and long-term indebtedness; -32-




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
    
    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:  
    
    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 Empaques de Cartón Titán, or Titán, and our proposed disposition of our Chihuahua
particleboard plant;
    
    the level of our outstanding indebtedness and the interest we are obligated to pay
on this indebtedness, which affects our net financial expenses;
    
    the Mexican and U.S. market prices of corrugated containers, containerboard and
newsprint, which significantly affect our net revenue;
    
    the level of production capacity in the United States and Mexico for the products
that we sell and our capacity utilization rate, which significantly affects the cost of
producing our products and may lead to the impairment of our assets;
    
    the Mexican and U.S. market prices of OCC and ONP, the principal raw materials in
our paper manufacturing operations, which significantly 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 defaults on our unsecured debt in November 2002 and our financial restructuring;
    
    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; -33-




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
    
    our limited ability to borrow funds from Mexican and international financial
institutions or to sell our debt securities in the Mexican and international securities
markets, primarily as a result of our defaults on our unsecured indebtedness; and
    
    our capital expenditure requirements, which consist primarily of maintenance of our
operating facilities. Financial Presentation and Accounting Policies Consolidated Financial Statements We have prepared our audited consolidated financial statements at December 31, 2004 and 2003
and for the three years ended December 31, 2004 in accordance with Mexican GAAP, which differs in
significant respects from U.S. GAAP. Note 24 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, 2004 and 2003 and for each of the three years in the period
ended December 31, 2004. As
discussed in Note 1c to our audited consolidated financial
statements, our financial statements at and for the year ended
December 31, 2004 have been restated subsequent to our filing
these financial statements with the Mexican National Banking and
Securities Commission. The aggregate effect of this restatement has
been to increase our total assets at December 31, 2004 by
Ps  2.7 million from our total assets as
previously reported, increase our stockholders equity at
December 31, 2004 by Ps 231.4 million
from our stockholders equity as previously reported and revise
the Ps 145.0 million net loss for the year
ended December 31, 2004 as previously reported to net income of
Ps 60.6 million for the year ended
December 31, 2004. 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, uncoated free sheet, kraft paper and coated
bleached board. This segment includes the operating results of the Grupo Durango
division and the Grupo Pipsamex division 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 production and sale of corrugated containers,
multi-wall sacks and bags and paper tubes. This segment includes the operating results
of the packaging division in Mexico and 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 2.1 million. As a result, we no longer produce paper tubes.
    
    Other- This segment includes the production and sale of plywood and particleboard. In 2004, paper products accounted for 44.4% of our net sales to third parties; packaging
products accounted for 54.2% of our net sales to third parties and other products accounted for the
remaining 1.4% of our net sales to third parties. Discontinued Operations In connection with our financial and operating restructuring, during 2003 we authorized the
discontinuation and/or sale of some subsidiaries or significant assets. The related assets,
liabilities and operating results are presented in our audited consolidated financial statements as
discontinued operations. In 2003, our discontinued operations consisted of (1) the molded pulp
division of Titán, which we sold on February 27, 2003, (2) Pronal, which we sold on November 14,
2003, and (3) the Chihuahua particleboard plant of Ponderosa. In 2004, our discontinued
operations consisted of the Chihuahua particleboard plant of Ponderosa. 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 -34-




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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 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 and to the extent we believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation allowance or increase this allowance
in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, and any valuation allowance recorded against our deferred
tax assets. In evaluating the need for a valuation allowance for
deferred income tax assets related to tax loss carryforwards, we first
consider the reversal of existing taxable temporary differences that
are expected to generate taxable income
during the tax loss carryforward periods. Subsequently, we consider any tax
planning strategies if prudent and feasible. As we have experienced significant losses in recent
years, we have not considered future taxable income projections. 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. Prior to December 31, 2003, Mexican GAAP required the calculation of impairment of long-lived
assets by comparing the unamortized carrying amount of the asset to the undiscounted future
expected cash flows to be generated by the assets, without interest charges. Under these rules, if
the sum of the expected future undiscounted cash flow is less than the carrying amount of the
asset, a loss was recognized for the difference between the fair value and carrying value of the
assets. We recorded impairment losses for our long-lived assets of
Ps 636.1 million during 2003
and Ps 1,624.6 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 203.6 million during 2003
and Ps 528.3 during 2002, which was recorded in income tax expenses (benefit) in our statement of
operations. On January 1, 2004, we adopted Bulletin C-15, Impairment of the Value of Long-Lived Assets
and Their Disposal, issued by MIPA, or Bulletin C-15. Bulletin C-15 establishes general criteria
for the identification and, if applicable, recording of losses from impairment or the decrease in
value of long-lived tangible and intangible assets, including goodwill. Bulletin C-15 requires the
calculation of impairment of long-lived assets by comparing the unamortized carrying amount of the
asset to the net present value of future expected net cash flows. Under Bulletin -35-




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C-15, if the net present value of future expected net cash flows is less than the carrying
amount of the asset, a loss was recognized for the difference between the net present value of
future expected net cash flows and carrying value of the assets. We recorded impairment losses for
our long-lived assets of Ps 463.7 million during 2004 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 139.1
million during 2004, which was recorded in income tax expenses (benefit) in our statement of
operations. For U.S. GAAP purposes, beginning on January 1, 2002, we follow SFAS No. 144, Accounting for
the Impairment of Disposal of Long-Lived Assets (SFAS 144). SFAS 144 provides criteria for when
and in what circumstances an impairment loss (write-down) should be recorded and the manner in
which the write-down should be measured. An evaluation of impairment is undertaken whenever events
or circumstances indicate that the carrying amount of an asset may not be recoverable. Under SFAS
144, the impairment criteria is met when the carrying value of assets exceeds the sum of expected
future cash flows (undiscounted and without interest charges) of the related assets. If it is
determined that an asset is impaired, it is written down to its fair value, if available or the
present value of expected future cash flows. The estimates of undiscounted cash flows and the net present value of future expected net cash
flows takes into consideration expectations of future macroeconomic conditions as well as our
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. For assets to be disposed of, our company assesses whether machinery or equipment can be used
at other facilities and if not, estimates the proceeds to be realized upon sale of the assets. Our
company has recorded impairment losses related to certain unused assets and such losses may
potentially occur in the future. We reviewed the fair value less disposal cost of the long-lived
assets for which management has committed to a plan of disposal, principally Ponderosas
particleboard plant in 2002 and 2003 and Pronals assets in 2002, and recorded impairment losses
for these assets of Ps 369.5 million during 2003 and Ps 106.2 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 118.2 during 2003 and Ps 34.0 during 2002, which was recorded
in loss on discontinued operations in our statement of operations. Pension plans, seniority premiums and indemnities The determination of our obligations for pension plans, seniority premiums and indemnities are
dependent on our selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in note 12 to our audited consolidated financial statements and
include, among others, the discount rate, expected long-term rate of return on plan assets and
rates of increase in compensation and healthcare costs. In accordance with generally accepted
accounting principles, actual results that differ from our assumptions are accumulated and
amortized over future periods and, therefore, generally affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are appropriate,
significant differences in our actual experience or significant changes in our assumptions may
materially affect our pension and other 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 and Liquidity Our Financial Restructuring In November 2002, we defaulted on payments of principal and interest under our unsecured
indebtedness. As a result of the factors described below, we did not generate sufficient cash
flows from our operations to make a total of US$52.2 million of principal or a total of US$34.7
million of interest payments that were due on our unsecured indebtedness during 2002. In 2003, we
did not pay a total of US$77.3 million of principal or a total of US$78.3 million of interest that
was due on our unsecured indebtedness. In 2004, we did not pay a total of US$66.4 million of
principal or a total of US$72.9 million of interest that was due on our unsecured indebtedness. Our liquidity crisis was caused by, among other things: -36-




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
    
    the substantial capital expenditures required to expand our production capacity,
which resulted in a substantial debt service burden and led to our default on our
unsecured indebtedness, which has restricted our access to the capital markets;
    
    the economic slow-down in the U.S. and Mexico, which resulted in a reduction in the
demand for manufactured products requiring the goods supplied by our company;
    
    a significant drop in international market prices for paper and packaging products;
    
    the significant increase in raw material costs and other production costs;
    
    the devaluation of the peso against the dollar from 2002 to 2004; and
    
    a significant delay in the implementation of our planned divestiture of certain non-strategic assets. In December 2002, we retained financial advisors to advise us in evaluating debt-restructuring
alternatives to implement a long-term solution to our capital structure and debt service
requirements. We also began discussions with our bank creditors and certain holders of our debt
securities. On May 18, 2004, we filed a voluntary petition for concurso mercantil(commercial
reorganization) under the LCM with the Mexican court. None of our subsidiaries filed for concurso
mercantilor other bankruptcy protection in Mexico. On
August 25, 2004, the Mexican court declared that we had satisfied all of the requirements to be a debtor under the LCM. We continued to negotiate with our creditors, and on August 13, 2004, we reached an agreement
in principle with creditors collectively holding approximately 68% of our unsecured debt regarding
the terms of a proposed plan of reorganization and a proposed plan support agreement. On November
17, 2004, the Mexican court certified the list of recognized claims in our commercial
reorganization proceeding. On December 23, 2004, the conciliator (conciliadora) appointed by the
Mexican Federal Institute of Commercial Reorganization Specialists (Instituto Federal de
Especialistas de Concursos Mercantiles) in our commercial reorganization proceeding submitted our
plan of reorganization to the holders of recognized claims that were party to our plan support
agreement. The plan of reorganization provided that, in exchange for their debt, our unsecured
financial creditors would receive new debt equal to approximately 85% of the outstanding principal
amount of our unsecured debt. In addition to the new debt, the plan of reorganization provided
that our unsecured financial creditors would receive a number of our Series B Shares representing
an aggregate of approximately 17% of our capital stock on a fully diluted basis. The plan was
executed by our company and the holders of a majority of the recognized claims on December 23,
2004. The conciliator submitted our executed plan of reorganization to the Mexican court on January
11, 2005, and it was approved by the Mexican court on February 7, 2005. On February
23, 2005, our plan of reorganization was consummated. As a result:  
    
    Bank creditors of our company with claims against our company in the amount of US$136.6
million (Ps 1,611.3 million) received a 2,392,957 of our Series B Shares, representing
2.16% of our issued and outstanding capital stock, and the principal amount of the debt
outstanding with respect to these claims was amended and restated under the Restructured
Credit Agreement. Under the Restructured Credit Agreement, notes in an aggregate principal
amount of US$116.1 million (Ps 1,294.6 million) were issued to the holders of these claims.
These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable quarterly in
arrears, and the principal amount of these notes will be amortized quarterly until the
maturity of these notes on December 30, 2012.
    
    Unsecured creditors of our company with claims against our company in the amount of
US$510.3 million (Ps 5,689.9 million) related to our 2003 notes, 2006 notes, 2008 notes,
2009 notes and ECP note received 16,412,961 of our Series B Shares, representing 14.84% of
our issued and outstanding capital stock, and an aggregate principal amount of US$433.8
million (Ps 4,836.5 million) of our 2012 notes in respect to these claims. The 2012 notes
bear interest at a rate of 7.50% per annum until December 31, 2005, 8.50% per -37-




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annum from January 1, 2006 through December 31, 2006, and 9.50% per annum thereafter,
payable quarterly in arrears, and mature on December 30, 2012. Our obligations under the Restructured Credit Agreement and the 2012 notes are guaranteed by
the following subsidiaries: (1) Administración Corporativa de Durango, S. A. de C. V., or ACD, (2)
Empaques de Cartón Titán, S.A. de C.V. or Titán (3) Envases y Empaques de México, S. A. de C. V., or Eyemex, (4) Cartonpack, S.A. de C.V.,
or Cartonpack, (5) Industrias Centauro, or Centauro, (6) Compañía Papelera de Atenquique, S. A. de
C. V., or Atenquique, (7) Ponderosa Industrial de México, S.A. de
C. V. or Ponderosa, (8) Porteadores de Durango, S. A. de C. V., (9) Compañía
Norteamericana de Inversiones en Celulosa y Papel, S. A. de C. V., (10) Reciclajes Centauro, S. A.
de C. V., (11) Durango Internacional, S.A. de C. V. and (12) Durango International, Inc. In addition, our obligations under the Restructured Credit Agreement and the 2012 notes are
secured by (1) the shares of Grupo Pipsamex and Durango McKinley Paper Company, (2) the real
property of ACD, Titán, Eyemex, Cartonpack, Centauro, Atenquique and Ponderosa, and (3) certain
assets of Titán and Eyemex. Disposition of Certain of Our Operations Our results of operations have been affected during the last three years by our disposition of
some of our operations. As a result of these dispositions, our net sales, gross profit and
operating income have decreased significantly and we have recorded significant other expenses, net
losses of discontinued operations and an extraordinary loss. Disposition of Durango Paper Company In October 2002, we sold Durango Paper Company and certain promissory notes to Operadora Omega
Internacional, S.A. de C.V., a related party. 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. This sale gave rise to an aggregate loss of Ps 1,587.4 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 and its subsidiaries, including 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 281.0 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
275.8 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 629.8 million), resulting in a gain of Ps 352.4 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 342.8 million), resulting in a loss of Ps 470.7 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 was pledged to Bancomext under the terms of our loan
agreements with Bancomext, and was included in our balance sheet as restricted cash as of December
31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to
Bancomext. -38-




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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 135.9 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 204.0 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, and was included in our balance sheet as restricted cash as of December
31, 2003. On September 29, 2004, we used this restricted cash to prepay a portion of our loans to
Bancomext. Disposition of Chihuahua Particleboard Operations During 2003, our management authorized a plan to sell a plant located in Chihuahua, which is
primarily engaged in the manufacturing of particleboard. Based on negotiations with a potential
buyer, we reduced the book value of the net assets to be sold by Ps 369.5 million, which reduction
is included in the net loss of discontinued operations in the statement of operations for 2003. If
we sell this plant, the capacity of our other segment will be reduced by 200 thousand short tons to
58 thousand short tons. Effect of Level of Indebtedness and Interest Rates At December 31, 2004, our total outstanding indebtedness on a consolidated basis was Ps
7,130.1 million, excluding Ps 1,081.9 million (US$97.0 million) of liabilities to be capitalized.
As a result of our substantial indebtedness, our company incurred
interest expenses of Ps 1,121.6
million in 2004, Ps 1,247.4 million in 2003 and Ps 1,185.8 million in 2002. In addition, because
substantially all of our indebtedness is denominated in dollars and the peso depreciated
significantly against the dollar during 2003 and 2002, our company incurred foreign exchange losses
of Ps 864.0 million in 2003 and Ps 1,050.1 million in 2002. These interest expenses and foreign
exchange losses were substantial factors in our net losses for 2004, 2003 and 2002. Our debt obligations with variable interest rates expose our company to market risks from
changes in the London interbank offered rate, or LIBOR. As a result of our defaults on our unsecured debt, on January 16, 2003, Standard & Poors
Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard & Poors, lowered our
foreign and local currency corporate ratings to SD. 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 January 21, 2003, Moodys Investors
Service, or Moodys, 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 cessation of these ratings agencies coverage of our company and 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 and our financial restructuring has adversely affected the terms of our trade
payables and our ability to obtain new customers. Pricing of Our Products In 2004, paper products accounted for 44.4% of our net sales to third parties and packaging
products accounted for 54.2% of our net sales to third parties. 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; -39-




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
    
    demand for packaging products as a result of the level of growth of the Mexican and
U.S. economies;
    
    fluctuations in the exchange rate between the peso and the dollar; and
    
    prevailing inflation rates. Containerboard.Our prices for containerboard primarily reflect international paper prices.
During 2002, our average price per short ton for containerboard declined by 11.0%, primarily
because of the slowing of the economies in Mexico and the United States. During 2003, our average
price per short ton for containerboard declined by 5.7%, principally due to the slow economic
recovery in the United States and Mexico. During 2004, our average price per short ton for
containerboard increased by 15.1%, principally as a result of increased economic activity in Mexico
and the United States. Newsprint.Our prices for newsprint primarily reflect international paper prices. We were
the only producer of newsprint in Mexico from the end of 1998, when we acquired Grupo Pipsamex,
until November 2003, when we sold Pronal. During 2002, our average price per short ton for
newsprint decreased by 16.3%, principally due to the slowing of the economies in Mexico and the
United States. During 2003, our average price per short ton for newsprint decreased by 5.3%,
principally due to the slow economic recovery in the United States and Mexico. In 2004, our
average price per short ton for newsprint increased by 7.7%, principally as a result of the
recovery of the international price of newsprint. Packaging products.In general, the prices of our packaging products fluctuate in accordance
with international prices. As a result of generally low prices for packaging products in the
United States, competition in Mexico from imports has increased. During 2002, our average price
per short ton for corrugated containers decreased by 9.6%, principally due to the slowing of the
economies in Mexico and the United States. During 2003, our average price per short ton for
corrugated containers decreased by 2.5%, principally due to the slow economic recovery in the
United States and Mexico. In 2004, our average price per short ton for corrugated containers
decreased by 0.1%. Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Pricing Global consumption of containerboard and newsprint has increased significantly over the past
30 years. Due to this growth in consumption, producers have experienced periods of insufficient
capacity for these products. Periods of insufficient capacity, including some due to raw material
shortages, have usually resulted in increased capacity utilization rates and international market
prices for our paper products, leading to increased operating margins. These periods have often
been followed by periods of capacity additions, which have resulted in declining capacity
utilization rates and international selling prices, leading to declining operating margins. We expect that these cyclical trends in international selling prices and operating margins
relating to global capacity shortfalls and additions will likely persist in the future, principally
due to the continuing impact of four general factors:  
    
    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. -40-




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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, 2004, 2003 and 2002. Year Ended December 31,2004
    
    
    2003
    
    
    2002Containerboard
    
    
    99
    %
    
    
    99
    %
    
    
    96
    %Newsprint and uncoated free sheet
    
    
    93
    %
    
    
    94
    %
    
    
    92
    %Corrugated containers
    
    
    71
    %
    
    
    70
    %
    
    
    67
    %Multi-wall sacks and bags
    
    
    59
    %
    
    
    56
    %
    
    
    68
    %
 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
2004, OCC and ONP represented approximately 38% of the total cost of goods sold of our paper
segment and approximately 30% of our consolidated cost of goods sold. The cost of OCC and ONP
varies in accordance with international market prices, which fluctuate depending upon the supply of
OCC and ONP and the demand for finished paper. Mexican OCC or ONP prices tend to follow price
movements in the United States, but are generally lower because Mexican OCC or ONP is lower in
quality. We believe that we are one of Mexicos largest users of recycled paper and operate recycling
centers in the United States in Albuquerque and Phoenix. In 2004, approximately 39% of the OCC and
ONP used in our United States paper production were collected by our recycling centers. We
purchase the remainder of our OCC and ONP requirements in the open market. Because the primary raw material of our packaging segment is containerboard produced by our
paper segment or other paper producers with cost structures similar to ours, fluctuations in the
international market price of OCC and ONP result in similar fluctuations in the cost of the primary
raw materials of the packaging segment. We attempt to revise the prices for our products, which are generally denominated in dollars
or are dollar-linked, to reflect changes in the international market prices of these products,
which in turn reflect fluctuations in the international market prices of OCC and ONP. However, as
a result of the imbalance between supply of and demand for paper and packaging products, during
2002 and 2003 we were not able to successfully pass through the increased prices of OCC and ONP to
our customers. -41-




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The international market price of OCC and ONP has fluctuated significantly in the past, and we
expect that it will continue to do so in the future. The international market price of OCC and ONP
has been subject to significant upward pressures during the past several years as a result of
significantly increased demand for OCC and ONP in Asia, particularly China. Significant increases
in the price of OCC and ONP and, consequently, the cost of producing our products, reduces our
gross margins and negatively affects our results of operations to the extent that we are unable to
pass all of these increased costs on to our customers and could result in reduced sales volumes of
our products. Conversely, significant decreases in the price of OCC and ONP and, consequently, the
cost of producing our products, would likely increase our gross margins and our results of
operations and could result in increased sales volumes if this lower cost leads us to lower our
prices. We do not currently hedge our exposure to changes in the prices of OCC and ONP. Energy Costs In 2004, energy cost represented approximately 17% of our cost of production. In particular,
our paper mills consume significant amounts of electric power. We purchase approximately 70% of
the electric power needs of our Mexican operations from the Federal Electricity Commission
(Comisión Federal de Electricidad),the Mexican state-owned electric company, under long-term
contracts and we produce the remainder at our own power plants. These long-term contracts
guarantee the supply of electric power at prices that have historically increased by the Mexican
inflation rate. In the United States, our McKinley mill is supplied 100% by a rural electric
cooperative at formula prices under a long-term contract. Our U.S. converting facilities purchase
electric power from local utilities. Mexican and United States Demand for Our Products We sell paper and packaging products in Mexico and the United States. The following is our
geographic segment sales information for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002(in million of constant pesos)Mexico
    
    Ps
    9,693.7
    
    
    Ps
    7,812.0
    
    
    Ps
    8,068.4United States
    
    
    2,391.3
    
    
    
    2,101.3
    
    
    
    3,432.6Eliminations.
    
    
    (4,232.5
    )
    
    
    (2,762.7
    )
    
    
    (3,025.7
    )Total
    
    Ps
    7,852.4
    
    
    Ps
    7,150.5
    
    
    Ps
    8,475.4
 In 2004:  
    
    approximately 63% of our net sales of paper to third parties was to customers in
Mexico, and the remainder was to customers in the United States; and
    
    approximately 86% of our net sales of packaging products to third parties was to
customers in Mexico, and the remainder was to customers in the United States. In 2004, approximately 8% 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 package consumer, agricultural,
manufacturing and industrial products -42-




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destined for the United States, our results of operations and financial condition have been,
and will continue to be, affected by the growth rate of the United States GDP. Mexican GDP growth has fluctuated significantly, and we anticipate that it will likely
continue to do so. Mexican GDP grew by 0.9% in 2002, contracted by 1.2% in 2003 and grew by 4.4%
in 2004. Our management believes that economic growth in Mexico would positively affect our future
net sales and results of operations. However, a recession in Mexico would likely reduce our future
net sales and 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 28% of our sales were made in dollars during 2004 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 2004, 22% of our consolidated cost of goods sold was incurred in dollars or was
dollar-linked. The primary dollar costs of our Mexican operations are incurred for imports of OCC
and ONP. Fluctuations in the peso affect the cost of imported OCC and ONP and other dollar-linked
or imported raw materials. The peso depreciated by 13.8% against the dollar in 2002 and by 7.6% in
2003, and appreciated by 0.8% against the dollar in 2004. Depreciation of the peso against the dollar generally results in our receiving more pesos for
our dollar sales but our dollar-based costs increase. The net effect on our operating income is
generally positive because the percentage of our net sales denominated in dollars or dollar-linked
is significantly higher than the percentage of our costs and expenses that are denominated in
dollars or dollar-linked. In addition, depreciation of the pesos against the dollar generally
benefits Mexican traditional exporters and maquiladora exporters that consume our packaging
products. Conversely, appreciation of the peso against the dollar generally results in our receiving
fewer pesos for our dollar sales but our dollar-based costs decrease. The net effect on our
operating income is generally negative because the percentage of our net sales denominated in
dollars or dollar-linked is significantly higher than the percentage of our costs and expenses that
are denominated in dollars or dollar-linked. In addition, appreciation of the peso against the
dollar generally reduces the sales of Mexican traditional exporters and maquiladora exporters that
consume our packaging products. At December 31, 2004, 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 -43-




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##### 




    
    our financial expenses increase as a result of foreign exchange losses that we must
record. 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 2002, 2003 and 2004 we recorded a gain from monetary position for those periods. The table below shows Mexican inflation according to the NCPI and our gain on monetary
position for the periods indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002(in millions of constant pesos,except percentages)Inflation
    
    
    5.2
    %
    
    
    4.0
    %
    
    
    5.7
    %Gain from monetary position
    
    Ps
    451.8
    
    
    Ps
    386.3
    
    
    Ps
    427.2
 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. -44-




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##### 



Income Taxes and Employee Statutory Profit Sharing The income tax rate was 35% in 2002, 34% in 2003 and 33% in 2004. Mexican income taxes take
into consideration the taxable and deductible effects of inflation. As a result of an amendment to
the Income Tax Law that became effective on November 13, 2004, the income tax rate will be 30%, 29%
and 28% in 2005, 2006 and 2007, respectively. These reductions in the income tax rate resulted in
an increase in the value of our deferred income tax liability of Ps 22.6 million, which increase
was charged to income tax benefit in our statement of income. Like other Mexican companies, we are required by law to pay our employees, in addition to
their agreed compensation and benefits, profit sharing in an aggregate amount equal to 10% of our
taxable income (calculated without reference to inflation adjustments). Prior to 2002, the payment
of employee statutory profit sharing was deductible in certain instances. This deduction was
completely eliminated in 2002, but is scheduled to be reinstated in 2006. Deferred income tax
assets and liabilities are recognized for temporary differences resulting from comparing the book
and tax values of assets and liabilities plus any future benefits from tax loss carryforwards.
Deferred income tax assets are reduced by any benefits about which there is uncertainty as to their
realizability. Asset Taxes Taxes on assets are calculated by applying a rate of 1.8% on the net average of the majority
of our restated assets less certain liabilities and is payable only to the extent that it exceeds
income tax payable for the applicable period. 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 175.6
million in 2004 and Ps 575.3 million in 2003 and charged to results of operations. Restated amounts as of December 31, 2004 and expiration dates are: Tax Loss
    
    
    RecoverableYear of expiration
    
    Carryforwards
    
    
    Asset Taxes(millions of constant pesos)2005
    
    Ps
    232.9
    
    
    Ps
    13.82006
    
    
    158.1
    
    
    
    27.62007
    
    
    105.0
    
    
    
    27.42008
    
    
    155.0
    
    
    
    26.62009
    
    
    101.8
    
    
    
    20.82010
    
    
    118.1
    
    
    
    25.12011
    
    
    130.6
    
    
    
    23.42012
    
    
    1,524.1
    
    
    
    60.52013
    
    
    1,460.0
    
    
    
    56.42014
    
    
    423.9
    
    
    
    5.6Total
    
    Ps
    4,409.3
    
    
    Ps
    287.2
 -45-




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##### 



Recent Developments Financial Restructuring As discussed above under Principal Factors Affecting Our Results of Operations and
LiquidityOur Financial Restructuring, our plan of reorganization was executed by our company and
the holders of a majority of the recognized claims on December 23, 2004. The conciliator submitted
our executed plan of reorganization to the Mexican court on January 11, 2005, and it was approved
by the Mexican court in final form on February 7, 2005. On February 23, 2005, our plan of reorganization was consummated. As a result:  
    
    Bank creditors of our company with claims against our company
in the amount of US$136.6
million (Ps 1,611.3 million) received 2,392,957 of our Series B Shares, representing 2.16%
of our issued and outstanding capital stock, and the principal amount of the debt
outstanding with respect to these claims was amended and restated under the Restructured
Credit Agreement. Under the Restructured Credit Agreement, notes in an aggregate principal
amount of US$116.1 million (Ps 1,294.6 million) were issued to the holders of these claims.
These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable quarterly in
arrears, and the principal amount of these notes will be amortized quarterly until the
maturity of these notes on December 30, 2012.
    
    Unsecured creditors of our company with claims against our company in the amount of
US$510.3 million (Ps 5,689.9 million) related to our 2003 notes, 2006 notes, 2008 notes,
2009 notes and ECP note received 16,412,961 of our Series B Shares, representing 14.84% of
our issued and outstanding capital stock, and an aggregate principal amount of US$433.8
million (Ps 4,836.5 million) of our 2012 notes in respect to these claims. The 2012 notes
bear interest at a rate of 7.50% per annum until December 31, 2005, 8.50% per annum from
January 1, 2006 through December 31, 2006, and 9.50% per annum thereafter, payable
quarterly in arrears, and mature on December 30, 2012. Our obligations under the Restructured Credit Agreement and the 2012 notes are guaranteed by
the following subsidiaries: (1) ACD, (2) Titán, (3) Eyemex, (4) Cartonpack, (5) Centauro, (6)
Atenquique, (7) Ponderosa, (8) Porteadores de Durango, S. A. de C. V., (9) Compañía Norteamericana
de Inversiones en Celulosa y Papel, S. A. de C. V., (10) Reciclajes Centauro, S. A. de C. V., (11)
Durango Internacional, S.A. de C. V. and (12) Durango International, Inc. In addition, our obligations under the Restructured Credit Agreement and the 2012 notes are
secured by (1) the shares of Grupo Pipsamex and Durango McKinley Paper Company, (2) the real
property of ACD, Titán, Eyemex, Cartonpack, Centauro, Atenquique and Ponderosa, and (3) certain
assets of Titán and Eyemex. Acquisition of Empaques del Norte On April 11, 2005, our company entered into an agreement to acquire all of the capital stock
of Empaques del Norte, S.A. de C.V. for US$5.8 million. The
purchase price will be made in five
installments between April 2005 and May 2006. Payment of
the first four installment payments has
been made. Under the purchase agreement, the seller retains title to these shares until all
installment payments have been made. Empaques del Norte, S.A. de C.V. owns a corrugated container
plant with an annual production capacity of 25,000 short tons. Acquisition of Líneas Aéreas On April 18, 2005, our company purchased substantially all of the capital stock of Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for Ps 100.0 thousand from certain
members of the Rincón family and some of their children. Líneas Aéreas owns two business jets and
provides transportation services to our subsidiaries and third parties. In connection with this
transaction, we assumed a financial lease agreement with GE Capital Leasing with respect to one of
the business jets. -46-




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##### 



Under this financial lease agreement, we are required to make monthly lease payments with a
final payment due in October 2007. The outstanding amount under this financial lease bears
interest at a rate of prime +1.50% per annum. Our obligations under this financial lease are
secured by a pledge of the business jet and guaranteed by CODUSA. As of June 30, 2005, the
aggregate principal amount outstanding under this financial lease was US$5.2 million (Ps 57.6
million). Sale of Ponderosa (Unaudited) On July 15, 2005, our subsidiaries, Ponderosa and Compañía Forestal de Durango S.A. de C.V., sold
the assets of our Chihuahua particleboard plant for US$30 million. As a result of this sale, the
capacity of our other segment was reduced by 200 thousand short tons, we ceased producing
particleboard and we no longer have any discontinued operations. Results of Operations The following discussion of our results of operations is based on our audited consolidated
financial statements prepared in accordance with Mexican GAAP. The discussion of the results of
our business segments is based upon financial information reported for each of the three segments
of our business, as detailed in note 22 to our audited consolidated financial statements. In the following discussion, references to increases or decreases in any year are made by
comparison with the corresponding prior year, except as the context otherwise indicates. The following table sets forth consolidated financial information for each of the three years
ended December 31, 2004. Year Ended December 31,2004as
restated
    
    
    2003
    
    
    2002(in millions of constant pesos)Net sales
    
    Ps
    7,852.4
    
    
    Ps
    7,150.5
    
    
    Ps
    8,475.4Cost of sales
    
    
    6,733.6
    
    
    
    6,151.0
    
    
    
    7,287.8Gross profit
    
    
    1,118.8
    
    
    
    999.5
    
    
    
    1,187.6Selling, general and administrative expenses
    
    
    676.2
    
    
    
    678.6
    
    
    
    659.5Operating income
    
    
    442.7
    
    
    
    320.9
    
    
    
    528.0Other income (expense), net
    
    
    (404.2
    )
    
    
    (1,588.3
    )
    
    
    (3,262.9
    )Net comprehensive financing cost:Interest expense
    
    
    (1,121.6
    )
    
    
    (1,247.4
    )
    
    
    (1,185.8
    )Interest income
    
    
    40.2
    
    
    
    44.1
    
    
    
    41.9Foreign exchange gain (loss)
    
    
    60.5
    
    
    
    (864.0
    )
    
    
    (1,050.1
    )Monetary position gain
    
    
    451.8
    
    
    
    386.3
    
    
    
    427.2(569.0
    )
    
    
    (1,681.0
    )
    
    
    (1,766.8
    )Loss from continuing operations before income taxes
and employee statutory profit sharing
    
    
    (530.5
    )
    
    
    (2,948.4
    )
    
    
    (4,501.6
    )Asset tax
    
    
    (14.7
    )
    
    
    
    
    
    
    Income tax benefit
    
    
    501.0
    
    
    
    0.7
    
    
    
    707.2Employee statutory profit sharing expense
    
    
    
    
    
    
    (1.8
    )
    
    
    (1.1
    )Loss before equity in income of associated companies
    
    
    (44.1
    )
    
    
    (2,949.5
    )
    
    
    (3,795.6
    )Equity in income of associated companies
    
    
    2.6
    
    
    
    2.0
    
    
    
    2.1Loss from continuing operations
    
    
    (41.5
    )
    
    
    (2,947.5
    )
    
    
    (3,793.5
    )Discontinued operations
    
    
    102.1
    
    
    
    (577.7
    )
    
    
    (108.2
    )Consolidated net loss
    
    Ps
    60.6
    
    
    Ps
    (3,525.2
    )
    
    Ps
    (3,901.7
    )
 -47-




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##### 



The following table sets forth consolidated financial information for our business
segments for each of the three years ended December 31, 2004. Year Ended December 31,2004
    
    
    2003
    
    
    2002(in millions of constant pesos, except percentages)PaperSales to third parties
    
    Ps
    3,488.3
    
    
    Ps
    2,929.8
    
    
    Ps
    4,235.4Intersegment sales
    
    
    3,936.3
    
    
    
    2,605.5
    
    
    
    2,879.4Total sales
    
    
    7,424.6
    
    
    
    5,535.4
    
    
    
    7,114.8Operating income (loss)
    
    
    55.5
    
    
    
    (116.5
    )
    
    
    8.9Operating margin (%)
    
    
    1.6
    %
    
    
    (4.0
    )%
    
    
    0.2
    %Depreciation and amortization
    
    
    285.8
    
    
    
    278.5
    
    
    
    348.4PackagingSales to third parties
    
    Ps
    4,257.2
    
    
    Ps
    4,134.9
    
    
    Ps
    4,141.4Intersegment sales
    
    
    296.1
    
    
    
    140.3
    
    
    
    98.4Total sales
    
    
    4,553.3
    
    
    
    4,275.2
    
    
    
    4,239.8Operating income
    
    
    386.0
    
    
    
    452.6
    
    
    
    520.1Operating margin (%)
    
    
    9.1
    %
    
    
    10.9
    %
    
    
    12.6
    %Depreciation and amortization
    
    
    133.8
    
    
    
    125.4
    
    
    
    119.0OtherSales to third parties
    
    Ps
    107.0
    
    
    Ps
    85.8
    
    
    Ps
    98.5Intersegment sales
    
    
    0.1
    
    
    
    17.0
    
    
    
    47.9Total sales
    
    
    107.1
    
    
    
    102.8
    
    
    
    146.5Operating
income (loss)
    
    
    1.2
    
    
    
    (15.3
    )
    
    
    (1.0
    )Operating margin (%)
    
    
    1.1
    %
    
    
    (17.8
    )%
    
    
    (1.0
    )%Depreciation and amortization
    
    
    7.5
    
    
    
    11.6
    
    
    
    10.6
 Year Ended December 31, 2004 Compared with Year Ended December 31, 2003 Net Sales Net sales increased by 9.8% in 2004 due to:  
    
    the 19.1% increase of net sales to third parties of our paper segment;
    
    the 3.0% increase of net sales to third parties of our packaging segment; and
    
    the 24.7% increase of net sales to third parties of our other segment. Net sales to third parties of our paper segment increased by 19.1% in 2004, due to (1) a 25.8%
increase in net sales to third parties of containerboard, principally due to a 15.1% increase in
our average sales price for containerboard and a 9.3% increase in our sales volume of
containerboard, (2) a 30.1% increase in net sales to third parties of newsprint, principally due to
a 20.9% increase in our sales volume of newsprint and a 7.7% increase in our average sales price
for newsprint, and (3) a 2.2% increase in net sales to third parties of uncoated free sheet,
principally due to a 5.1% increase in our average sales price for uncoated free sheet, which was
partially offset by a 2.7% decrease in our sales volume of uncoated free sheet. Net sales to third parties of our packaging segment increased by 3.0% in 2004, primarily as a
result of (1) a 2.6% increase in net sales to third parties of corrugated containers, principally
due to a 2.7% increase in our sales volume of corrugated containers, the effects of which were
partially offset by a 0.1% decline in our average sales price for corrugated containers, and (2) an
8.6% increase in net sales to third parties of multi-wall sacks and bags, principally due to a
11.1% increase in our sales volume of multi-wall sacks and bags, the effects of which were
partially offset by a 2.1% decline in our average sales price for multi-wall sacks and bags. -48-




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##### 



Net sales to third parties of our other segment increased by 24.7% in 2004, primarily due to a
15.2% increase in our average sales price for our other products and an 8.2% increase in our sales
volume of our other products. Cost of Sales Cost of sales increased by 9.5% in 2004, primarily due to increased sales volumes of paper
products. Average prices for recycled fiber, consisting of OCC and ONP, which accounted for
approximately 30% of our cost of sales in 2004, increased by 17.7% in nominal dollar terms to
US$146 per short ton in 2004 from US$124 per short ton in 2003. Our energy cost, which represented
approximately 17% of our cost of production in 2004, increased by 10.1%, primarily as a result of
increased production volumes and increased prices for energy. On a unit cost basis, energy cost
increased by 4% in 2004. Our labor cost, which represented approximately 12% of our cost of
production in 2004, increased by 4%, primarily as a result of increases in wages paid to our
employees. On a unit cost basis, labor costs decreased by 2% in 2004. Gross Profit and Gross Margin Gross profit increased by 11.9% in 2004, primarily as a result of the increase in net sales of
our paper and packaging segments. Gross margin increased to 14.2% in 2004 compared to 14.0% in
2003. Selling, General and Administrative Expenses Selling, general and administrative expenses remained stable at Ps 676.2 million in 2004
compared to Ps 678.6 million in 2003. Selling, general and administrative expenses as a percentage
of our net sales decreased to 8.6% in 2004 compared to 9.5% in 2003 as a result of our greater
control of our selling, general and administrative expenses which remained stable despite our
increased net sales. Operating Income Operating income increased by 38.0% in 2004, primarily as a result of the 11.9% increase in
our gross profit that principally resulted from our increased net sales. Operating margin
increased to 5.6% in 2004 compared to 4.5% in 2003. Operating income in our paper segment was Ps 55.5 million compared to operating loss of Ps
116.5 million in 2003, primarily as a result of (1) the recovery of this segments operating margin
to 1.6% in 2004 compared to (4.0)% in 2003 as a result of the increase in average sales prices of
our paper products, and (2) this segments increased net sales in 2004. Operating income in our packaging segment decreased by 14.7%, primarily as a result of the
decline of the operating margin of this segment to 9.1% in 2004 compared to 10.9% in 2003,
principally as a result of the decline in the average prices of our packaging products. The
effects of this decline in operating margin was partially offset by the increased sales of this
segment. Operating income in our other segment was Ps 1.2 million compared to operating loss of Ps 15.3
million in 2003, primarily as a result of (1) the recovery of this segments operating margin to
1.1% in 2004 compared to (17.8)% in 2003, primarily as a result of higher average prices for our
other products, and (2) this segments increased net sales in 2004. Other Expense, Net Other expense, net decreased by 74.6% in 2004. In 2004, other expense, net arose primarily as
a result of:  
    
    a Ps 463.7 million expense recorded as a result of the impairment of long-lived
assets at five of our mills and plants; -49-




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##### 




    
    a Ps 322.8 million expense recorded as a result of the amortization in full of the
debt issuance expenses relating to our 2003 notes, 2006 notes, 2008 notes and 2009
notes; and
    
    a Ps 144.6 million expense reflecting the expenses we incurred in 2004 related to
the restructuring of our indebtedness. These expenses were partially offset by other income of Ps 620.8 million we recorded as a result of
our purchase of notes issued by our company in the aggregate principal amount of US$48.1 million
(Ps 536.3 million) for US$7.5 million (Ps 86.0 million). In 2003, other expense, net arose primarily as a result of:  
    
    a Ps 636.1 million expense recorded as a result of the impairment of long-lived
assets at five of our mills and plants;
    
    a Ps 287.0 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 331.4 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; and
    
    a Ps 210.0 million expense reflecting our loss on the sale of property, plant and
equipment, principally the sale of Grupo Pipsamexs warehouse in Mexico City. Net Comprehensive Financing Cost Net comprehensive financing cost decreased by 66.1% in 2003, primarily due to (1) the Ps 60.5 million
foreign exchange gain we recorded in 2004 compared to the Ps 864.0 million foreign exchange loss we
recorded in 2003 as a result of a 0.8% appreciation of the peso in 2004 as compared to a 7.6%
depreciation of the peso in 2003, and (2) a 10.1% decrease in interest expense in 2004, primarily
as a result of our ceasing to accrue interest on our outstanding unsecured debt after the Mexican
court declared us to be in commercial reorganization under the LCM on August 25, 2004, the effect
of which was partially offset by our accrual of interest on this debt at default rates in 2004
prior to August 25, 2004. Income Tax Benefit Income
tax benefit was Ps 501.0 million in 2004 as compared to Ps 0.7 million in 2003,
principally due to the change in the valuation allowance for recoverable deferred income tax assets
and recoverable tax on assets. Income (Loss) from Discontinued Operations Income
from discontinued operations was Ps 102.1 million in 2004 compared loss from
discontinued operations of Ps 577.7 million in 2003. In 2004, our discontinued operations were the
operations of our Chihuahua particleboard mill, which were held for sale at December 31, 2004. In
2003, our discontinued operations were:  
    
    the operations of our molded pulp division, which we sold for US$53.7 million on
February 27, 2003;
    
    the operations of Pronal, which we sold for US$28.0 million on November 14, 2003; and
    
    the operations of our Chihuahua particleboard mill, which were held for sale at December 31, 2003. In 2004, income from discontinued operations was composed of: -50-




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##### 




    
    income of Ps 68.1 million generated by our discontinued operations; and
    
    a Ps 34.0 million income tax and employee statutory profit sharing benefit recorded
with respect to our discontinued operations. In 2003, loss from discontinued operations was composed of:  
    
    a Ps 593.2 million loss incurred by our discontinued operations, including a Ps
369.5 million impairment charge assessed against the Chihuahua particleboard mill;
    
    a Ps 470.7 million loss recorded on the sale of Pronal;
    
    a Ps 352.4 million gain recorded on the sale of our molded pulp division; and
    
    a Ps 133.8 million income tax and employee statutory profit sharing benefit recorded
with respect to our discontinued operations. Consolidated Net Income
(Loss) Net
income was Ps 60.6 in 2004 and a net loss of Ps 3,525.3 in 2003. Net
income as a percentage of net sales decreased to 0.8%
in 2004 compared to a net loss of 49.3% in 2003. Year Ended December 31, 2003 Compared with Year Ended December 31, 2002 Net Sales Net sales decreased by 15.6% in 2003 due to:  
    
    the 30.8% 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 2.5% decrease in our average price of corrugated containers. Net sales to third parties of our paper segment decreased by 30.8% 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 2.7% decrease in net sales to third parties of newsprint, principally due to a
5.3% decrease in our average sales price for newsprint and a 2.7% increase in our sales
volume of newsprint; and
    
    a 3.9% increase in net sales to third parties of uncoated free sheet, principally
due to a 2.2% decline in our average sales price for uncoated free sheet, which was
partially offset by a 6.3% increase in our sales volume of uncoated free sheet. -51-




---



##### 



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 by 3.3% in
nominal dollar terms to US$124 per short ton in 2003 from US$120 per short ton in 2002. Our energy
cost, which represented approximately 18% of our cost of production in 2003, increased by only 4%,
despite the higher prices we paid for energy, primarily as a result of increased prices for energy.
On a unit cost basis, energy costs increased by 15% in 2003. Our labor cost, which represented
approximately 11% of our cost of production in 2003, decreased by 29% in 2003, primarily as a
result of our sale of Durango Paper Company in October 2002. On a unit cost basis, labor costs
decreased by 21% in 2003, primarily as a result of our sale of Durango Paper Company, which had
higher labor costs than our other paper plants. Gross Profit and Gross Margin Gross profit decreased by 15.8% in 2003, primarily as a result of the decline in our net
sales. Gross margin was stable at 14.0% in 2003 and 2002. Selling, General and Administrative Expenses Selling,
general and administrative expenses increased by 2.9% 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 9.5% in 2003
compared to 7.8% in 2002. Operating Income Operating income decreased by 39.2% in 2003, primarily as a result of the 15.8% decline in our
gross profit that principally resulted from our declining net sales. Operating margin decreased to
4.5% in 2003 compared to 6.2% in 2002. Operating loss in our paper segment was Ps 116.5 million compared to operating income of Ps
8.9 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 (4.0)% in 2003 compared to 0.2% in 2002. Operating income in our packaging segment decreased by 13.0%, 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 12.6% in 2002. Operating loss in our other segment decreased to Ps 15.3 million in 2003 from Ps 1.0 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. Other Expense, Net Other expense, net was Ps 1,588.3 million in 2003 compared to Ps 3,262.9 million in 2002. In
2003, other expense, net arose primarily as a result of:  
    
    a Ps 636.1 million expense recorded as a result of the impairment of long-lived
assets at five of our mills and plants. -52-




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
    
    a Ps 287.0 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 275.8 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 210.0 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 1,624.6 million expense recorded as a result of the impairment of long-lived
assets at nine of our mills and plants.
    
    a Ps 1,587.4 million expense reflecting our loss on the sale of Durango Paper
Company. Net Comprehensive Financing Cost Net comprehensive financing cost decreased by 4.9% in 2003, 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 5.2% increase in interest expense, primarily as a result of an increase in the
average interest rate for our debt obligations; and
    
    a 9.6% 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. Income Tax Benefit Income tax benefit was Ps 0.7 million in 2003 compared to Ps 707.2 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 577.7 million in 2003 compared to a loss of Ps
108.2 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$28.0 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 593.2 million loss incurred by our discontinued operations, including a Ps
369.5 million impairment charge assessed against the Chihuahua particleboard mill;
    
    a Ps 470.7 million loss recorded on the sale of Pronal; -53-




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
    
    a Ps 352.4 million gain recorded on the sale of our molded pulp division; and
    
    a Ps 133.8 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 11.9 million loss incurred by our discontinued operations, primarily as a
result of the Ps 167.6 million net comprehensive financing cost incurred by our
discontinued operations and the Ps 106.2 million impairment charge assessed against our
Pronal mill, which exceeded the Ps 170.5 million operating
income and the Ps 91.3
million other income of our discontinued operations; and
    
    a Ps 96.3 million income tax and employee statutory profit sharing expense incurred
by our discontinued operations. Consolidated Net Loss Net loss decreased by 9.6% in 2003. Net loss as a percentage of net sales increased to 49.3%
in 2003 compared to 46.0% in 2002. Liquidity and Capital Resources Our principal cash requirements consist of the following:  
    
    working capital requirements;
    
    servicing our indebtedness; and
    
    capital expenditures related to investments in operations, major maintenance and
expansion of plant facilities. Our principal sources of liquidity have historically consisted of:  
    
    cash flows from operating activities;
    
    short-term and long-term borrowings; and
    
    sales of debt securities in domestic and international capital markets. At December 31, 2004 and December 31, 2003, we had cash and temporary investments of Ps 834.9
million and Ps 680.6 million, respectively. In addition, we had restricted cash totaling Ps 165.7
million at December 31, 2003. At December 31, 2004 and December 31, 2003, we had working capital
of Ps 2,044.5 million and Ps (8,294.7) million, respectively. Our working capital position has
substantially improved as a result of the restructuring of our indebtedness. We believe that cash generated by our operating activities will be adequate to meet our debt
service requirements, capital expenditures and working capital needs for the foreseeable future.
Our future operating performance and our ability to service our debt are subject to future economic
conditions and to financial, business and other factors, many of which are beyond our control. -54-




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Changes in Financial Position Net Resources Generated (Used) by Operating Activities Operating
activities generated net resources of Ps 819.2 million in 2004, used net resources
of Ps 465.0 million in 2003 and Ps 166.7 million in 2002. The significant factors that led to the
generation of net resources by operating activities in 2004 were our
consolidated loss for continuing operations of Ps 79.0 million, net of items not requiring or generating resources, principally:  
    
    impairment of long-lived assets of Ps 463.7 million related to five of our mills and plants;
    
    depreciation and amortization of Ps 427.0 million,
    
    amortization of debt-issuance cost of Ps 327.5 million related to our 2003 notes,
2006 notes, 2008 notes and 2009 notes as a result of our financial restructuring, and
    
    deferred income tax benefit of Ps 514.5 million, primarily as a result of the
impairment of our long-lived assets. These effects were supplemented by (1) a Ps 131.2 million decrease in trade accounts receivables,
net, primarily as a result of greater efficiency in our collection process, (2) net income of
discontinued operations, net of items not requiring the use of
resources, of Ps 102.1 million, and
(3) a Ps 70.8 million decrease in inventories. The effects of these items were partially offset by
a Ps 215.5 million decrease in trade accounts payable. The significant factors that led to the use of net resources from operating activities in 2003
were our consolidated net loss of Ps 2,947.5 million, net of items not requiring or generating
resources, principally:  
    
    impairment of long-lived assets of Ps 636.1 million related to five of our mills and plants;
    
    depreciation and amortization of Ps 415.4 million,
    
    loss related to Durango Paper Company of Ps 331.4 million; and
    
    loss on sale of property, plant and equipment of Ps 210.0 million principally
related to the sale of Grupo Pipsamexs warehouse in Mexico City. The effects of our net loss were supplemented by (1) net loss of discontinued operations, net of
items not requiring the use of resources; of Ps 188.0 million, (2) a Ps 95.1 million increase in
trade accounts receivable, net principally as a result of the increase in recoverable taxes; and
(3) a Ps 85.8 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 966.1 million increase in interest payable as a result of our failure to pay
interest payments due on our unsecured indebtedness during 2003;
    
    a Ps 90.6 million increase in trade accounts payable resulting from our decision to
delay payments to certain of our trade creditors in order to conserve our cash
resources;
    
    a Ps 79.2 million increase in liabilities of discontinued operations; and
    
    a Ps 50.8 million decrease in inventories, principally resulting from a decrease in
spare parts and finished products. -55-




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The significant factors that led to the use of net resources from operating activities in 2002
were our consolidated net loss of Ps 3,793.5 million, net of items not requiring or generating
resources, principally:  
    
    deferred income tax benefit of Ps 828.0 million, primarily as a result of the
impairment of certain of our long-lived assets;
    
    impairment of long-lived assets of Ps 1,624.6 million related to nine of our mills and plants ;
    
    loss related to Durango Paper Company of Ps 1,587.4 million; and
    
    depreciation and amortization of Ps 478.0 million. The effects of our net loss were supplemented by (1) a Ps 372.2 million decrease in trade accounts
payable, primarily as a result of the sale of Durango Paper Company, (2) a Ps 163.7 million
increase in assets of discontinued operations; and (3) a Ps 119.4 million decrease in liabilities
of discontinued operations. The effects of these items were partially offset by:  
    
    a Ps 475.3 million decrease in trade accounts receivable, net, principally as a
result of the sale of Durango Paper Company;
    
    a Ps 257.0 million decrease in inventories, principally as a result of the sale of
Durango Paper Company;
    
    a Ps 167.1 million increase in interest payable, principally as a result of our
failure to pay interest payments due on our unsecured indebtedness after November 29,
2002; and
    
    the net income of discontinued operations, net of items not requiring the use of
resources, of Ps 136.3 million. Net Resources Generated (Used) by Financing Activities Financing
activities used net resources of Ps 605.6 million in 2004 and Ps 58.7 million in
2003, and generated net resources of Ps 892.7 million in 2002. In 2004, net resources used by
financing activities on a consolidated basis primarily consisted of payments of Ps 773.1 million of
long-term debt, primarily payments on our capital leases and secured debt. The effects of these
payments were partially offset by the incurrence of Ps 97.9 million of short-term and long-term
debt, primarily as a result of the effects of the application of inflation accounting. In 2003, net resources used by financing activities on a consolidated basis primarily
consisted of payments of Ps 427.0 million on our long-term debt, primarily payments on our capital
leases and secured debt. The effects of these payments were partially offset by the incurrence of
Ps 272.9 million of short-term and long-term debt, primarily as a result of the effects of the
application of inflation accounting. 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 1,951.2
million);
    
    US$22.0 million (Ps 245.3 million) of indebtedness under the Bank of America, N.A.
loan agreement; and
    
    US$24.0 million (Ps 267.6 million) of indebtedness under the Bank of Albuquerque
loan agreement. In 2002, in addition to scheduled amortizations under our outstanding debt: -56-




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
    
    we repurchased US$103.5 million (Ps 1,223.1 million) of our 12 5/8% Senior Notes due 2003;
    
    we prepaid US$19.6 million (Ps 231.6 million) of our outstanding debt to Banamex; and
    
    we prepaid US$3.9 million (Ps 46.1 million) of our outstanding debt to California Commerce Bank. Net Resources Generated (Used) by Investing Activities Investing
activities used net resources of Ps 59.4 million in 2004, generated net resources of
Ps 957.1 million in 2003, and used net resources of Ps 1,039.7 million in 2002. In 2004, net
resources used by investing activities on a consolidated basis primarily consisted of our
acquisition of machinery and equipment for Ps 207.3 million. The effects of these transactions
were partially offset by the termination of restrictions placed on Ps 165.7 million of the proceeds
of the sales of Pronal and Grupo Pipsamexs Mexico City warehouse as a result of the prepayment of
a portion of our indebtedness to Bancomext in connection with the restructuring of our debt to
Bancomext on September 30, 2004. In 2003, net resources generated by investing activities on a consolidated basis primarily
consisted of (1) Ps 972.6 million received as proceeds from the sale of our molded products
division and Pronal, and (2) Ps 242.4 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 165.7 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 112.3 million. In 2002, net resources used in investing activities on a consolidated basis primarily
consisted of our acquisition of machinery and equipment for Ps 479.1 million, our acquisition of
other assets for Ps 399.0 million, and our investment of Ps 224.0 million in our subsidiaries, due
to our sale of Durango Paper Company. Indebtedness At December 31, 2004, our total outstanding indebtedness on a consolidated basis was Ps
7,130.1 million, excluding Ps 1,081.9 million (US$97.0 million) of liabilities to be capitalized,
consisting of Ps 178.1 million of short-term indebtedness, including current portion of long-term
indebtedness (or 2.5% of our total indebtedness), and Ps 6,952.0 million of long-term indebtedness
(or 97.5% of our total indebtedness). All of our indebtedness at December 31, 2004 was denominated
in foreign currencies. The weighted average interest rate on our indebtedness was 13.7% at
December 31, 2004 without giving effect to our financial restructuring, 12.2% at December 31, 2003
and 11.3% at December 31, 2002. Short-Term Indebtedness As a result of our financial restructuring, at December 31, 2004 we classified our unsecured
bank debt and our 2003 notes, 2006 notes, 2008 notes, 2009 notes and ECP note as short-term and
long-term debt with maturities corresponding to the 2012 notes and the notes to be issued under the
Restructured Credit Agreement in accordance with the restructuring agreement. Liabilities to be Capitalized As
part of our financial restructuring, on February 23, 2005, we issued 18,805,918 of our
Series B Shares, representing approximately 17.0% of our issued and outstanding capital stock, in
respect of claims of our unsecured creditors for principal of Ps 1,081.9 million and accrued
interest through December 31, 2004 of Ps 2,077.0 million. The amount of our long-term debt was
reduced by Ps 1,081.9 million and the amount of our accrued interest was reduced by Ps 2,077.0
million in our balance sheet as of December 31, 2004 and these amounts were recorded as liabilities
to be capitalized on our balance sheet as of December 31, 2004. -57-




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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, 2004. The amounts are shown net of the
liabilities to be capitalized with respect to these debt instruments. OutstandingPrincipal Amount atInstrument
    
    December 31, 2004
    
    Final MaturityECP Note
    
    US$4.3 million
    
    Restructured2003 Notes
    
    US$15.5 million
    
    Restructured2006 Notes
    
    US$256.5 million
    
    Restructured2008 Notes
    
    US$8.8 million
    
    Restructured2009 Notes
    
    US$148.7 million
    
    RestructuredBanamex Loan
    
    US$64.0 million
    
    RestructuredBanamex Promissory Note
    
    US$4.3 million
    
    RestructuredFirst California Commerce Bank Loan
    
    US$9.9 million
    
    RestructuredSecond California Commerce Bank Loan
    
    US$10.6 million
    
    RestructuredJPMorgan Chase Loan
    
    US$8.5 million
    
    RestructuredBank of America, N.A. Loan Agreement Guarantee
    
    US$14.5 million
    
    RestructuredFirst JPMorgan Chase Letter of Credit
    
    US$2.2 million
    
    RestructuredSecond JPMorgan Chase Letter of Credit
    
    US$2.0 million
    
    RestructuredBancomext Loan
    
    US$56.3 million
    
    September 2014Bancomext Fabrica Mexicana Loan
    
    US$8.6 million
    
    September 2014Bank of Albuquerque Loan
    
    US$14.0 million
    
    May 2008Commerzbank Loan
    
    7.9 million
    
    January 2010NAFIN Loan
    
    US$0.1 million
    
    RepaidArrendadora Bank of America, N.A. Leases
    
    US$3.8 million
    
    August 2005GE Capital Leasing Leases
    
    US$6.9 million
    
    April 2009
 A substantial portion of our debt was restructured on February 23, 2005. See Principal
Factors Affecting Our Results of Operations and LiquidityOur Financial Restructuring. Our Notes ECP Note. At December 31, 2004, before recognizing the effects of our financial
restructuring, we had one series of notes outstanding under our Euro Commercial Paper Program in an
aggregate amount of US$5.0 million (Ps 55.7 million). As part of our financial restructuring, on
February 23, 2005, the principal of and accrued and unpaid interest on these notes was converted
into an aggregate principal amount of US$4.3 million of our 2012 notes and 56,402 of our Series B
Shares. 2003 Notes. At December 31, 2004, before recognizing the effects of our financial
restructuring, we had outstanding US$18.2 million (Ps 203.3 million) aggregate principal amount of
our 2003 notes. The 2003 notes matured on August 1, 2003 and were not paid. In addition, we did
not make interest payments on our 2003 notes following November 29, 2002. At December 31, 2004,
before recognizing the effects of our financial restructuring, the aggregate amount of accrued and
unpaid interest of the 2003 notes was US$23.4 million (Ps 260.6 million). As part of our financial
restructuring, on February 23, 2005, principal of and accrued and unpaid interest on our 2003 notes
was converted into an aggregate principal amount of US$15.5 million of our 2012 notes and 563,348
of our Series B Shares. 2006 Notes. At December 31, 2004, before recognizing the effects of our financial
restructuring, we had outstanding US$301.7 million
(Ps 3,364.3 million) aggregate principal amount
of our 2006 notes. We did not make interest payments on our 2006 notes following November 29,
2002. At December 31, 2004, before recognizing the effects of our financial restructuring, the
aggregate amount of accrued and unpaid interest of the 2006 notes was US$392.1 million (Ps 4,371.5
million). As part of our financial restructuring, on February 23, 2005, the principal of and
accrued and unpaid interest on our 2006 notes was converted into an aggregate principal amount of
US$256.5 million of our 2012 notes and 9,559,019 of our Series B Shares. 2008 Notes. At December 31, 2004, before recognizing the effects of our financial
restructuring, we had outstanding US$10.4 million (Ps 115.5 million) aggregate principal amount of
our 2008 notes. We did not make interest payments on our 2008 notes following November 29, 2002.
At December 31, 2004, before recognizing the effects of our financial restructuring, the aggregate
amount of accrued and unpaid interest of the 2008 notes was
US$13.6 million (Ps 151.2 million). As
part of our financial restructuring, on February 23, 2005, the principal of -58-




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and accrued and unpaid interest on our 2008 notes was converted into an aggregate principal
amount of US$8.8 million of our 2012 notes and 334,333 of our Series B Shares. 2009 Notes. At December 31, 2004, before recognizing the effects of our financial
restructuring, we had outstanding US$175.0 million (Ps 1,951.2 million) aggregate principal amount
of our 2009 notes. We did not make interest payments on the 2009 notes. At December 31, 2004,
before recognizing the effects of our financial restructuring, the aggregate amount of accrued and
unpaid interest of the 2009 notes was US$236.0 million (Ps 2,631.8 million). As part of our
financial restructuring, on February 23, 2005, the principal of and accrued and unpaid interest on
our 2009 notes was converted into an aggregate principal amount of US$148.8 million of our 2012
notes and 5,899,859 of our Series B Shares. Our Unsecured Bank Debt and Guarantees Banamex Loan. We borrowed an aggregate principal amount of US$94 million (Ps 1,048.1 million)
from Banamex under a loan agreement. This loan was payable in 10 quarterly installments beginning
in June 2002 and bore interest at a rate of LIBOR + 2.8% payable quarterly. This loan matured in
September 2004 and was not paid. At December 31, 2004, before recognizing the effects of our
financial restructuring, the outstanding principal amount under this loan was US$75.3 million (Ps
840.0 million). We did not make principal or interest payments under this loan following November
29, 2002. At December 31, 2004, before recognizing the effects of our financial restructuring, the
aggregate amount of accrued and unpaid interest under this loan was US$18.1 million (Ps 201.8
million). As part of our financial restructuring, on February 23, 2005, we issued 1,318,455 of our
Series B Shares to Banamex, and a note in the aggregate principal amount of US$64.0 million was
issued under the Restructured Credit Agreement with respect to the remaining principal of and
accrued and unpaid interest on this loan. Banamex Note. We borrowed an aggregate principal amount of US$7.3 million (Ps 81.4 million)
from Banamex under a promissory note. This promissory note bore interest at a rate of 5.2% per
annum payable semi-annually. This promissory note matured in December 2002 and was not paid. At
December 31, 2004, before recognizing the effects of our financial restructuring, the outstanding
principal amount under this promissory note was US$5.1 million (Ps 56.9 million). We did not make
principal or interest payments under this promissory note following November 29, 2002. At December
31, 2004, before recognizing the effects of our financial restructuring, the aggregate amount of
due and unpaid interest under this promissory note was
US$1.5 million (Ps 16.5 million). As part
of our financial restructuring, on February 23, 2005, we issued 99,856 of our Series B Shares to
Banamex, and a note in the aggregate principal amount of US$4.3 million was issued under the
Restructured Credit Agreement with respect to the remaining principal of and accrued and unpaid
interest on this note. California Commerce Bank Loans. We borrowed an aggregate principal amount of US$26.7 million
(Ps 297.5 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 130.2 million) bore
interest at a rate of LIBOR +2.75%. The first California Commerce Bank loan agreement matured in
January 2003 and was not paid. The second California Commerce Bank loan agreement in the amount of
US$15.0 million (Ps 167.2 million) bore interest at a rate of LIBOR + 3.25%. The second California
Commerce Bank loan agreement matured in May 2004 and was not paid. We did not make principal or
interest payments under the California Commerce Bank loan agreements following November 29, 2002.
At December 31, 2004, before recognizing the effects of our financial restructuring, the aggregate
amount of due and unpaid principal under the California Commerce Bank loan agreements was US$24.2
million (Ps 269.6 million) and the aggregate amount of due and unpaid interest under the California
Commerce Bank loan agreements was US$3.3 million (Ps 36.3 million). As part of our financial
restructuring, on February 23, 2005, we issued 418,826 of our Series B Shares to California
Commerce Bank, and a note in the aggregate principal amount of US$20.6 million was issued under the
Restructured Credit Agreement with respect to the remaining principal of and accrued and unpaid
interest on the California Commerce Bank loan agreements. JPMorgan Chase Loan. We borrowed an aggregate principal amount of US$50.0 million (Ps 557.5
million) from JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) under a loan agreement. The
JPMorgan Chase loan agreement was payable in five semiannual installments beginning in December
2000 and bore interest at a rate of LIBOR + 1.5% payable quarterly. This loan matured in December
2002 and was not paid. We did not make principal or interest payments under this loan following
November 29, 2002. At December 31, 2004, before -59-




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recognizing the effects of our financial restructuring, the aggregate amount of due and unpaid
principal under this loan was US$10.0 million (Ps 111.5 million) and the aggregate amount of due
and unpaid interest under this loan was US$0.6 million (Ps 6.8 million). As part of our financial
restructuring, on February 23, 2005, we issued 163,890 of our Series B Shares to creditors under
this loan agreement, and a note in the aggregate principal amount of US$8.5 million was issued
under the Restructured Credit Agreement with respect to the remaining principal of and accrued and
unpaid interest on this loan. Bank of America, N.A. Loan. Our former subsidiary, Durango Georgia Receivables Company,
borrowed an aggregate principal amount of US$22.0 million (Ps
245.3 million) from Bank of America,
N.A. under a loan agreement. This loan was payable in five monthly installments beginning in
August 2002, and bore interest at a rate of LIBOR + 3.0%. 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 were recorded as indebtedness of our company in our
financial statements. We did not make principal or interest payments under this guarantee. At
December 31, 2004, before recognizing the effects of our financial restructuring, the aggregate
amount of due and unpaid principal under this loan was US$17.0 million (Ps 189.5 million) and the
aggregate amount of due and unpaid interest under this loan was US$1.9 million (Ps 20.8 million).
As part of our financial restructuring, on February 23, 2005, we issued 292,019 of our Series B
Shares to the creditor under this loan agreement, and a note in the aggregate principal amount of
US$14.5 million was issued under the Restructured Credit Agreement with respect to the remaining
principal of and accrued and unpaid interest on our guarantee obligations. First JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to SunTrust Leasing Corporation in the aggregate principal amount of US$2.6
million (Ps 29.2 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 was recorded as indebtedness of our company in our financial
statements. We did not make principal or interest payments under this reimbursement obligation.
Under the terms of the reimbursement agreement, past due obligations under the reimbursement
agreement bore interest at a rate of 7.25% per annum. At December 31, 2004, before recognizing the
effects of our financial restructuring, the aggregate amount of due and unpaid principal under this
reimbursement obligation was US$2.6 million (Ps 29.2 million) and the aggregate amount of due and
unpaid interest under this reimbursement obligation was US$0.3 million (Ps 3.8 million). As part
of our financial restructuring, on February 23, 2005, we issued 53,910 of our Series B Shares to
JPMorgan Chase Bank, and a note in the aggregate principal amount of US$2.2 million was issued
under the Restructured Credit Agreement with respect to the remaining principal of and accrued and
unpaid interest on our guarantee obligations. Second JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to Pitney Bowes Credit Corporation in the aggregate principal amount of US$3.1
million (Ps 34.6 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 was recorded as indebtedness of our company in our financial
statements. Under the terms of the reimbursement agreement, past due obligations under the
reimbursement agreement bore interest at a rate of 7.25% per annum. At December 31, 2004, before
recognizing the effects of our financial restructuring, the aggregate amount of due and unpaid
principal under this reimbursement obligation was US$2.4 million (Ps 26.4 million) and the
aggregate amount of due and unpaid interest under this reimbursement obligation was US$0.3 million
(Ps 3.3 million). As part of our financial restructuring, on February 23, 2005, we issued 46,001
of our Series B Shares to JPMorgan Chase Bank, and a note in the aggregate principal amount of
US$2.0 million was issued under the Restructured Credit Agreement with respect to the remaining
principal of and accrued and unpaid interest on our guarantee obligations. Our Secured Bank Debt -60-




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Bancomext Loans. Our subsidiary, Grupo Pipsamex, borrowed an aggregate principal amount of
US$80.0 million (Ps 892.0 million) from Bancomext under a loan agreement. In 2004, we defaulted
under this loan agreement and negotiated the restructuring of this loan agreement with Bancomext.
This loan agreement was restructured on September 29, 2004. In connection with the restructuring,
we applied US$28.0 million of the proceeds of our sale of our subsidiary, Pronal, and Grupo
Pipsamex warehouse in Mexico City to the principal amount and accrued interest under this loan
agreement. The restructured loan is payable in 40 quarterly installments beginning in December
2004 and bears interest at a rate of LIBOR +5.1535%, payable quarterly. This loan is secured by a
first priority security interest in substantially all of the assets of Grupo Pipsamex and certain
of its subsidiaries and is guaranteed by CODUSA. As of December 31, 2004, the aggregate principal
amount outstanding under this loan agreement was US$56.3 million (Ps 627.5 million). Our subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an aggregate principal
amount of US$15.4 million (Ps 171.7 million) from Bancomext under a loan agreement. In 2004, we
defaulted under this loan agreement and negotiated the restructuring of this loan agreement with
Bancomext. This loan agreement was restructured on September 29, 2004. In connection with the
restructuring, we applied US$12.0 million of the proceeds of our sale of our subsidiary, Pronal,
and Grupo Pipsamex warehouse in Mexico City to the principal amount and accrued interest under
this loan agreement. The restructured loan is payable in 40 quarterly installments beginning in
December 2004 and bears interest at a rate of LIBOR +5.153%, payable quarterly. This loan is
secured by a second priority security interest in substantially all of the assets of Fábrica
Mexicana de Papel, S.A. de C.V. and certain other subsidiaries of Grupo Pipsamex and is guaranteed
by CODUSA. As of December 31, 2004, the aggregate principal amount outstanding under this loan
agreement was US$8.6 million (Ps 95.6 million). Bank of Albuquerque Loan. Our subsidiary, Durango McKinley Paper Company, borrowed an
aggregate principal amount of US$24.0 million (Ps 267.6 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 117.1 million) under this loan agreement. This loan
agreement was used to refinance a credit facility that our former subsidiary, Durango Paper
Company, had with the Bank of America, N.A. The principal on the term loan is payable in 24
quarterly installments beginning August 2002 and bears interest at a rate of LIBOR + 2.75%. The
obligations of Durango McKinley Paper Company under the Bank of Albuquerque loan agreement are
secured by the accounts, inventory and equipment of Durango McKinley Paper Company and its real
property located in Houston, Texas, Mesquite, Texas and Prewitt, New Mexico. In addition, the
obligations are guaranteed by Durango International, Inc. As of December 31, 2004, the aggregate
principal amount outstanding under this loan agreement was US$14.0 million (Ps 156.1 million). Commerzbank Loan. Our subsidiary, Ponderosa, borrowed an aggregate principal amount of 10.7
million (Ps 161.5 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, 2004, the aggregate
principal amount outstanding under this loan was 7.9 million (Ps 116.9 million). NAFIN Loan. Our subsidiary, Atenquique, borrowed an aggregate principal amount of US$0.8
million (Ps 8.9 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, 2004, the aggregate principal amount outstanding
under this loan agreement was US$0.1 million (Ps 1.3 million). On May 13, 2005, we prepaid the
balance of this loan without penalty. 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 192.9 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 -61-




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leased machinery. We have sub-leased the machinery to certain of our subsidiaries. As of
December 31, 2004, the aggregate principal amount outstanding under these promissory notes was
US$3.8 million (Ps 42.2 million). GE Capital Leasing Leases. Our subsidiary, Titán, has entered into financial lease agreements
with GE Capital Leasing for the acquisition of machinery. Titán issued two promissory notes in
respect of the future minimum lease payments under these financial lease agreements in an aggregate
principal amount of US$10.0 million (Ps 111.5 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, 2004, the
aggregate principal amount outstanding under these promissory notes was US$6.9 million (Ps 76.5
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;
    
    pay dividends or make certain other restricted payments;
    
    consummate certain asset sales;
    
    enter into certain transactions with affiliates; or
    
    merge or consolidate with any other person or sell or otherwise dispose of all or substantially all of our assets. The Common Agreement for the benefit of the holders of our 2012 notes and creditors under the
Restructured Credit Agreement also requires prepayments of the indebtedness from the proceeds from
certain asset sales, insurance, and incurrence of certain indebtedness. Our failure to comply with
the restrictions contained in the Common Agreement constitutes an event of default, which could result
in an acceleration of such indebtedness. We must maintain minimum debt service, minimum net worth and maximum leverage ratios under the
Restructured Credit Agreement, and the Bank of Albuquerque loan agreement. Our failure to comply
with these restrictions constitutes an event of default, which could result in an acceleration of
such indebtedness. The above covenants, together with our highly leveraged position, have restricted, and will
continue to restrict, our corporate activities, including our ability to respond to market
conditions, to provide for unanticipated capital expenditures or to take advantage of business
opportunities. Off-Balance Sheet Arrangements We 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 -62-




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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. Contractual Commitments and Capital Expenditures Contractual Commitments The following table summarizes significant contractual obligations and commitments that have
an impact on our liquidity at December 31, 2004, giving effect to the restructuring as if the
restructuring had occurred on December 31, 2004: 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalPs millionIndebtedness
    
    Ps
    118.3
    
    
    Ps
    228.8
    
    
    Ps
    266.3
    
    
    Ps
    255.7
    
    
    Ps
    233.4
    
    
    Ps
    5,908.9
    
    
    Ps
    7,011.5Interest on indebtedness (1)
    
    
    43.0
    
    
    
    48.1
    
    
    
    52.5
    
    
    
    51.4
    
    
    
    50.0
    
    
    
    48.6
    
    
    
    293.6Capital leases
    
    
    59.8
    
    
    
    17.7
    
    
    
    17.7
    
    
    
    17.7
    
    
    
    5.8
    
    
    
    
    
    
    
    118.7Operating leases
    
    
    26.8
    
    
    
    19.9
    
    
    
    18.9
    
    
    
    16.9
    
    
    
    16.9
    
    
    
    35.2
    
    
    
    134.7Notes payable
    
    
    48.8
    
    
    
    38.1
    
    
    
    22.6
    
    
    
    17.9
    
    
    
    10.4
    
    
    
    
    
    
    
    137.8Purchase obligations (2)
    
    
    3.2
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    3.2
    
    
    
    52.4
    
    
    
    68.4Total contractual obligations
    
    Ps
    299.9
    
    
    Ps
    355.8
    
    
    Ps
    381.2
    
    
    Ps
    362.8
    
    
    Ps
    319.7
    
    
    Ps
    6,045.1
    
    
    Ps
    7,764.5
 
 (1)
    
    Consists of estimated future payments of interest on our indebtedness, calculated based on
interest rates and foreign exchange rates applicable at December 31, 2004 and assuming that
all amortization payments and payments at maturity on our indebtedness will be made on their
scheduled payment dates.(2)
    
    Consists of purchase commitments for raw materials and 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, 2004. Our subsidiaries lease certain equipment under noncancelable operating leases. Estimated
future minimum lease payments under noncancelable operating leases as of December 31, 2004 are
included in operating leases in the table above. Capital Expenditures Our capital expenditures on property, plant and equipment were Ps 207.3 million in 2004, Ps
111.8 million in 2003 and Ps 479.1 million in 2002. Our principal capital expenditures projects
during 2002 through 2004 included:  
    
    Ps 336.6 million for the expansion of Titáns corrugating plant in Tepatitlán, Jalisco,
which was completed in 2002;
    
    Ps 262.4 million for the installation of a new particleboard press at one of Ponderosas
plant, which was completed in 2002; -63-




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
    
    Ps 154.1 million for the installation of Durango McKinley Paper Companys BHS
corrugating plant in Dallas, Texas, which was completed in 2003; and
    
    Ps 154.2 million in 2004 for the purchase of printers for the packaging division and
machinery and equipment for our paper mills, which increased our annual containerboard
capacity by 57,000 short tons. 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: Years Ended December 31,2005
    
    
    20062002
    
    
    2003
    
    
    2004
    
    
    Estimated
    
    
    Estimated(in millions of constant pesos)Capital
expenditures (other
than environmental)
    
    Ps
    469.9
    
    
    Ps
    106.2
    
    
    Ps
    193.1
    
    
    Ps
    128.0
    
    
    Ps
    204.0Environmental
capital
expenditures
    
    
    9.2
    
    
    
    5.6
    
    
    
    14.2
    
    
    
    12.0
    
    
    
    16.0Total
    
    Ps
    479.1
    
    
    Ps
    111.8
    
    
    Ps
    207.3
    
    
    Ps
    140.0
    
    
    Ps
    220.0
 Our
loan agreements and the Common Agreement governing the Restructured
Credit Agreement and the 2012 notes contain significant
restrictions on our ability to make capital expenditures. We currently are budgeting total capital
expenditures of approximately Ps 133.8 million for 2005 and Ps 133.8 million for 2006. Our
principal capital expenditures for 2005 consist of efficiency enhancement projects and cost
reduction projects. We expect to finance our capital expenditure plan with internally generated cash and supplier
financing. No assurance can be given that we will be able to meet our capital expenditure budget. Differences between Mexican GAAP and U.S. GAAP Our audited consolidated financial statements are prepared in accordance with Mexican GAAP.
Mexican GAAP differs in significant respects from U.S. GAAP. For more information about the
differences between Mexican GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of our
consolidated net income (loss) and total stockholders equity as of December 31, 2004 and 2003 and
for each of the three years in the period ended December 31, 2004, see note 24 to our audited
consolidated financial statements. It should be noted that our reconciliation to U.S. GAAP does
not include the reversal of the restatement of the financial statements as required by Bulletin
B-10, Recognition of the Effects of Inflation in the Financial Information, since the application
of this bulletin represents a comprehensive measure of the effects of price-level changes in the
Mexican economy and, as such, is considered a more meaningful presentation than historical
cost-based financial reporting in Mexican pesos for both Mexican and U.S. accounting purposes. Restatement of U.S. GAAP
deferred income tax amounts   (i)
    
    The valuation allowance for deferred income tax assets 
Previously, in establishing a valuation allowance, we fully reserved the total balance of the deferred
income tax assets related to tax loss carryforwards without taking
into consideration the reversal of existing taxable temporary
differences during the tax loss carryforward periods. We have
concluded that the evaluation of recoverability of the deferred income tax assets originated by tax loss carryforwards should
be evaluated on an individual company basis taking into consideration
the reversal of taxable temporary differences for both Mexican and
U.S. GAAP. We considered tax planning strategies where prudent and
feasible. Given our economic situation, we did not consider other potential sources of future taxable income.  (ii)
    
    Other items  Previously, the tax basis used in the
calculation of certain temporary differences, principally related to fixed
assets, inventories and tax loss carryforwards were price-level
adjusted using incorrect rates. Also,
the tax rates used in the measurement of deferred taxes were
incorrect. Finally, there were certain individually insignificant
items that were identified during the process of reevaluating the
deferred tax of years which we corrected as part of the restatement.  Year ended December 31,2003
    
    
    2002U.S. GAAP net income (loss) as previously reported
    
    
    (Ps 2,335.1
    )
    
    
    (Ps 2,412.8
    )Deferred
income tax adjustments:Correction
to valuation allowance charge period to period
    
    
    (115.1
    )
    
    
    71.8Correction
of tax inflation indexing of NOLs
    
    
    (13.7
    )
    
    
    180.5Correction
of book and tax basis of fixed assets and inventories due to inconsistent
inflation indexing
    
    
    (147.3
    )
    
    
    71.0Use of
incorrect tax rates
    
    
    (42.9
    )
    
    
    42.9Other
individually insignificant items
    
    
    (15.0
    )
    
    
    12.8U.S. GAAP net income (loss) as restated
    
    
    (Ps 2,669.1
    )
    
    
    (Ps 2,033.8
    )Stockholders equity under U.S. GAAP as previously reported
    
    
    (Ps 1,254.4
    )Adjustment
to the valuation allowance
    
    
    990.6Adjustment
for other items
    
    
    22.6Stockholders equity under U.S. GAAP as restated
    
    
    (Ps 241.2
    )
 New Accounting
Pronouncements In December 2004, and as amended in April 2005, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R),
which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement recognition. SFAS 123R is
effective for fiscal years beginning after June 15, 2005. Early application of SFAS 123R is
encouraged, but not required. The adoption of SFAS 123R did not have a material impact on our
consolidated results of operations or financial position. In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets (An amendment to APB Opinion No.
29) (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary exchanges of
similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted. We are currently
evaluating the potential impact of this statement. In June 2005, the FASB published SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which changes the
requirements for the accounting for and reporting of a change in accounting principle and redefines
restatement as the revising of previously issued financial statements to reflect the correction of
an error. SFAS No. 154 requires retrospective application to prior periods financial statements
of changes in accounting principle, unless it is impracticable to determine the period-specific
effects of the cumulative effect of the change. This Statement also carries forward without change
the guidance contained in Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This Statement does not change the
transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. We are evaluating the impact that this statement may have on our financial position or
results of operations. In March 2005, the FASB issued Interpretation No. 47 (FIN 47). Accounting for Conditional
Asset Retirement Obligations  an interpretation of FASB Statement No. 143. FIN 47 requires an
entity to recognize a liability for the fair value of a conditional asset retirement obligation if
the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement
obligation is a legal obligation to perform an asset retirement activity in which the timing or
method of settlement are conditional upon a future event that may or may not be within control of
the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15,
2005. We have not quantified the impact of adopting FIN 47, but we do not expect the adoption to
have material impact on our financial position or results of operations. Item 6. Directors, Senior Management and Employees. Directors Our board of directors is responsible for the management of our business. Our bylaws
(estatutos sociales)provide that the board of directors will consist of the number of directors
and alternate directors elected by our stockholders at the annual ordinary stockholders meeting,
each of whom is elected for a term of one year. Pursuant to our bylaws, alternate directors may be appointed by our stockholders to serve on
the board of directors in place of directors who are unable to attend meetings. If a member of our
board is absent from a -64-




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meeting, a specific alternate director is called to serve as a director for such meeting.
Even when alternate directors are not substituting for a director, they are invited to attend all
board meetings. Our board of directors includes 15 directors. No alternate directors were elected by our
stockholders at the most recent ordinary stockholders meeting. The table below sets forth the members of our board of directors: Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chairman of the Board of Directors and Chief Executive Officer
    
    
    1982José Antonio Rincón(1)
    
    Vice-Chairman of the Board of Directors and Chief Operating Officer
    
    
    1982Mayela Rincón de Velasco(1)
    
    Director, Vice President and Chief Financial Officer
    
    
    1982Jesús Rincón(1)
    
    Director
    
    
    1987Wilfrido Rincón(1)
    
    Director
    
    
    1987Ignacio Rincón(1)
    
    Director
    
    
    1987Ángel Del Palacio
    
    Director
    
    
    2001Alfonso Fernández De Castro
    
    Director
    
    
    2001Buenaventura G. Saravia
    
    Director
    
    
    2001Roberto Isaac Hernández
    
    Director
    
    
    2001Martín Rincón(1)
    
    Director
    
    
    2003Juan Francisco Ealy Ortiz
    
    Director
    
    
    2005Jose Luis Michel Nava
    
    Director
    
    
    2005Javier Pérez Rocha
    
    Director
    
    
    2005Rebeca Castaños Castaños
    
    Director
    
    
    2005
 
 (1)
    
    Miguel Rincón, José A. Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón
and Mayela Rincón de Velasco are siblings. The following is a summary of the business experience, areas of expertise and principal
outside business interests of our current directors. 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. He is
currently the president of Sector Privado Empresarial de Durango, A.C. He is currently the
president of the philanthropic board of the General Hospital of Durango (Hospital General de
Durango). Mayela Rincón de 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 Durango Association of Public Accountants (Colegio de Contadores Públicos de
Durango, A.C.). 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 -65-




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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 2004, he has been the
general manager of Planning and Development of our company. From 2002 to 2004 he was the Logistics
Managing Director for domestic and imported raw materials for our company. From 1998 to 2002, he
was the general manager of the Paper Division of Grupo Durango. From 1997 to 1998, he served as
general manager of Ponderosa S.A. From 1994 to 1996 he worked as development manager of our
company. He served as president of the Mexican National Chamber of the Forestry Industry (Consejo
Consultivo Forestal Nacional)from 1997 to 1999 and is vice-president of the Mexican National
Chamber for the Pulp and Paper Industry. He is an active member of the Mexican National
Association for Forestry (Asociación Nacional de Forestales). Ignacio 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). Ángel Del Palaciohas been a Director of our company since 2001. He is an entrepreneur in the
services sector and the general manager of several automobile dealerships in the north of Mexico.
He has a bachelors degree in business and an MBA from the Monterrey Institute of Technology
(ITESM). Alfonso Fernández de Castrohas been a Director of our company since 2001. He is an
entrepreneur in the Mexican forest industry. He is the founder and general manager of Grupo
Forestal Alfa, one of the principal companies in the Mexican forest industry. Buenaventura G. Saraviahas been a Director of our company since 2001. He is an entrepreneur
in the cattle breeding industry and the general manager of Empresas la Punta one of the principal
exporters of cattle from Mexico to the United States. He has a bachelors degree in business from
the Monterrey Institute of Technology (ITESM). Roberto Isaac Hernándezhas been a Director of our company since 2001. He is an entrepreneur
in the services sector and the general manager of a chain of gas stations and supermarkets in the
north of Mexico. He has a bachelors degree in economics from the Monterrey Institute of Technology
(ITESM) and an MBA from the Notre Dame University in France. Martín Rincónhas been a Director of our company since 2003. Since 2002, he has been the
general manager of Grupo Pipsamex. From 1998 to 2002, he was the commercial director of Grupo
Pipsamex. From 1997 to 1998, he was the finance manager of McKinley Paper Company and was the
supply manager of the Grupo Durango division from 1995 to 1997. In 1999, he was the Vice President
of the Mexican National Chamber for the Pulp and Paper Industry. He is currently 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 del
Libro). Juan Francisco Ealy Ortizhas been a Director of our company since April 2005. Since 1969, he
has been the Chairman, Chief Executive Officer and General Manager of El Universal S.A. de C.V.,
one of the largest media companies in Mexico. He has a bachelors degree in economics from
Universidad Nacional Autónoma de México (UNAM). Jose Luis Michel Navahas been a Director of our company since April 2005. He has been the
head of Institutional Remedial Management for the Latin-America Region for Citibank, N.A. since
August 2002. From February 2000 to August 2002, he was a private investor. He was the
head of the Mexico office for Institutional Remedial Management Citibank N.A. Sucursal en Mexico
between September 1996 and February 2000. He was a Private Bank Director for Mexico with Citibank
N.A. Sucursal en Mexico between June 1991 and August 1996. Between March 1985 and June 1991 he
held various other positions with Citibank N.A. Sucursal en -66-




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Mexico. He is a member of the
board of directors of Compañía Industrial de Parras. He has a
Bachelor in Science in Industrial Engineering from Universidad La Salle in México City and a Master
in Science in economics from the University of Wisconsin. Javier Pérez Rochahas been a Director of our company since April 2005. He has practiced law
as a sole practicioner since 1978. From 1965 through 1978, he was an associate or partner with the
Mexican law firm of Santamaria y Steta. He is a member of the board of directors of G. Collado,
S.A. de C.V. and Sanluis Corporación, S.A. de C.V. He has a degree in law from Universidad
Nacional Autónoma de México (UNAM). Rebeca Castaños Castañoshas been a Director of our company since April 2005. He has
practiced as a certified accountant with Despacho Castaños, S.C. since 1990. From 1998 through
2000, she was controller of Durango Apparel, S.A. de C.V. She has a bachelors degree in
accounting from Durango State University. Executive Officers Our executive officers are appointed by the board of directors and serve until their
successors have been appointed and take office. The table below sets forth our executive officers: Name
    
    Current Title
    
    SinceMiguel Rincón(1)
    
    Chief Executive Officer
    
    
    1982José Antonio Rincón(1)
    
    Chief Operating Officer
    
    
    1982Mayela Rincón de Velasco(1)
    
    Chief Financial Officer
    
    
    1982Gustavo Peyro Medina
    
    Audit Managing Director
    
    
    1996Arturo Díaz Medina
    
    Administrative Managing Director
    
    
    1998Jesús Romo Carrasco
    
    Controller
    
    
    1988Gabriel Villegas Salazar
    
    Secretary of the Board and General Counsel
    
    
    1987
 
 (1)
    
    Miguel Rincón, José Antonio Rincón and Mayela Rincón de Velasco are siblings. The following is a summary of the business experience and areas of expertise of our current
officers. Information regarding current officers who are also directors is provided above. Gustavo Peyro Medinahas been Audit Managing Director of our company since 1996. He also was
Manager of the Controller and Audit Department of our company from 1992 to 1999. Since 1983, he
has been an active member of MIPA and the Durango Association of Public Accountants. He has been a member of the Institute of Internal Auditors since 2001. He is
an active member of the Institute of Internal Auditors, Inc. Arturo Díaz Medinahas been the Administrative Managing Director of our company since 1998.
He held other finance and operations positions from 1994 to 1998 in two of our paper mills. Prior
to joining our company, he was head of the finance and commercial areas of an auto parts company
based in Durango, Mexico. Since 1990 he has been an active member of the Durango Association of
Public Accountants. Jesús Romohas been the Controller of our company since 1998. He is a professor of accounting
and statistics at Durango State University.Since 1978, he has been an active member of the
Durango Association of Public Accountants.He has a bachelors degree in accounting from Durango
State University and an MBA from the Monterrey Institute of Technology (ITESM). Gabriel Villegas Salazarhas been Secretary of the Board and Legal Counsel of our company
since 1987. In 1993, he was appointed General Counsel. He has studied American law at the
Iberoamericana University coordinated by the Georgetown University Law Center. -67-




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##### 



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 executive officers during 2004 was Ps 21.9
million. In 2005, we expect that the aggregate amount of compensation paid to our executive
officers will total approximately Ps 23.7 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 must elect
at least one statutory auditor (comisario)and a corresponding alternate statutory auditor. The
primary role of a statutory auditor is to report to our stockholders at the annual ordinary
stockholders meeting regarding the accuracy of the financial information presented to our
stockholders by our board of directors. Subject to terms and conditions, a statutory auditor is
also authorized:  
    
    to call ordinary or extraordinary stockholders meetings;
    
    to place items on the agenda for meetings of stockholders or our board of directors;
    
    to attend meetings of stockholders and of our board of directors; and
    
    generally to inspect the affairs of our company. On April 29, 2005, our ordinary stockholders meeting appointed Héctor Ortiz Rosales as our
statutory auditor and appointed Carlos Orozco Rentería as our alternate statutory auditor. Prior
to his appointment as statutory auditor, Mr. Ortiz had been our alternate statutory auditor since
2003. Audit Committee Our audit committee recommends the external auditors of our company to our board of directors,
suggests the terms and conditions of the auditors service, supervises the auditors work, acts as
an intermediary between our board of directors and the auditors, guarantees the independence of the
auditors, reviews the auditors working plan, communications and audit reports. Our audit committee
informs our board of directors of audit results, recommends to our board of directors guidelines
for financial reporting, assists our board of directors in the review of financial information,
contributes in the determination of the general outline of the internal control system and
evaluates its effectiveness, supports our board of directors in the evaluation and coordination of
the annual internal audit programs, coordinates the internal, external and statutory auditing work,
and verifies the compliance with such statutes and regulations as are applicable to our company. Our audit committee acts and adopts any resolution by majority vote. In case of conflict of
interest, the members with conflicts do not participate. The committee has such powers
specifically granted by our bylaws and participates in such studies, advisory work and additional
matters submitted to it by our board of directors. Our audit committee informs the board of directors of its activities at least twice a year or
at any other time that the audit committee deems appropriate or becomes aware of any acts or facts
material to our company. Our audit committee may not delegate any of its powers to anyone, but may request advice from
experts to adequately resolve such matters submitted to it. -68-




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##### 



The member of our audit committee are Rebeca Castaños Castaños, Buenaventura G. Saravia and
Mayela Rincón de Velasco. Rebeca Castaños Castaños is the president of our Audit Committee. Remuneration Committee Our remuneration committee recommends designations of our principal officers, suggests
evaluation criteria in accordance with the general guidelines issued by our board of directors and
analyzes and submits to our board of directors the structures and remuneration of our principal
officers. Our remuneration committee acts and adopts any resolution by majority vote. In case of
conflict of interest, the members with conflicts do not participate. The committee has such powers
specifically granted by our bylaws and participates in such studies, advisory work and additional
matters submitted to it by our board of directors. Our remuneration committee informs the board of directors of its activities at least twice a
year or at any other time that the remuneration committee deems appropriate or becomes aware of any
acts or facts material to our company. Our remuneration committee may not delegate any of its powers, but may request advice from
experts to resolve adequately such matters submitted to the remuneration committee. The members of our remuneration committee are Ángel del Palacio E., Roberto Isaac Hernández
and Wilfrido Rincón. Ángel del Palacio E. is the president of our remuneration
committee. Financing and Planning Committee Our financing and planning committee evaluates and makes suggestions on our investment
policies and our guidelines for strategic planning. It opines on matters related to our annual
report, follows up on compliance of approved budgets and identifies risks affecting us. Our financing and planning committee acts and adopts any resolution by majority vote. In case
of conflict of interest, the members with conflicts do not participate. The committee has such
powers specifically granted by our bylaws and participates in such studies, advisory work and
additional matters submitted to it by our board of directors. Our financing and planning committee informs the board of directors of its activities at least
twice a year or at any other time that the financing and planning committee deems appropriate or
becomes aware of any acts or facts material to our company. Our financing and planning committee may not delegate any of its powers to anyone, but may
request advice from experts to resolve adequately such matters submitted to the remuneration
committee. The members of our financing and planning committee are Alfonso Fernández de Castro, José A.
Rincón and Mayela Rincón de Velasco. Alfonso Fernández de Castro is the president of our financing
and planning committee. Employees At December 31, 2004, we had 7,583 employees (7,301 in Mexico and 282 in the United States)
and approximately 65% our work force was unionized. We have not experienced any work stoppages in
our facilities or those of our subsidiaries, other than a strike at our Atenquique mill which
lasted nine days in July 1998 and which was resolved by contract renegotiations. We currently have
good relations with our employees at all our facilities. The table below shows the number of our employees in Mexico and the United States at the end
of each of the past three years: -69-




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##### 



As of December 312004
    
    
    2003
    
    
    2002Mexico (1)
    
    
    7,301
    
    
    
    7,283
    
    
    
    8,493United States
    
    
    282
    
    
    
    304
    
    
    
    342Total
    
    
    7,583
    
    
    
    7,587
    
    
    
    8,835
 
 (1)
    
    Includes 1,124, 1,453 and 1,457 temporary employees as of December 31, 2002, 2003 and 2004,
respectively. Includes 593, 211 and 192 employees of our discontinued operations as of
December 31, 2002, 2003 and 2004, respectively. Item 7. Major Stockholders and Related Party Transactions. Major Stockholders We have two classes of common stock, represented by the Series A Shares and the Series B
Shares. As of October 24, 2005, our issued and outstanding capital stock consisted of 91,835,193
Series A Shares, with no par value, and 18,805,918 Series B Shares, with no par value. Each Series
A Share and Series B Shares is entitled to one vote at each meeting of our stockholders. As of June 28, 2005, there were 1,916,333 of our ADSs outstanding, each ADS representing two
CPOs, each of which represents one Series A Share. As of June 28, 2005, approximately 4.1% of our
outstanding Series A Shares were represented by ADSs and were held by approximately 435 beneficial
owners. The stockholders who are presently part of our management currently own, directly and
indirectly through their ownership in ACM and their beneficial ownership of the Banamex Trust and
the Rincón Family Trust, approximately 79.0% of the issued and outstanding Series A Shares and
Series B Shares and have the power to elect the majority of the directors and control our company.
On April 29, 2005, our stockholders voted to elect 15 directors. The following table sets forth current information with respect to the beneficial ownership of
our common stock as of October 24, 2005 by:  
    
    each person known by us to beneficially own more than 5%, in the aggregate, of each
class of outstanding shares of our common stock; and
    
    all of our directors and executive officers as a group. Our principal shareholders have the same voting rights with respect to each class of our shares
that they own as other holders of shares of that class. Series A Shares
    
    
    Series B Shares
    
    
    TotalNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    Number ofShares
    
    
    %
    
    
    shares
    
    
    %
    
    
    shares
    
    
    %Rincón Family Trust (1)
    
    
    56,350,367
    
    
    
    61.4
    
    
    
    
    
    
    
    
    
    
    
    56,350,367
    
    
    
    50.9Administradora
Corporativa y
Mercantil, S.A. de
C.V. (ACM) (2)
    
    
    15,068,000
    
    
    
    16.4
    
    
    
    
    
    
    
    
    
    
    
    15,068,000
    
    
    
    13.6Banamex Trust (3)
    
    
    15,911,511
    
    
    
    17.3
    
    
    
    
    
    
    
    
    
    
    
    15,911,511
    
    
    
    14.4Miguel Rincón (4)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    40,455
    
    
    
    0.2
    
    
    
    87,370,333
    
    
    
    79.0José Antonio Rincón (5)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    14,699
    
    
    
    0.1
    
    
    
    87,344,577
    
    
    
    78.9Jesús Rincón (6)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    
    
    
    
    
    
    
    
    87,329,878
    
    
    
    78.9Wilfrido Rincón (7)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    14,256
    
    
    
    0.1
    
    
    
    87,344,134
    
    
    
    78.9Ignacio Rincón (8)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    9,472
    
    
    
    0.1
    
    
    
    87,339,350
    
    
    
    78.9Martin Rincón (9)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    3,168
    
    
    
    *
    
    
    
    87,333,046
    
    
    
    78.9Mayela Rincón (10)
    
    
    71,418,367
    
    
    
    77.8
    
    
    
    8,807
    
    
    
    *
    
    
    
    71,427,174
    
    
    
    64.6All directors and
executive officers as
a group (19 persons)
(11)
    
    
    87,329,878
    
    
    
    95.1
    
    
    
    90,857
    
    
    
    0.5
    
    
    
    87,420,735
    
    
    
    79.0
 -70-




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##### 



*
    
    Less than 0.1%.(1)
    
    The beneficiaries of the Rincón Family Trust are Miguel Rincón, José Antonio Rincón, Jesús
Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón and Mayela Rincón.(2)
    
    ACM is owned by Miguel Rincón, José Antonio Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio
Rincón and Martín Rincón. Mayela Rincón is a member of the board of directors of ACM.(3)
    
    The beneficiaries of the Banamex Trust are Miguel Rincón, José Antonio Rincón, Jesús Rincón,
Wilfrido Rincón, Ignacio Rincón and Martín Rincón.(4)
    
    Includes 40,455 Series B Shares owned by Miguel Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Miguel Rincón disclaims beneficial ownership of the Series
A Shares owned by ACM, except to the extent of his ownership of ACM. Miguel Rincón disclaims
beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the Banamex
Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and the
Banamex Trust.(5)
    
    Includes 14,699 Series B Shares owned by José Antonio Rincón, 56,350,367 Series A Shares
owned by the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511
Series A Shares owned by the Banamex Trust. José Antonio Rincón disclaims beneficial
ownership of the Series A Shares owned by ACM, except to the extent of his ownership of ACM.
José Antonio Rincón disclaims beneficial ownership of the Series A Shares owned by the Rincón
Family Trust and the Banamex Trust, except to the extent of his beneficial ownership in the
Rincón Family Trust and the Banamex Trust.(6)
    
    Includes 56,350,367 Series A Shares owned by the Rincón Family Trust, 15,068,000 Series A
Shares owned by ACM, and 15,911,511 Series A Shares owned by the Banamex Trust. Jesús Rincón
disclaims beneficial ownership of the Series A Shares owned by ACM, except to the extent of
his ownership of ACM. Jesús Rincón disclaims beneficial ownership of the Series A Shares
owned by the Rincón Family Trust and the Banamex Trust, except to the extent of his beneficial
ownership in the Rincón Family Trust and the Banamex Trust.(7)
    
    Includes 14,256 Series B Shares owned by Wilfrido Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Wilfrido Rincón disclaims beneficial ownership of the
Series A Shares owned by ACM, except to the extent of his ownership of ACM. Wilfrido Rincón
disclaims beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the
Banamex Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and
the Banamex Trust.(8)
    
    Includes 9,472 Series B Shares owned by Ignacio Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Ignacio Rincón disclaims beneficial ownership of the
Series A Shares owned by ACM, except to the extent of his ownership of ACM. Ignacio Rincón
disclaims beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the
Banamex Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and
the Banamex Trust.(9)
    
    Includes 3,168 Series B Shares owned by Martín Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and 15,911,511 Series A
Shares owned by the Banamex Trust. Martin Rincón disclaims beneficial ownership of the Series
A Shares owned by ACM, except to the extent of his ownership of ACM. Martín Rincón disclaims
beneficial ownership of the Series A Shares owned by the Rincón Family Trust and the Banamex
Trust, except to the extent of his beneficial ownership in the Rincón Family Trust and the
Banamex Trust.(10)
    
    Includes 8,807 Series B Shares owned by Mayela Rincón, 56,350,367 Series A Shares owned by
the Rincón Family Trust and 15,068,000 Series A Shares owned by ACM. Mayela Rincón disclaims
beneficial ownership of the Series A Shares owned by ACM. Mayela Rincón disclaims beneficial
ownership of the Series A Shares owned by the Rincón Family Trust, except to the extent of her
beneficial ownership in the Rincón Family Trust.(11)
    
    Includes 90,857 Series B Shares owned by directors and officers of our company, 56,350,367
Series A Shares owned by the Rincón Family Trust, 15,068,000 Series A Shares owned by ACM, and
15,911,511 Series A Shares owned by the Banamex Trust. Rincon Family Trust On
June 22, 2005, the Rincón Family Trust was established by Miguel Rincón, José Antonio
Rincón, Jesús Rincón, Wilfrido Rincón, Ignacio Rincón, Martín Rincón and Mayela Rincón de Velasco,
as settlors and beneficiaries. The settlors contributed an aggregate of 56,350,367 Series A Shares
to the Rincón Family Trust, representing 50.9% of the aggregate outstanding capital stock of
Corporación Durango. -71-




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##### 



Under the agreement governing the Rincón Family Trust, resolutions of the technical committee
must be adopted by the vote of at least 60% of the beneficial interests in the Rincón Family Trust.
The technical committee of the Rincón Family Trust has the power to instruct the trustee with
respect to the voting and disposition of the shares owned by the Rincón Family Trust, in the
understanding that the main purpose of the Rincón Family Trust is to hold, at least, 50.9% of the
outstanding capital stock of Corporación Durango throughout the term of the Rincón Family Trust. In
addition, the agreement prohibits the members of the Rincón family from transferring any interest
in the Rincón Family Trust to any person other than another member of the Rincón family or a direct
descendant thereof. The Rincón Family Trust has a term of nine years. The Rincon Family Trust may
be amended through resolutions of the technical committee adopted by the vote of at least 75% of
the beneficial interests in the Rincón Family Trust, and approved in writing by the trustee. Upon
the termination of the Rincón Family Trust, the shares contributed by the settlors will be
transferred to them according to the number of shares originally contributed to the Rincón Family
Trust by each settlor. The Trust Agreement establishing and governing
the Rincón Family Trust is attached as Exhibit 3.1 hereto. Banamex Trust On February 24, 2005, the Banamex Trust was established by Miguel Rincón, José Antonio Rincón,
Jesús Rincón, Wilfrido Rincón, Ignacio Rincón and Martín Rincón, as settlors and beneficiaries.
The settlors contributed an aggregate of 15,911,511 Series A Shares to the Banamex Trust. The
Series A Shares held by the Banamex Trust are pledged to secure ACMs obligations under a loan made
by Banamex to ACM, or the ACM Loan. Under the agreement governing the Banamex Trust, each settlor
is entitled to instruct the trustee of the Banamex Trust with respect to the voting of the Series A
Shares contributed to the Banamex Trust by that settlor unless an event of default has occurred and
is continuing under the pledge agreement between the Banamex Trust and Banamex. The pledge
agreement permits Banamex to cause the Banamex Trust to sell all or part of the Series A Shares
held by the Banamex Trust if the price of the Series A Shares on the Mexican Stock Exchange meets
or exceeds the peso equivalent of US$1.50. Banamex may exercise this right at any time whether or
not an event of default under the pledge agreement has occurred. All proceeds from any such sale
are to be paid to Banamex and applied against ACMs obligations under the ACM Loan. ACM Pledge ACM granted a pledge in favor of Banamex over the all of the Series A Shares that ACM owns to
secure ACMs obligations under the ACM Loan. The pledge agreement permits Banamex to cause the
sale of all or part of the Series A Shares owned by ACM if the price of the Series A Shares on the
Mexican Stock Exchange meets or exceeds the peso equivalent of US$1.50. Banamex may exercise this
right at any time whether or not an event of default under the pledge agreement has occurred. All
proceeds from any such sale are to be paid to Banamex and applied against ACMs obligations under
the ACM Loan. CPO Trust Certain Series A Shares are held in trust by Nacional Financiera S.N.C., or NAFIN, as the
trustee of a trust, which we refer to as the CPO Trust, established under a trust agreement dated
November 24, 1989 between NAFIN as the grantor and as trustee for the benefit of the holders of
certain Ordinary Participation Certificates, or CPOs issued by the trustee. Each CPO represents an
interest in one share of Series A Common Stock held in the CPO Trust. The CPO Trust and the CPOs
issued under the trust agreement will expire on November 24, 2019. Holders of CPOs are not entitled to exercise any voting rights with respect to the Series A
Shares held in the CPO Trust. Such voting rights are exercisable only by the trustee, which is
required by the terms of the trust agreement to vote such Series A Shares in the same manner as the
majority of the Series A Shares that are not held in the CPO Trust that are voted at any
shareholders meeting. Currently, the Rincón Family Trust owns a majority of the shares of Series A Shares that are
not held in the CPO Trust. As of March 31, 2005, the latest date for which information is
available, 3,930,078 Series A Shares were held in the CPO Trust. Issuance of Series B Shares On February 23, 2005, in connection with our financial restructuring, we issued 18,805,918 of
our Series B Shares, representing 17.0% of our issued and outstanding capital stock following this
issuance. The issuance of our Series B Shares had a substantial dilutive effect on the holders of
our Series A Shares, including our principal shareholders. -72-




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##### 



Related Party Transactions Durango Paper Company 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. 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 281.0 million). In 2003, the
creditors of these obligations called these guarantees. As a result,
we recorded Ps 275.8 million
as due from related parties in 2003 and recorded an allowance for doubtful accounts in the full
amount of this obligation. Administradora Corporativa y Mercantil, S.A. de C.V. From time to time, ACM, a company owned and controlled by the Rincón family, borrows funds
from our company to fund principal and interest payments on its indebtedness. The outstanding
balance on these loans was Ps 196.4 million at December 31, 2004. We recorded an allowance for
doubtful accounts against these loans of Ps 184.4 million during 2003. These loans bear interest
at a rate of 5% per annum and mature on May 17, 2006. In 2004, we accrued interest income in an
aggregate amount of Ps 9.4 million on these loans. In 2004, ACM purchased paper from our company
for Ps 4.9 million. Líneas Aéreas Ejecutivas de Durango, S.A. de C.V. We obtain flight services from Líneas Aéreas, a company owned and controlled by the Rincón
family. During the year ended December 31, 2004, we purchased services from Líneas Aéreas for an
aggregate purchase price of Ps 35.1 million. In 2003, Líneas Aéreas borrowed Ps 14.7 million from our company. This loan bears interest at
a rate of 15% per annum and matures on December 31, 2006. As of December 31, 2004, the outstanding
balance of this loan was Ps 1.1 million. In 2004, Líneas Aéreas paid us interest in an aggregate
amount of Ps 4.1 million. On April 18, 2005, our company purchased substantially all of the capital stock of Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for Ps 100.0 thousand from certain
members of the Rincón family and some of their children. Líneas Aéreas owns two business jets and
provides transportation services to our subsidiaries and third parties. In connection with this
transaction, we assumed a financial lease agreement with GE Capital Leasing with respect to one of
the business jets. Under this financial lease agreement, we are required to make monthly lease payments with a
final payment due in October 2007. The outstanding amount under this financial lease bears
interest at a rate of prime +1.50% per annum. Our obligations under this financial lease are
secured by a pledge of the business jet and guaranteed by CODUSA. As of June 30, 2005, the
aggregate principal amount outstanding under this financial lease was US$5.2 million (Ps 57.6
million). Transactions with Directors and their Affiliates We sell newsprint to El Universal at prices that are not materially more favorable than sales
to other third parties. Juan Francisco Ealy Ortiz, one of our directors, is the Chairman, Chief
Executive Officer and Managing Director of El Universal. During the year ended December 31, 2004,
we recorded net sales to El Universal of
approximately US$13.0 million (Ps 144.1 million). Item 8. Financial Information. See Item 18. Financial Statements. -73-




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##### 



Legal Proceedings We are, or since January 1, 2004, have been a party to the following significant lawsuits: Voluntary Concurso Mercantil Petition (Solicitud de Concurso Mercantil Presentada por el Propio
Comerciante), Case No. 3/2004 On May 18, 2004, we filed a voluntary petition for concurso mercantilunder the LCR with the
Mexican court. On August 25, 2004, the Mexican court declared that we had satisfied all of the requirements to be a debtor under the LCR. On November 17, 2004, the Mexican court certified the list of
recognized claims in our concurso mercantilproceeding. On December 23, 2004, the conciliator submitted our
plan of reorganization to the holders of recognized claims and the plan was executed by us and the
holders of recognized claims representing approximately 65% of the total number of recognized claims. On January
11, 2005, the conciliator submitted the executed plan of reorganization to the Mexican court, and
on February 7, 2005, the Mexican court approved the plan of reorganization and the termination of
the concurso mercantil. On February 23, 2005, our plan of reorganization was consummated. For a
description of our plan of reorganization, see Item 4: Information on Our CompanySignificant
Developments During 2004 and Recent Developments Financial Restructuring. In re: Petition of Gabriel Villegas Salazar, as Foreign Representative of Corporación Durango, S.A.
de C.V., Debtor in Foreign Proceeding, Case No.: 04-13487(RDD). On May 20, 2004, our foreign representative, Gabriel Villegas Salazar, filed the 304
Proceeding with the United States Bankruptcy Court for the Southern District of New York,
commencing a case in the United States ancillary to the concurso mercantilproceeding in Durango,
Mexico. The 304 Proceeding was administered under the case caption In re: Petition of Gabriel
Villegas Salazar, as foreign representative of Corporación Durango, S.A. de C.V., Debtor in Foreign
Proceeding. Pursuant to sections 105(a) and 304(b) of the United States Bankruptcy Code and in furtherance
of the concurso mercantilproceeding, on June 4, 2004 and August 16, 2004, the United States
Bankruptcy Court for the Southern District of New York entered a preliminary injunction enjoining
the commencement or continuation of any action against our company, its officers and directors, and
four of our operating subsidiaries, Titán, Centauro, Atenquique, and Ponderosa. The preliminary
injunction entered on August 16, 2004 provided that it would expire by its own terms on February 28,
2005. On December 28, 2004, our foreign representative filed a motion with the United States
Bankruptcy Court for the Southern District of New York for entry of an order extending comity to
our concurso mercantilproceeding and our plan of reorganization, as well as permanently enjoining
our creditors from taking any action in respect of their claims that were restructured in the
concurso mercantilproceeding. On January 19, 2005, the United States Bankruptcy Court for the
Southern District of New York entered an order permanently enjoining our creditors from taking
action against our company in respect of their claims that were restructured in the concurso mercantil
proceeding, as well as recognizing and giving effect to our plan of reorganization and the order
from the Mexican court confirming the same. 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 alleged damages of approximately US$53 million. On August 4, 2004, HG
Estate LLC and St. Marys Railroad Corporation executed special releases in favor of our company.
HG Estate LLC also agreed to dismiss this litigation, without prejudice. The order of dismissal
was entered by the court on August 23, 2004. -74-




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Compass Income Master Fund, Inc. et al. v. Corporación Durango, S.A. de C.V., Index No.: 600621/03,
Supreme Court of the State of New York, County of New York. On February 25, 2003, Compass Income Master Fund, Inc., Compass Renta Fija America Latina
F.I.I. and Interbank Overseas, Ltd. filed a suit against our company in New York state court for
breach of contract seeking payment of US$3.5 million, plus interest at 9% per annum from February
13, 2003. The plaintiffs breach of contract action was based upon commercial paper we issued on
or about August 13, 2002. On June 4, 2004, the action was stayed pursuant to an order of the
United States Bankruptcy Court for the Southern District of New York. The plaintiffs subsequently
informed us that they had sold the commercial paper that was the subject of their lawsuit. We
signed a stipulation of discontinuance without prejudice at the request of the plaintiffs, and on
March 1, 2005, the court ordered that the lawsuit be discontinued. Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V. On December 16, 2003, the Mexican government through the Mexican National Water Commission
made demand upon Pronal, a former subsidiary of Grupo Pipsamex, for payment of Ps 159 million
(US$14.5 million) for water consumed during the calendar years 2000 and 2001. On March 4, 2004,
Pronal filed a declaratory action with the Administrative and Fiscal Mexican Federal Tribunal
(Tribunal Federal de Justicia Fiscal y Administrativa) asking that the court find that Pronal is
not liable for any amounts to the National Water Commission and that, as a result, the demand be
nullified. The action is still in discovery. In the event Pronal is unsuccessful in having the
demand nullified and required to pay the National Water Commission, Pronal could seek to assert
indemnification rights against Grupo Pipsamex under the terms of the Stock Purchase Agreement
executed on November 14, 2003, pursuant to which Grupo Pipsamex, as seller, agreed to indemnify
Pronal and the buyer for certain debts. In addition, in the event Pronal is unable to recover in
full from Grupo Pipsamex, Pronal could also demand payment from Corporacion Durango under the
guaranty dated November 14, 2003. 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 sought: (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; and (6) a determination that the Durango Georgia Entities are the alter-ego of CODUSA.
On August 24, 2004, we reached a consensual settlement of the claims against us, which settlement
was approved by order of the United States Bankruptcy Court for the Southern District of Georgia on
August 27, 2004. Other Litigation We are party to various legal proceedings in the ordinary course of our business. We do not
expect any of these proceedings, if determined adversely to us, individually or in the aggregate,
to have a material adverse effect on the results of our operations or on our financial condition. Dividend Policy We have not paid any dividends in the past five years. The declaration, amount and payment of
dividends are determined by a majority vote of the stockholders, including holders of the Series A
Shares, at our annual ordinary stockholders meeting, generally on the recommendation of the board
of directors, and will depend on our results of operations, financial condition, cash requirements,
the ability of our subsidiaries to pay cash dividends to us, future prospects and other factors
deemed relevant by our stockholders. Our ability to declare and pay dividends is currently
restricted under the terms of the Common Agreement. -75-




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Significant Changes Other than as otherwise disclosed in this annual report, no significant change has occurred
since the date of the audited consolidated financial statements included in the annual report. Item 9. The Offer and Listing. General The Series A Shares are listed on the Mexican Stock Exchange. Our ADSs are issued by The Bank of New York, as depositary. Each ADS represents two CPOs
issued by NAFIN, as trustee of the CPO Trust. Each CPO represents a financial interest in one
Series A Share held in the CPO Trust. Our ADSs are presently being quoted, and have been quoted
since May 27, 2004, on the Pink Sheets Electronic Quotation Service, or the Pink Sheets, maintained
by Pink Sheets LLC for the National Quotation Bureau, Inc. The ticker symbol CDURQ has been
assigned to our ADSs for over-the-counter quotations. Prior to July 15, 2005, our ADSs were listed and traded on the NYSE. As a result of our
filing on May 18, 2004 of our concurso mercantilproceeding, on May 25, 2004, our ADSs were
suspended from trading by the NYSE and, thereafter, delisted by the NYSE. Trading on the Mexican Stock Exchange, the New York Stock Exchange and the Pink Sheets The Mexican Stock Exchange, located in Mexico City, is the only stock exchange in Mexico.
Founded in 1894, it ceased operation in the early 1900s and was reestablished in 1907. The Mexican
Stock Exchange is organized as a corporation, the shares of which are held by 30 brokerage firms.
The firms are exclusively authorized to trade on the floor of the Mexican Stock Exchange. Trading
on the Mexican Stock Exchange takes place principally through an automated system known as the
Electronic Exchange System for Registered or Assigned Transactions (Sistema Electrónico de
Negociación de Transacciones, Registro y Asignación), or SENTRA, between the hours of 8:30 a.m. and
3:00 p.m., Mexico City time. Trades in securities listed on the Mexican Stock Exchange may,
subject to certain requirements, also be effected off the Mexican Stock Exchange. Due primarily to
tax considerations, however, most transactions in listed Mexican securities are effected through
the Mexican Stock Exchange. The Mexican Stock Exchange operates a system of automatic suspension
of trading in shares of a particular issuer as a means of controlling excessive price volatility. Settlement takes place two business days after a transaction involving the purchase or sale of
shares is completed on the Mexican Stock Exchange. Deferred settlement, even if by mutual
agreement, is not permitted without the approval of the CNBV. Most securities traded on the
Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V. (Institución para el Depósito
de Valores), or Indeval, a privately-owned central securities depositary that acts as a
clearinghouse, depositary, custodian, settlement, transfer and registration institution for Mexican
Stock Exchange transactions, thereby eliminating the need for physical transfer of securities. The Mexican Stock Exchange is one of Latin Americas two largest exchanges by market
capitalization, but it remains relatively small and illiquid compared to major world markets. In
December 2004, the five largest traded equity issues (measured by market capitalization)
represented approximately 43% of the total value of equity issues traded on the Mexican Stock
Exchange. Although there is substantial participation by the public in the trading of securities,
a major part of the activity of the Mexican Stock Exchange reflects transactions by approximately
50 institutional investors. There is no formal over-the-counter market for securities in Mexico. Holders of ADSs have no voting rights with respect to the underlying CPOs or Series A Shares.
Voting rights with respect to the Series A Shares held in the CPO Trust will be exercised by the
CPO Trustee, which is required to vote the underlying Series A Shares in the same manner as the
majority of the Series A Shares that are not so held and that are voted at the relevant
stockholders meeting. The tables below set forth (1) the high and low closing sales prices (in nominal pesos) for
our Series A Shares on the Mexican Stock Exchange, (2) the high and low closing sales prices for
the ADSs on the New York Stock -76-




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##### 



Exchange, and (3) high and low quotations for our ADSs on the Pink Sheets for the periods
indicated. Quotations on the Pink Sheets reflect inter-dealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual transactions. Mexican Stock Exchange
    
    
    New York Stock ExchangePesos per Series A Share
    
    
    Dollars per ADSHigh
    
    
    Low
    
    
    High
    
    
    Low2000
    
    Ps
    48.00
    
    
    Ps
    31.00
    
    
    US$
    6.06
    
    
    US$
    5.942001
    
    
    24.00
    
    
    
    24.00
    
    
    
    5.55
    
    
    
    5.152002
    
    
    14.00
    
    
    
    14.00
    
    
    
    5.55
    
    
    
    1.012003
    
    
    16.30
    
    
    
    3.00
    
    
    
    1.70
    
    
    
    0.402004
    
    
    19.98
    
    
    
    2.90
    
    
    
    3.85
    (1)
    
    
    0.20
    (1)
 
 (1)
    
    Through May 25, 2004. The high and low prices on the Pink Sheets between May 27, 2004 and
December 31, 2004 were US$0.95 and US$0.20, respectively. Source
 Mexican Stock Exchange
    
    
    New York Stock Exchange (1)Pesos per Series A Share
    
    
    Dollars per ADSHigh
    
    
    Low
    
    
    High
    
    
    Low2003First Quarter
    
    Ps
    14.00
    
    
    Ps
    3.00
    
    
    US$
    1.34
    
    
    US$
    0.40Second Quarter
    
    
    5.80
    
    
    
    3.00
    
    
    
    1.60
    
    
    
    0.44Third Quarter
    
    
    6.30
    
    
    
    5.80
    
    
    
    1.50
    
    
    
    0.80Fourth Quarter
    
    
    16.30
    
    
    
    10.70
    
    
    
    1.70
    
    
    
    0.972004First Quarter
    
    
    19.98
    
    
    
    11.80
    
    
    
    3.85
    
    
    
    1.55Second Quarter
    
    
    14.50
    
    
    
    10.98
    
    
    
    2.40
    (1)
    
    
    0.95
    (1)Third Quarter
    
    
    10.98
    
    
    
    6.50
    
    
    
    0.50
    
    
    
    0.20Fourth Quarter
    
    
    7.00
    
    
    
    2.90
    
    
    
    0.65
    
    
    
    0.252005First Quarter
    
    
    13.00
    
    
    
    6.89
    
    
    
    1.55
    
    
    
    0.40Second Quarter
    
    
    12.00
    
    
    
    6.69
    
    
    
    1.25
    
    
    
    0.60Third
Quarter (through October 24)
    
    
    9.00
    
    
    
    6.00
    
    
    
    0.85
    
    
    
    0.15
 
 (1)
    
    Through May 25, 2004. Prices after May 25, 2004 are prices quoted on the Pink Sheets.(2)
    
    Through May 25, 2004. The high and low prices on the Pink Sheets between May 27, 2004 and
June 30, 2004 were US$0.95 and US$0.20, respectively. Source
 Mexican Stock Exchange
    
    
    Pink SheetsPesos per Series A Share
    
    
    Dollars per ADSHigh
    
    
    Low
    
    
    High
    
    
    LowApril 2005
    
    Ps
    12.00
    
    
    Ps
    12.00
    
    
    US$
    1.25
    
    
    US$
    1.15May 2005
    
    
    12.64
    
    
    
    6.25
    
    
    
    1.15
    
    
    
    0.60June 2005
    
    
    12.00
    
    
    
    7.70
    
    
    
    0.75
    
    
    
    0.66July 2005
    
    
    8.00
    
    
    
    6.50
    
    
    
    0.70
    
    
    
    0.15August 2005
    
    
    9.00
    
    
    
    6.00
    
    
    
    0.75
    
    
    
    0.15September 2005
    
    
    9.00
    
    
    
    7.82
    
    
    
    0.85
    
    
    
    0.55October (through
October 24)
    
    
    9.50
    
    
    
    9.00
    
    
    
    0.85
    
    
    
    0.50
 -77-




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##### 



Source: Mexican Stock Exchange; Pink Sheets LLC. On
October 24, 2005, the closing sales price of our Series A Shares on the Mexican Stock Exchange
was Ps 9.50 per share. Trading of our ADSs on the New York Stock
Exchange was suspended on
May 25, 2004. On July 15, 2004, our ADSs were delisted from
the NYSE. 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 and Series B Shares are evidenced by share certificates in registered
form. Our stockholders may hold their Series A Shares or Series B Shares in the form of physical
certificates or indirectly through institutions that have an account with Indeval. Accounts may be
maintained at Indeval by brokers, banks or other entities approved by the CNBV. Voting Rights Each of our shares entitles the holder thereof to one vote at any general meeting of our
stockholders. Currently, Series A Shares and Series B Shares are the only shares of our capital
stock outstanding. Stockholders meetings may be ordinary stockholders meeting or extraordinary stockholders
meetings. Extraordinary stockholders meetings are those called to consider certain matters
specified in Article 182 of the Mexican Companies Law (Ley General de Sociedades Mercantiles),
including:  
    
    amendments to our bylaws;
    
    anticipated dissolution of our company;
    
    merger and transformation of our company from one type of company to another; and
    
    increases or decreases affecting the fixed portion of our capital stock. General meetings called to consider matters not required to be considered at an extraordinary
stockholders meeting, including increases and decreases affecting the variable portion of our
capital stock, are ordinary stockholders meetings. An annual ordinary stockholders meeting must be
held at least once a year, within four months after the end of the preceding fiscal year. The annual ordinary stockholders meeting is held to consider the approval of the annual report
of our board of directors and for our subsidiaries in which we have an investment that exceeds 20%
of our net worth, including the approval of the financial statements for the preceding fiscal year,
the election of directors and our statutory auditor and the allocation of our profits, if any, from
the preceding year. The quorum for an ordinary stockholders meeting convened on the first call is at least 50% of
all outstanding shares and action may be taken by holders of a majority of the shares represented
at such meeting. If a quorum is not present, a subsequent ordinary stockholders meeting may be
called at which a quorum shall exist regardless of the number of shares present, and action may be
taken by a majority of the shares represented at such meeting. The quorum for an extraordinary
stockholders meeting convened on the first call is 75% of all outstanding shares. If a quorum is
not present, a subsequent extraordinary stockholders meeting may be called at which 50% of all
outstanding shares constitute a quorum. Whether on first or subsequent call, actions at an
extraordinary stockholders meeting may be taken only by holders of a majority of the outstanding
shares. -78-




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##### 



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:  
    
    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) deposited their shares with a Mexican or non-Mexican
credit institution or an institution for the deposit of securities and present a certificate of
deposit from such institution prior to the meeting indicating ownership by such person will be
admitted as such to stockholders meetings. A stockholder may be represented by an
attorney-in-fact who holds a duly granted power-of-attorney on the form provided by the Company for
such purposes. Dividends At the annual ordinary stockholders meeting, our board of directors submits our financial
statements for the previous fiscal year, together with a report thereon from our board of
directors, to the stockholders for approval. The stockholders, after they have approved the
financial statements, determine the allocation of our distributable earnings for the preceding
year. Five percent of our net income must be allocated to a legal reserve fund until such fund
reaches an amount equal to at least 20% of our then current capital
stock. As of October 24, 2005,
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 the Common Agreement. Liquidation Rights Upon our dissolution, one or more liquidators must be appointed by an ordinary stockholders
meeting or an extraordinary stockholders meeting to wind up our affairs. All fully paid and
outstanding shares of capital stock will be entitled to participate equally in any distribution
upon liquidation. Partially paid shares participate in a liquidation distribution in the same
manner as they would in a dividend distribution. -79-




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##### 



Changes in Capital Stock The fixed portion of our capital stock may be increased or decreased by a resolution of an
extraordinary stockholders meeting. The variable portion of our capital stock may be increased or
decreased by resolution of an ordinary stockholders meeting, unless such increase or decrease is
derived from our repurchase of our shares, in which case a resolution of our board of directors
authorizing such action would be sufficient. Capital increases and decreases must be recorded in
our book of capital variations. Pre-Emptive Rights In the event of a capital increase, a holder of issued and outstanding shares of our capital
stock has a preemptive right to subscribe for a sufficient number of shares to maintain such
holders existing proportional holdings of shares. However, our stockholders may waive these
preemptive rights with respect to any specific capital increase at a stockholders meeting and such
waiver would be binding on all stockholders, whether or not present or represented at the
stockholder meeting. Preemptive rights, if not waived, must be exercised within 15 days following
the publication of notice of the capital increase in the Official Gazette of the State of Durango
(Periódico Oficial del Estado de Durango) and in a newspaper of major circulation in the city of
Durango, Mexico. Under Mexican law, preemptive rights cannot be represented by an instrument that
is negotiable separately from the corresponding share. Repurchase Obligation In accordance with our bylaws, and as prescribed by the CNBV, our majority stockholders are
obligated to make a public offer for the purchase of stock held by our minority stockholders in the
event that the listing of our stock with the Mexican Stock Exchange is cancelled either by
resolution of our company or by an order of the CNBV. The price at which the stock must be
purchased by our majority stockholders is the greater of:  
    
    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 95% of our stockholders and the amount offered to be paid for
the shares owned by the public is less than 300,000 UDIS. This provision, contained in our bylaws,
may not be amended without the consent of holders of at least 95% of our capital stock and the
prior approval of the CNBV. Other Provisions Variable Capital and Withdrawal Rights. The outstanding variable portion of our capital stock
may be fully or partially withdrawn by our stockholders. The minimum fixed portion of our capital
stock specified in our bylaws cannot be withdrawn. A stockholder who wishes to effect a total or
partial withdrawal of its shares must notify us in an authenticated written notice to that effect.
If notice of withdrawal is received prior to the last quarter of any fiscal year, the withdrawal
becomes effective at the end of the fiscal year in which the notice is given. Otherwise, the
withdrawal becomes effective at the end of the following fiscal year. Because our fixed capital
cannot be withdrawn, requests for withdrawals are satisfied only to the extent of our available
variable capital and in the order in which they are received. Requests which are received
simultaneously would be satisfied pro 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 -80-




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
    
    the book value per share as calculated from our financial statements (as approved at
the annual ordinary stockholders meeting) for the fiscal year at the end of which the
withdrawal becomes effective. Any such amount to be paid by us becomes due on the day following the annual ordinary stockholders
meeting referred to above. Right of Dissenting Stockholders to Tender Their Shares. The Mexican Companies Law provides
that upon the adoption at an extraordinary stockholders meeting of resolutions approving changes in
our 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 more than
49% of the capital stock of our company. Forfeiture of Shares. As required by Mexican law, our bylaws provide, Any foreigner who at
the time of incorporation, or at any time thereafter, acquires a corporate interest or
participation in the corporation shall be considered by that fact alone as Mexican with respect to
such interest or participation and it shall be understood that he agrees not to invoke the
protection of his Government under penalty, in case of failure to comply with such agreement, of
forfeiture of such interest or participation in favor of the Mexican Nation. Under this
provision, a non-Mexican stockholder of our company is deemed to have agreed not to ask such
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 continues until 99 years from the date of our
incorporation and can be extended by resolution of an extraordinary stockholders meeting. Conflict of Interest. A stockholder of our company that votes on a business transaction in
which its interest conflicts with that of our company may be liable for losses and damages only if
the transaction would not have been approved without its vote. Additionally, a member of our board
of directors or of any committee thereof whose interests conflict with those of our company must
disclose the conflict to the other members of our board or directors or the respective committee
and abstain from any deliberation or vote in connection therewith. Failure by a director or member
of the respective committee to comply with such obligations may result in such director or member
being liable for damages and losses. Purchase by our company of its Shares. In accordance with the provisions of Article 14 Bis3
of the Mexican Securities Market Law (Ley del Mercado de Valores), we may purchase our shares. An
ordinary general meeting of stockholders may authorize, for any fiscal year, the repurchase of our
shares, specifying the maximum amount of funds available, provided that the total amount of funds
authorized for such purpose cannot exceed the retained earnings of our company. Upon any
repurchase of our shares, our capital stock would be reduced accordingly. Shares Without Voting Rights. With the prior consent of the CNBV, we may issue shares without
voting rights or restricted voting rights, and with restrictions to other corporate rights in
addition to those restrictions set forth in Article 113 of the Mexican Companies Law. Any issuance
of shares, other than common shares, may not exceed 25% of our issued and outstanding capital
stock, unless issued with the prior approval of the CNBV. For calculation of the percentage,
shares (or the corresponding CPOs) with voting restrictions based on the nationality of the related -81-




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##### 



holders, will not be considered. We do not currently have shares without voting rights, but
the voting rights of our shares deposited in the CPO Trust are limited. Prohibition on Purchase of Shares by Subsidiaries of our Company. Companies or other entities
controlled by us may not purchase, directly or indirectly, shares of our capital stock or shares of
companies or entities that are our stockholders. Material Contracts Our company has not entered into any other material contracts other than those entered into in
the ordinary course of business or those disclosed elsewhere within this Form 20-F. For a brief discussion of certain terms of our significant debt agreements, see Item 5.
Operating and Financial Review and Prospects  Indebtedness and for a discussion of other
transactions and agreements with our affiliates and associated companies, see Item 7. Major
Stockholders and Related Party Transactions  Related Party Transactions. Exchange Controls The Mexican government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos into dollars or other currencies, and vice versa. However, in the
past, the Mexican economy has experienced balance of payment deficits and shortages in foreign
exchange reserves, and the Mexican government has responded by restricting the ability of Mexican
or foreign persons or entities to convert pesos to foreign currencies generally, and dollars in
particular. The Mexican government may institute a restrictive currency exchange control policy in
the future. Any restrictive currency exchange control policy could prevent or restrict our access
to dollars to meet our dollar-denominated obligations, including our debt obligations, when and if
issued, and could also have a material adverse effect on our business, financial condition and
results of operations. 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 October 24, 2005, 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, -82-




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CPOs and ADSs are urged to consult their own tax advisors as to the Mexican or other tax
consequences of the purchase, ownership and disposition of Series A Shares, Series A Shares
represented by ADSs and CPOs, including, in particular, the effect of any foreign, state or local
tax laws. The United States and Mexico have entered into a Convention for the Avoidance of Double
Taxation and Prevention of Fiscal Evasion with respect to Income Taxes and accompanying protocol,
or the Treaty, that generally became effective on January 1, 1994. In general, the Treaty does not
have adverse effects on holders of ADSs, Series A Shares and CPOs. The United States and Mexico have also entered into an agreement that regulates the exchange
of information regarding tax matters. Series A Shares, ADSs, CPOs Taxation of Dividends Under the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta), dividends, either in cash
or in kind, paid with respect to Series A Shares underlying the CPOs and ADSs to a Foreign Holder
will not be subject to any withholding tax. On the other hand, during 2004 Mexican companies paying dividends with profits that have not
yet been subject to the corporate income tax, are obligated to pay a tax of 33% of the amount
resulting from the increase to the amount of the dividend multiplied by a factor of 1.4925, as if
the distributed profits would have been a profit after the payment of the tax. There are tax rate
modifications for 2005 and will be subsequent changes in the following years. Tax rate applicable
in 2005 is 30%. Such tax rate will decrease 1% in both 2006 and 2007, to a minimum rate of 28%,
while the applicable factor will be 1.4286 during 2005, 1.4085 during 2006 and 1.3889 as of 2007. 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: -83-




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
    
    Subject to Mexican income tax assessed at the rate of 25% on the total amount of the
transaction, without any deduction. The purchaser of Series A Shares is obligated to
withhold the tax only if he is a Mexican resident or has a permanent establishment in
Mexico; in any other cases, the Foreign Holder will be obligated to pay the tax
directly to the Mexican tax authorities; or
    
    Subject to Mexican income tax assessed at the optional rate of 33% on the gains
obtained (if any) as long as the Foreign Holder (i) has a representative in Mexico that
meets certain requirements, and is appointed before the actual sale or disposition
takes place, (ii) is not a resident of a country considered as a tax haven or of a
country with territorial taxation system in terms of the provisions of the Income Tax
Law, and (iii) files an audited opinion of the transaction prepared by a public
accountant authorized for such purposes with the Mexican Ministry of Finance and
Public Credit. In this case, the Foreign Holder will be obligated to pay the tax
through the appointed representative to the Mexican tax authorities. There are tax
rate modifications for 2005 and there will be subsequent changes in the following
years. Tax rate applicable in 2005 is 30%. Such tax rate will decrease 1% in each of
the subsequent years of 2006 and 2007, to a minimum rate of 28%; or
    
    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 U.S. federal
income tax considerations of holders that will hold Series A Shares, CPOs or ADSs as capital
assets. This description is based on the Internal Revenue Code of 1986, as amended, or the Code,
United States Treasury Regulations (temporary, proposed and final) issued under the Code, and
administrative and judicial interpretations of the Code and regulations, each as in effect and
available as of the date of this annual report. These income tax laws, regulations, and interpretations, however, may change at any time, and
any change could be retroactive to the issuance date of the Series A Shares, CPOs or ADSs, as the
case may be. These income tax laws and regulations are also subject to various interpretations,
and the U.S. Internal Revenue Service, or the IRS, or the U.S. courts could later disagree with the
explanations or conclusions set out below. This description does not address all of the tax consequences that may be relevant to a
holder. This description does not address, except as stated below, any of the tax consequences to:  
    
    holders that may be subject to special tax treatment, such as financial
institutions, insurance companies, real estate investment trusts, regulated investment
companies, tax-exempt organizations, grantor trusts or dealers or traders in securities
or currencies;
    
    certain expatriates; -84-




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
    
    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;
    
    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 U.S. Treasury Department has expressed concern that depositaries
for American depositary receipts, or other intermediaries between the holders of shares of an
issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S.
foreign tax credits by U.S. Holders of such receipts or shares. Accordingly, the analysis
regarding the sourcing rules described below for U.S. foreign tax credit purposes could be affected
by future actions that may be taken by the U.S. Treasury Department. Ownership of CPOs or ADSs in General For U.S. federal income tax purposes, a holder of CPOs or ADSs generally will be treated as
the owner of the Series A Shares represented by such CPOs or ADSs. Distributions Subject to the discussion below under Passive Foreign Investment Company Considerations, the
gross amount of any distribution by our company of cash or property (other than certain
distributions, if any, of Series A Shares, CPOs or ADSs distributed pro rata to all stockholders of
our company, including holders of CPOs or ADSs) with respect to Series A Shares, CPOs or ADSs,
before reduction for any Mexican taxes withheld therefrom, will be -85-




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includible in income by a U.S. Holder as dividend income to the extent such distributions are
paid out of the current or accumulated earnings and profits of our company as determined under U.S.
federal income tax principles. Such dividends will not be eligible for the dividends received
deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under
Passive Foreign Investment Company Considerations, non-corporate U.S. Holders generally 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 U.S.
federal income tax principles. Any such dividend paid in pesos will be included in the gross income of a U.S. Holder in an
amount equal to the dollar value of the pesos on the date of receipt. The amount of any
distribution of property other than cash will be the fair market value of such property on the date
of distribution. Dividends received by a U.S. Holder with respect to Series A Shares, CPOs or ADSs will be
treated as foreign source income, which may be relevant in calculating such 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. U.S. Holders should note that recently enacted legislation eliminates the
financial services income category with respect to taxable years beginning after December 31,
2006. Under the new legislation, the foreign tax credit limitation categories would be limited to
passive category income and general category 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 U.S. federal income tax rate applicable to such gain will be lower than the maximum
marginal U.S. federal income tax rate applicable to ordinary income (other than certain dividends)
if such U.S. 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 U.S. source income or loss for U.S. foreign tax credit purposes. The deductibility of
capital losses is subject to limitations. The initial tax basis of Series A Shares to a U.S. Holder will be the dollar value of any
peso-denominated purchase price determined on the date of purchase. If the Series A Shares are
treated as traded on an established securities market, a cash basis U.S. Holder (or, if it
elects, an accrual basis U.S. Holder) will determine the dollar value of the cost of such Series A
Shares by translating the amount paid at the spot rate of exchange on the settlement date of the
purchase. The conversion of dollars to pesos and the immediate use of that currency to purchase
Series A Shares generally will not result in taxable gain or loss for a U.S. Holder. With respect to the sale or exchange of Series A Shares, the amount realized generally will be
the dollar value of the payment received determined on (i) the date of receipt of payment in the
case of a cash basis U.S. Holder and (ii) the date of disposition in the case of an accrual basis
U.S. Holder. If the Series A Shares are treated as traded on an established securities market, a
cash basis taxpayer (or, if it elects, an accrual basis taxpayer) will determine the dollar value
of the amount realized by translating the amount received at the spot rate of exchange on the
settlement date of the sale. -86-




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Subject to the discussion below under Backup Withholding Tax and Information Reporting
Requirements, a Non-U.S. Holder of Series A Shares, CPOs or ADSs generally will not be subject to
U.S. federal income or withholding tax on any gain realized on the sale or exchange of such Series
A Shares, CPOs or ADSs unless (i) such gain is effectively connected with the conduct by such
Non-U.S. Holder of a trade or business in the United States or (ii) in the case of any gain
realized by an individual Non-U.S. Holder, such holder is present in the United States for 183 days
or more in the taxable year of such sale or exchange and certain other conditions are met. Passive Foreign Investment Company Considerations A Non-U.S. corporation will be classified as a passive foreign investment company, or a
PFIC, for U.S. federal income tax purposes in any taxable year in which, after applying certain
look-through rules, either (i) at least 75% of its gross income is passive income or (ii) at
least 50% of the gross value of its assets is attributable to assets that produce passive income
or are held for the production of passive income. Passive income for this purpose generally
includes dividends, interest, royalties, rents and gains from commodities and securities
transactions. Based on certain estimates of our 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, 2004. 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, or by a U.S. payor or U.S. middleman, to
a holder of Series A Shares, CPOs or ADSs (other than an exempt recipient, including a corporation,
a payee that is not a United States person who provides appropriate certification and certain other
persons). A payor will be required to withhold backup withholding tax from any such payments
within the United States, or by a U.S. payor or U.S. middleman, to a holder (other than an exempt
recipient) if such holder fails to furnish its correct taxpayer identification number or otherwise
fails to comply with, or establish an exemption from, such backup withholding tax requirements.
The backup withholding tax rate is 28% for 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. -87-




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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 Exchange Act. 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. 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 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 2i to our audited consolidated financial
statements. Interest Rate Risk We face primary market risk exposure due to interest rate risk. Approximately 33.3% of our
long-term interest-bearing debt at December 31, 2004 was variable rate. Substantially all of our
long-term debt is denominated in dollars. As a result, depreciation of the peso will result in
increases in our interest expense in peso terms. Variable rate long-term debt denominated in
dollars bears interest at rates tied to LIBOR, the rate that banks in the London interbank market
offer for dollar deposits of varying maturities. 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, 2004. -88-




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The table below summarizes our debt obligations, which include notes, bank loans and leases,
at December 31, 2004. 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, 2004, which was Ps
11.1495 = US1.00. Liabilities
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(in millions of constant pesos)Fixed Rate DebtMillions of Pesos
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,836Weighted Average rate
    
    
    8.50
    %
    
    
    9.50
    %
    
    
    9.50
    %
    
    
    9.50
    %
    
    
    9.50
    %
    
    
    9.50
    %Variable Rate DebtMillions of Pesos
    
    
    178
    
    
    
    246
    
    
    
    284
    
    
    
    273
    
    
    
    242
    
    
    
    1,070Weighted Average rate
    
    
    6.90
    %
    
    
    7.75
    %
    
    
    7.80
    %
    
    
    7.84
    %
    
    
    7.88
    %
    
    
    7.93
    %Total DebtMillions of Pesos
    
    
    178
    
    
    
    246
    
    
    
    284
    
    
    
    273
    
    
    
    242
    
    
    
    5,906Weighted Average rate
    
    
    8.01
    %
    
    
    9.01
    %
    
    
    9.08
    %
    
    
    9.15
    %
    
    
    9.21
    %
    
    
    9.28
    %
 In the event that the average interest rate applicable to our financial liabilities in 2005 is
1% higher than the average interest rate in 2004, our financial expenses would increase by
approximately Ps 72.5 million. Foreign Currency Exchange Rate Risk Since substantially all of our long-term interest-bearing debt is denominated in dollars, the
interest expense varies with exchange rate movements between the peso and the dollar. We have not
entered into any derivative contracts to limit our exposure to exchange rate fluctuations. Although
prices for our products in Mexico are quoted in pesos, prices are linked to dollars. We believe
that this link mitigates in part the effect of exchange rate fluctuations between the dollar and
the peso. However, because the majority of our costs of production are paid in pesos, in periods in
which the peso appreciates against the dollar, our operating margins are reduced. The table set forth above summarizes our debt obligations that are sensitive to foreign
currency exchange rates at December 31, 2004. The table presents principal payment obligations in
millions of pesos by maturity date for dollar-denominated debt. In the event that the peso depreciates by 10% against the dollar during 2005 as compared to
the peso/dollar exchange rate at December 31, 2004, our financial expenses indexed to the dollar in
2005 would increase by approximately Ps 52.9 million. 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 2004
and Recent DevelopmentsFinancial Restructuring, on November 29, 2002, we suspended payment of
principal and interest on our unsecured debt instruments. As of December 31, 2004, our company was
in default on payments of principal and/or interest under the following indebtedness: -89-




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
    
    the 2003 notes, the 2006 notes, the 2008 notes, the 2009 notes and the ECP note;
    
    a bank loan issued under a credit agreement, dated as of May 25, 2001, between our
company and Banamex;
    
    a promissory note issued on July 22, 2002 to Banamex by our company;
    
    bank loans issued under a business loan agreements, dated as of January 4, 2001 and May
18, 2001, between our company and California Commerce Bank;
    
    a bank loan issued under a trade finance facility agreement, dated as of December 17,
1997, between our company, JPMorgan Chase Bank, Deutsche Bank AG and Banc of America
Securities Limited;
    
    a guarantee made by our company of 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.;
    
    a guarantee of a reimbursement obligation of a letter of credit issued by JPMorgan Chase
Bank to SunTrust Leasing Corporation for the benefit of our former subsidiary, Durango
Georgia Paper Company; and
    
    a guarantee of a reimbursement obligation of a letter of credit issued by JPMorgan Chase
Bank to Pitney Bowes Credit Corporation for the benefit of our former subsidiary, Durango
Georgia Paper Company. For further information with respect to these debt instruments, see Item 5: Operating and
Financial Review and ProspectsIndebtednessLong-term Indebtedness. As discussed under Item 4. Information on Our Company  Significant Developments During 2004
and Recent DevelopmentsFinancial Restructuring, on February 23, 2005, our plan of reorganization
was consummated. As a result, the creditors under each of the debt instruments set forth above
received Series B Shares and 2012 notes or notes under our Restructured Credit Agreement in
exchange for their recognized claims in our concurso mercantilproceeding. Under the terms of the
Common Agreement governing the Restructured Credit Agreement and the
2102 notes, we were required to deliver certain financial information
to the administrative agent under the Restructured Credit Agreement
and the trustee under the indenture governing our 2012 notes on
or prior to June 30, 2005. We did not deliver such financial
information on or prior to June 30, 2005 and, consequently, a
default occurred under the Common Agreement. The Common Agreement
provides that such a default may be cured within 30 days
following our receipt of a notice of default from certain or our
creditors. As of October 28, 2005, we had not received a notice
of default from any or our creditors. Upon the provision of this
financial information to the administrative agent and the trustee on
October 28, 2005, this default was cured and therefore does not
give rise to any right of our creditors to accelerate the
Restructured Credit Agreement or the 2012 notes. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable. Item 15. Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of December 31, 2004, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives, and management necessarily applies its judgment in assessing the costs and benefits of such
controls and procedures. Based
upon and as of the date of our evaluation, other than as described above, our Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31, 2004, our
disclosure controls and procedures were 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. Subsequent
to the issuance of our annual report released to the Mexican Stock
Exchange for the fiscal year ended December 31, 2004 and before
we filed this annual report, we identified and corrected certain
amounts that had been previously reported in our Mexican GAAP
financial statements for the year ended December 31, 2004, as
described in note 1.c. to our financial statements, and in our
U.S. GAAP financial information for the years ended December 31,
2003 and 2002, as described in note 24 to our financial
statements. As a result of the corrections, we also amended the
reconciliation to U.S. GAAP of our net income and shareholders
equity for the years ended December 31, 2001 and 2000 that also
appear in this annual report. We
recognize that the inadvertant errors that caused the need for the
corrections described above represent a material weakness in our
internal controls over financial reporting, as defined under the
Public Company Accounting Oversight Boards Auditing Standard
No. 2, An Audit of Internal Control Over Financial Reporting
Performed in Conjunction with an Audit of Financial Statements. We
are currently implementing measures to improve our internal controls
over financial reporting as part of our effort to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. We believe that
certain of these measures, undertaken to ensure the quality of the
information and modifications to our internal control processes,
including upgrading our information technologies through automation
of our consolidation system, will improve our ability to prepare our
financial information under both Mexican GAAP and U.S. GAAP,
specifically in our deferred income tax calculations. There has been no change in our internal control
over financial reporting during 2004 that has materially affected, or
is reasonably 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. Other
than as described above, there were no
significant deficiencies or material weaknesses, -90-




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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 Rebeca Castaños Castaños, Buenaventura G. Saravia and Mayela
Rincón de Velasco. Our Board of Directors has determined that Mayela Rincón de Velasco is our
audit committee financial expert within the meaning of applicable law. Mayela Rincón de Velasco
is our Chief Financial Officer and, therefore, is not independent with respect to our company. Our
Board of Directors is reviewing the qualifications of the other members of the audit committee to
determine is an audit committee financial expert within the meaning of applicable law and
independent under the listing standards of a national securities exchange registered pursuant to
section 6(a) of the Exchange Act or a national securities association registered pursuant to
section 15A(a) of the Exchange Act that have been approved by the United States Securities and
Exchange Commission. Item 16B. Code of Ethics. We have adopted a Code of Conduct and Business Ethics Policy that applies to our principal
executive officer, principal financial officer and principal accounting officer as well as all our
directors, other officers and employees. This Code of Conduct and Business Ethics Policy can be
found at our website, www.corpdgo.com. Item 16C. Principal Accountant Fees and Services. Audit Fees The following table summarizes the aggregate fees billed to us by our principal accounting
firm, PricewaterhouseCoopers, for the fiscal year ended December 31, 2004 and the aggregate fees
billed to us by our prior 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: For the year ended December 31,2004
    
    
    2003(in thousands of constant pesos)Audit Fees
    
    Ps
    9,850
    
    
    Ps
    10,544Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    856
    
    
    
    756Other Fees
    
    
    5,248
    
    
    
    Total Fees
    
    Ps
    15,954
    
    
    Ps
    11,300
 Audit fees and audit-related fees.Audit fees in the above table, which include all
audit-related fees, for the year ended December 31, 2004 are the
aggregate fees billed or expected to be billed by
PricewaterhouseCoopers in connection with the audit of our annual financial statements and
regulatory audits. Audit fees in the above table, which include all audit-related fees, for the
year ended December 31, 2003 are the aggregate fees billed by DTT Member Firms in connection with
the audit of our annual financial statements and regulatory audits. 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, 2004 are fees billed or
expected to be billed by PricewaterhouseCoopers for tax consultations and tax return preparation
for our U.S. subsidiaries. Tax -91-




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##### 



fees in the above table for the year ended December 31, 2003 are fees billed by DTT Member
Firms for tax return preparation, assistance
to obtain government approval for amounts included in tax filings
such as value-added tax return assistance and request for technical
advice from taxing authorities. Other Fees.Other fees in the above table for the year ended December 31, 2004 are fees
billed by PricewaterhouseCoopers for non-audit services related to the financial restructuring of
our company. As a percentage of total fees billed to our company, other fees represent 32.9% for
2004. 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 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. During the year ended December 31, 2004, there were no purchases made by or on behalf of
Corporación Durango, S.A. de C.V. or any affiliated purchaser, as defined in Section
240.10b-18(a)(3), of shares or other units of any class of Corporación Durango, S.A. de C.V.s
equity securities that are registered by Corporación Durango, S.A. de C.V. pursuant to Section 12
of the Exchange Act. -92-




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PART III Item 17. Financial Statements. Not applicable. Item 18. Financial Statements. See
pages F-1 to F-73, incorporated herein by reference. Item 19. Exhibits. Documents filed as exhibits to this annual report: 1.1
    
    Bylaws of our company, as amended (English translation)2.1
    
    Indenture, dated as of February 23, 2005, between Corporación Durango S.A. de
C.V. and Law Debenture Trust Company of New York, as Trustee2.2
    
    Restructured Credit Agreement, dated as of February 23, 2005, among Corporación Durango, S.A.
de C.V., the Guarantors named therein, the Tranche A Holders named therein, and The Bank of
New York, as Administrative Agent2.3
    
    Common Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de C.V., the
Guarantors and Additional Guarantors named therein, the A Lenders named therein, The Bank of
New York, as Administrative Agent, Law Debenture Trust Company of New York, as Trustee,
Deutsche Bank Trust Company Americas, as Collateral Agent, Deutsche Bank Mexico, S.A.,
Institución De Banca Multiple, Trust Division, as Collateral Agent, Deutsche Bank Trust
Company Americas, as Guarantor Paying Agent, and the Subordinating Creditors named therein.2.4
    
    The total amount of long-term debt securities of our company and its subsidiaries under any
one instrument, other than the Restructured Credit Agreement, does not exceed 10% of the total
assets of our company and its subsidiaries on a consolidated basis. We agree to furnish copies
of any or all such instruments to the United States Securities and Exchange Commission upon
request.2.5
    
    Form of Deposit Agreement among our company, The Bank of New York and owners and beneficial
owners of American Depositary Receipts issued thereunder, including the form of American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our companys registration
statement No. 33-80148 on Form F-1 filed on June 10, 1994)2.6
    
    Trust Agreement, dated November 24, 1989, between NAFIN, as grantor, and NAFIN, Trust
Department, as CPO trustee, together with an English translation (incorporated by reference to
Exhibit 4.4 to our companys registration statement No. 33-80148 on Form F-1 filed on June 10,
1994)2.7
    
    Public Deed with respect to the CPOs, together with an English translation (incorporated by
reference to Exhibit 4.5 to our companys registration statement No. 33-80148 on Form F-1
filed on June 10, 1994)3.1
    
    Convenience translation of
Irrevocable Trust Administration Agreement, dated June 22, 2005,
between Miguel Rincón Arredondo, José A. Rincón Arredondo, Jesús Rincón Arredondo, Wilfrido
Rincón Arredondo, Ignacio Rincón Arredondo, Martín Rincón Arredondo and Mayela Rincón
Arredondo de Velasco, as Settlors and Beneficiaries, and Banco Invex, S.A., Institución de
Banca Múltiple, Invex Grupo Financiero, Fiduciario, as Trustee (incorporated by reference to Exhibit 99.5 filed as an exhibit to Amendment No. 3 to Schedule 13D
filed with the United States Securities and Exchange Commission on July 18, 2005)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 200212.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 -93-




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##### 



SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. CORPORACIÓN DURANGO, S.A. DE C.V.By:

/s/
Mayela
Rincón Arredondo de VelascoName:
    Mayela Rincón Arredondo de VelascoTitle:
    Chief Financial Officer




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CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004, 2003 AND 2002 INDEX Contents
    
    PageReports of Independent Registered Public Accounting Firms
    
    F-2Financial statements:Consolidated balance sheets
    
    
    F-4Consolidated statements of operations
    
    
    F-5Consolidated statements of changes in stockholders equity
    
    
    F-6Consolidated statements of changes in financial position
    
    
    F-7Notes to the consolidated financial statements
    
    F-8
  F-1




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Mexico City, April 14,
2005, except for Notes 1c, 17 and 24 as to which the date is
July 14, 2005. Board of Directors and Stockholders of
Corporación Durango, S. A. de C. V.: We have audited the accompanying consolidated balance sheet of Corporación Durango, S.A. de C. V.
and subsidiaries (collectively, the Company) as of
December 31, 2004, and the related
consolidated statements of operation, changes in stockholders equity and changes in financial
position for the years ended December 31, 2004 and 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico and with
the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and that they are prepared in accordance
with accounting principles generally accepted in Mexico. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures contained in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. As mentioned in Note 10b. to the consolidated financial statements, on February 23, 2005, the
Company and its creditors signed a financial restructuring agreement and therefore, completed the
Concurso Mercantil process. As a result of the financial restructuring, the Company reclassified,
as of December 31, 2004, $9,695 millions of Mexican pesos of its short-term debt to long-term. In our opinion, the financial statements present fairly, in all material respects, the consolidated
financial position of Corporación Durango, S. A. de C. V. and subsidiaries as of December 31, 2004,
and the consolidated results of their operations, the changes in their stockholders equity
and changes in their financial position for the years ended December 31, 2004 and 2002, in
conformity with accounting principles generally accepted in Mexico. As discussed in Note 1c,
the accompanying consolidated financial statements have been restated
for the year ended December 31, 2004 from those which were
previously filed with the Mexican National Banking and Securities
Commission. Accounting principles
generally accepted in Mexico vary in certain significant respects from
accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such
differences is presented in Note 24, as restated, to the consolidated financial statements. PricewaterhouseCoopers, S.C. Javier Monroy C.P.
Audit Partner F-2




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##### 



Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V. We have audited the accompanying consolidated balance sheet of Corporación Durango, S. A. de
C. V. and subsidiaries (the Company) as of December 31, 2003, and the related consolidated
statements of operations, changes in stockholders equity and changes in financial position for the
year then ended, all expressed in thousands of Mexican pesos of purchasing power of December 31,
2004. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Mexico and
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Corporación Durango, S. A. de C. V. and subsidiaries as of December 31,
2003, and the results of their operations, changes in their stockholders equity and changes in
their financial position for the year then ended in conformity with accounting principles generally
accepted in Mexico. Accounting principles generally accepted in Mexico vary in certain significant respects from
accounting principles generally accepted in the United States (U.S.
GAAP). The application of the
latter would have affected the determination of stockholders equity as of December 31, 2003, and
the determination of net loss for the year then ended to the extent summarized in Note 24. As discussed in Note 24
to the consolidated financial statements, the reconciliation to U.S.
GAAP as of December 31, 2003 and for the year then ended has
been restated for adjustments to deferred income taxes for U.S. GAAP purposes only. The consolidated financial statements as of December 31, 2003 and for the year then ended issued on
June 28, 2004 were prepared assuming that the Company will continue as a going concern. Since
November 2002 the Company had failed to pay principal and interest of certain obligations, and
therefore the Company reclassified most of its debt as short-term. In addition, during 2003 and
2002 the Company had incurred significant consolidated net losses, and since 2001 its operating
margin has declined substantially. As of December 31, 2003, the Company had negative working
capital and was experiencing severe liquidity problems. Furthermore, the Company estimated that
upon the adoption of Bulletin C-15, Impairment of the Value of Long-Lived Assets and Their
Disposal, whose application was mandatory for fiscal years beginning on or after January 1, 2004,
a charge to results of operations for the year 2004 of
Ps.653,881,000, net of deferred income taxes,
would be required, which would additionally reduce its stockholders equity. These factors, among
others, raise substantial doubt about its ability to continue as a going concern. The Companys
ability to continue as a going concern is dependent upon its ability to generate profits and to
restructure its debt. The originally issued 2003 financial statements do not include any
additional adjustments related to the valuation and presentation of assets or the presentation and
amount of liabilities that might result if the Company is unable to continue as a going concern. The accompanying financial statements have been translated into English for the convenience of
readers in the United States of America. Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu C.P.C. Claudia Leticia Rizo Navarro April 30, 2004
(June 28, 2004 as to Notes 1.e, 24, 25, 26 and 27 to the originally issued 2003 financial statements, and
July 4, 2005 as to the restatement to constant Mexican pesos as
of December 31, 2004 and the adjustment to deferred income taxes discussed in Note 24) F-3




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CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2004 AND 2003
(Notes 1, 2 and 3)(In thousands of constant Mexican pesos as of December 31, 2004) 2004
    
    
    2003as
restatedAssetsCurrent Assets:Cash and cash equivalents (Note 4)
    
    $
    834,932
    
    
    $
    680,628Accounts receivable  Net (Note 5)
    
    
    1,803,502
    
    
    
    1,887,577Short-term related parties (Note 15)
    
    
    13,070
    
    
    
    15,024Inventories  Net (Note 6)
    
    
    1,078,254
    
    
    
    1,149,085Prepaid expenses
    
    
    6,727
    
    
    
    23,540Current assets of discontinued operations (Note 18)
    
    
    104,493
    
    
    
    88,559Total current assets
    
    
    3,840,978
    
    
    
    3,844,413Restricted cash (Note 7)
    
    
    
    
    
    
    165,678Property, plant and equipment  Net (Note 8)
    
    
    11,100,932
    
    
    
    11,905,795Other assets  Net (Note 9)
    
    
    339,927
    
    
    
    567,976Non-current assets of discontinued operations (Note 18)
    
    
    249,296
    
    
    
    265,969Total assets
    
    $
    15,531,133
    
    
    $
    16,749,831LiabilitiesCurrent Liabilities:Short-term debt (Note 10)
    
    $
    42,152
    
    
    $
    8,978,136Current
portion of long-term debt (Note 10)
    
    
    135,994
    
    
    
    126,353Notes payable
    
    
    48,818
    
    
    
    54,471Accrued interest
    
    
    15,973
    
    
    
    1,459,682Trade accounts payable
    
    
    736,931
    
    
    
    952,478Accrued expenses and taxes
    
    
    688,821
    
    
    
    476,410Employee statutory profit sharing
    
    
    848
    
    
    
    2,537Current
liabilities of discontinued operations (Note 18)
    
    
    126,912
    
    
    
    89,071Total current liabilities
    
    
    1,796,449
    
    
    
    12,139,138Long-term Liabilities:Long-term debt (Note 10)
    
    
    6,951,969
    
    
    
    415,833Long-term notes payable
    
    
    88,942
    
    
    
    104,965Deferred income taxes (Note 17)
    
    
    1,441,792
    
    
    
    2,015,309Pension plans and seniority premiums (Note 12)
    
    
    305,532
    
    
    
    209,819Long-term
liabilities of discontinued operations (Note 18)
    
    
    145,341
    
    
    
    200,120Liabilities to be capitalized to equity (Notes 10.c and 21)
    
    
    3,158,970
    
    
    
    Total long-term liabilities
    
    
    12,092,546
    
    
    
    2,946,046Total liabilities
    
    
    13,888,995
    
    
    
    15,085,184Stockholders Equity:Common stock (Note 13)
    
    
    4,988,460
    
    
    
    4,988,413Additional paid-in capital
    
    
    1,459,044
    
    
    
    1,459,044Retained earnings
    
    
    2,599,015
    
    
    
    6,118,130Net loss for the period
    
    
    60,790
    
    
    
    (3,519,115
    )Loss from holding non monetary assets
    
    
    (4,558,746
    )
    
    
    (4,399,583
    )Cumulative initial effect of deferred income taxes
    
    
    (3,240,795
    )
    
    
    (3,240,795
    )Cumulative translation adjustment of foreign subsidiaries
    
    
    256,894
    
    
    
    187,259Majority stockholders equity
    
    
    1,564,662
    
    
    
    1,593,353Minority stockholders equity in consolidated subsidiaries
    
    
    77,476
    
    
    
    71,294Total stockholders equity
    
    
    1,642,138
    
    
    
    1,664,647Commitments and contingencies (Notes 19 and 20)
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    15,531,133
    
    
    $
    16,749,831
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3)(In thousands of constant Mexican pesos as of December 31, 2004, except per share amounts) 2004
    
    
    2003
    
    
    2002as
restatedNet sales
    
    $
    7,852,415
    
    
    $
    7,150,547
    
    
    $
    8,475,357Cost of sales
    
    
    6,733,582
    
    
    
    6,151,018
    
    
    
    7,287,789Gross profit
    
    
    1,118,833
    
    
    
    999,529
    
    
    
    1,187,568Selling, general and administrative expenses
    
    
    676,156
    
    
    
    678,643
    
    
    
    659,530Operating income
    
    
    442,677
    
    
    
    320,886
    
    
    
    528,038Other (expenses)  Net (Note 16)
    
    
    (404,171
    )
    
    
    (1,588,269
    )
    
    
    (3,262,873
    )Net comprehensive financing cost:Interest expense
    
    
    (1,121,609
    )
    
    
    (1,247,356
    )
    
    
    (1,185,826
    )Interest income
    
    
    40,201
    
    
    
    44,130
    
    
    
    41,923Exchange gain (loss)
    
    
    60,545
    
    
    
    (864,019
    )
    
    
    (1,050,078
    )Gain on monetary position
    
    
    451,823
    
    
    
    386,259
    
    
    
    427,203(569,040
    )
    
    
    (1,680,986
    )
    
    
    (1,766,778
    )Loss from continuing operations before income
taxes, employee statutory profit sharing and
equity in income of associated companies
    
    
    (530,534
    )
    
    
    (2,948,369
    )
    
    
    (4,501,613
    )Asset tax
    
    
    (14,718
    )
    
    
    
    
    
    
    Income tax benefit (Note 17)
    
    
    501,089
    
    
    
    684
    
    
    
    707,158Employee statutory profit sharing
    
    
    
    
    
    
    (1,823
    )
    
    
    (1,138
    )486,371
    
    
    
    (1,139
    )
    
    
    706,020Loss from continuing operations before equity in
income of associated companies
    
    
    (44,163
    )
    
    
    (2,949,508
    )
    
    
    (3,795,593
    )Equity in the income of associated companies
    
    
    2,648
    
    
    
    1,994
    
    
    
    2,106Loss from continuing operations
    
    
    (41,515
    )
    
    
    (2,947,514
    )
    
    
    (3,793,487
    )Discontinued operations  Net (Note 18)
    
    
    102,135
    
    
    
    (577,740
    )
    
    
    (108,202
    )Consolidated
net income (loss)
    
    $
    60,620
    
    
    ($
    3,525,254
    )
    
    ($
    3,901,689
    )Net income (loss):Majority interest
    
    $
    60,790
    
    
    ($
    3,519,115
    )
    
    ($
    3,905,103
    )Minority interest
    
    
    (170
    )
    
    
    (6,139
    )
    
    
    3,414Consolidated
net income (loss)
    
    $
    60,620
    
    
    ($
    3,525,254
    )
    
    ($
    3,901,689
    )Basic and diluted income (loss) per share of:Continuing operations
    
    $
    (0.45
    )
    
    $
    (31.64
    )
    
    $
    (40.36
    )Discontinued operations
    
    
    1.11
    
    
    
    (6.22
    )
    
    
    (1.15
    )Basic and
diluted net income (loss) per share
    
    $
    0.66
    
    
    $
    (37.86
    )
    
    $
    (41.51
    )Weighted average of shares outstanding
    
    
    91,834,192
    
    
    
    92,942,916
    
    
    
    94,072,122
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3) (In thousands of constant Mexican pesos as of December 31, 2004) Cumulative
    
    
    Cumulative
    
    
    MinorityLoss from
    
    
    Additional
    
    
    initial effect
    
    
    translation
    
    
    stockholdersCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    holding non
    
    
    liability
    
    
    of deferred
    
    
    adjustment
    
    
    equity
    
    
    Totalstock
    
    
    Treasury
    
    
    paid-in
    
    
    Retained
    
    
    monetary
    
    
    for seniority
    
    
    income
    
    
    of foreign
    
    
    in consolidated
    
    
    stockholders(Note 13)
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    assets
    
    
    premiums
    
    
    taxes
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    equityBalances as of January 1, 2002
    
    $
    5,110,092
    
    
    $
    
    
    
    $
    1,390,881
    
    
    $
    10,361,700
    
    
    ($
    4,952,912
    )
    
    ($
    154,051
    )
    
    ($
    3,240,795
    )
    
    $
    129,993
    
    
    $
    45,774
    
    
    $
    8,690,682Equity swap terminations
    
    
    
    
    
    
    (121,679
    )
    
    
    68,163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,516
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,905,103
    )
    
    
    139,746
    
    
    
    
    
    
    
    
    
    
    
    (38,180
    )
    
    
    29,055
    
    
    
    (3,774,482
    )Balances as of December 31, 2002
    
    
    5,110,092
    
    
    
    (121,679
    )
    
    
    1,459,044
    
    
    
    6,456,597
    
    
    
    (4,813,166
    )
    
    
    (154,051
    )
    
    
    (3,240,795
    )
    
    
    91,813
    
    
    
    74,829
    
    
    
    4,862,684Reduction of common stock
(Note 13.b)
    
    
    (121,679
    )
    
    
    121,679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer of the additional liability
for seniority premium (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154,051
    )
    
    
    
    
    
    
    154,051
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for doubtful accounts for
receivable due from shareholders
(Note 15.b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (184,416
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (184,416
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,519,115
    )
    
    
    413,583    
    
    
    

    
    
    
    
    
    
    
    95,446
    
    
    
    (3,535
    )
    
    
    (3,013,621
    )Balances as of December 31, 2003
    
    
    4,988,413
    
    
    
    
    
    
    
    1,459,044
    
    
    
    2,599,015
    
    
    
    (4,399,583
    )
    
    
    
    
    
    
    (3,240,795
    )
    
    
    187,259
    
    
    
    71,294
    
    
    
    1,664,647Increase in common stock (Note 13.c)
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,790
    
    
    
    (159,163
    )
    
    
    
    
    
    
    
    
    
    
    69,635
    
    
    
    6,182
    
    
    
    (22,556
    )Balances as of December 31, 2004 (as restated)
    
    $
    4,988,460
    
    
    $
    
    
    
    $
    1,459,044
    
    
    $
    2,659,805
    
    
    ($
    4,558,746
    )
    
    $
    
    
    
    ($
    3,240,795
    )
    
    $
    256,894
    
    
    $
    77,476
    
    
    $
    1,642,138
 The accompanying notes are an integral part of these consolidated financial statements. F-6




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITIONFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3) (In thousands of constant Mexican pesos as of December 31, 2004) 2004
    
    
    2003
    
    
    2002as
restatedOperating activities:Consolidated loss from continuing operations
    
    
    ($41,515
    )
    
    
    ($2,947,514
    )
    
    
    ($3,793,487
    )Items applied to income that did not require (provide) resources:Depreciation and amortization
    
    
    427,024
    
    
    
    415,418
    
    
    
    477,977Amortization of debt issuance costs and other financing costs
    
    
    327,464
    
    
    
    97,109
    
    
    
    132,729Loss on sale of property, plant and equipment
    
    
    22,108
    
    
    
    210,027
    
    
    
    31,073Impairment of long-lived assets
    
    
    463,689
    
    
    
    636,139
    
    
    
    1,624,568Loss on
operations of Durango Paper Company
    
    
    
    
    
    
    331,444
    
    
    
    1,587,373Deferred income tax
    
    
    (514,481
    )
    
    
    (76,103
    )
    
    
    (828,014
    )Other
    
    
    16,472
    
    
    
    23,123
    
    
    
    214,422700,761
    
    
    
    (1,310,357
    )
    
    
    (553,359
    )Changes in operating assets and liabilities:Trade accounts receivable  Net
    
    
    131,213
    
    
    
    (95,097
    )
    
    
    475,261Inventories  Net
    
    
    70,831
    
    
    
    50,776
    
    
    
    256,997Other current assets
    
    
    (28,371
    )
    
    
    7,667
    
    
    
    (12,724
    )Trade accounts payable
    
    
    (215,548
    )
    
    
    90,622
    
    
    
    (372,196
    )Accrued interest
    
    
    
    
    
    
    966,126
    
    
    
    167,074Accrued expenses and taxes other than income taxes
    
    
    39,528
    
    
    
    13,632
    
    
    
    (43,594
    )Other  Net
    
    
    (3,217
    )
    
    
    (85,840
    )
    
    
    62,560Net resources (used in) provided by operating activities before
discontinued operations
    
    
    695,197
    
    
    
    (362,471
    )
    
    
    (19,981
    )Assets of discontinued operations
    
    
    (15,934
    )
    
    
    6,244
    
    
    
    (163,650
    )Liabilities of discontinued operations
    
    
    37,842
    
    
    
    79,216
    
    
    
    (119,402
    )Discontinued operations  net of items that did not require resources
    
    
    102,135
    
    
    
    (188,008
    )
    
    
    136,313124,043
    
    
    
    (102,548
    )
    
    
    (146,739
    )Net resources provided by (used in) operating activities
    
    
    819,240
    
    
    
    (465,019
    )
    
    
    (166,720
    )Financing activities:Short-term and long-term debt
    
    
    97,888
    
    
    
    272,871
    
    
    
    2,722,915Payments of long-term debt
    
    
    (773,124
    )
    
    
    (427,048
    )
    
    
    (1,792,002
    )Common stock increase
    
    
    47
    
    
    
    
    
    
    
    Translation adjustment of foreign subsidiaries
    
    
    69,635
    
    
    
    95,446
    
    
    
    (38,181
    )Net resources (used in) generated by financing activities
    
    
    (605,554
    )
    
    
    (58,731
    )
    
    
    892,732Investing activities:Restricted cash
    
    
    165,678
    
    
    
    (165,678
    )
    
    
    Acquisition of machinery and equipment
    
    
    (207,279
    )
    
    
    (111,805
    )
    
    
    (479,092
    )Sale of property, plant and equipment
    
    
    15,952
    
    
    
    242,406
    
    
    
    62,352Revenue from the sale of discontinued operations
    
    
    
    
    
    
    972,608
    
    
    
    Investment in subsidiaries
    
    
    
    
    
    
    
    
    
    
    (223,957
    )Other assets
    
    
    (33,733
    )
    
    
    19,571
    
    
    
    (398,981
    )Net resources (used in) generated by investing activities
    
    
    (59,382
    )
    
    
    957,102
    
    
    
    (1,039,678
    )Increase in cash and cash equivalents
    
    
    154,304
    
    
    
    433,352
    
    
    
    (313,666
    )Balance of cash and cash equivalents at beginning of year
    
    
    680,628
    
    
    
    247,276
    
    
    
    560,942Balance of cash and cash equivalents at end of year
    
    $
    834,932
    
    
    $
    680,628
    
    
    $
    247,276
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (In thousands of constant Mexican pesos as of December 31, 2004) NOTE 1  THE ENTITY:  a.
    
    Entity  Corporación Durango, S. A. de C. V. (CODUSA) and subsidiaries (collectively, the
Company) are primarily engaged in the manufacturing and selling of packaging (corrugated
boxes and multi-wall bags and sacks ), paper (containerboard, newsprint and bond) and other
wood products (plywood and particleboard) in Mexico and in the United States of America.b.
    
    In October 2002, the Company sold its investment in Durango Paper Company (DPC) to
Operadora Omega Internacional, S.A. de C.V. This sale resulted in an aggregate loss in 2002
of $1,587,373, which was recorded within other expenses in the statement of operations. The
Company granted certain guarantees for a bank loan and certain letters of credit issued by
DPC, amounting to $280,967 (US$25.2 million). During 2003, the creditors called these
guarantees and consequently, the 2003 statement of operations reflects a charge of $275,792
(US$23.6 million). These liabilities were included in the restructured debt.c.
    
    Subsequent to the filing of the Mexican GAAP financial
statements with the Mexican National Banking and Securities Commission
for the year ended December 31, 2004, management identified and corrected the following inadvertent errors:  (i)
    
    The deferred income tax liability amount recorded at
December 31, 2004 was reduced by $228,703 as a result of using the enacted income tax rate in effect at the date
of the expected future reversal of temporary differences instead of the 30% rate which was previously used, which only represented the tax
rate for the year ended December 31, 2004. This restatement resulted in a reduction of the deferred income tax charge for the
year ended December 31, 2004 for the same amount.(ii)
    
    The Company corrected the income tax liability of foreign
subsidiaries at December 31, 2004, which was reduced by $37,639,
resulting in a reduction of the current income tax charge for the
year ended December 31, 2004 for the same amount.(iii)
    
    The Company has also written off certain legal fees amounting to $34,889 which were previously erroneously capitalized within other assets.  As a result of the above adjustments minority interest in the
results of operations was impacted by $2,782. NOTE 2  BASIS OF PRESENTATION:  a.
    
    Debt restructuring  Since November 2002, the Company was not able to make principal and
interest payments on certain of its long-term debt (see Note 10c.) and was in default. As a
result, certain of the Companys long-term debt was reclassified to short-term in 2003. With
the debt restructuring agreement executed by the Company and its creditors in February 2005,
the balances of the restructured debt have been reclassified, as of December 31, 2004, to
short-term and long-term in accordance with the terms of the restructuring.  b.
    
    Basis of presentation  The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Mexico (Mexican GAAP) issued by
the Mexican Institute of Public Accountants (MIPA). F-8




---



##### 



c.
    
    Consolidation of financial statements  The consolidated financial statements include the

assets, liabilities and income or loss of the subsidiaries in which the Company holds more
than 50% ownership and operating and financial control. The ownership percentage in the
capital stock of the Companys significant consolidated subsidiaries is shown below. All
significant intercompany balances and transactions have been eliminated in these consolidated
financial statements. Group
    
    Ownership(or Company)
    
    percentage
    
    ActivityIndustrias Centauro, S. A. de C. V.
    
    
    99
    %
    
    Manufacturing of paper
for corrugated boxesCompañía Papelera de Atenquique, S. A. de C. V.
    
    
    98
    %
    
    Manufacturing of paper
for corrugated boxesEnvases 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 Internacional, S. A. de C. V. and
subsidiaries
    
    
    100
    %
    
    Manufacturing of paper
for corrugated boxes
and corrugated boxesPorteadores de Durango, S.A. de C.V. and subsidiaries
    
    
    100
    %
    
    Hauling freightAdministración Corporativa de Durango, S. A. de C.
V.
    
    
    100
    %
    
    Administrative servicesPonderosa Industrial de México, S. A. de C. V.
    
    
    100
    %
    
    Manufacturing of
plywood and
particleboard
  d.
    
    Translation of financial statements of foreign subsidiaries  The accounting policies of
foreign subsidiaries are the same as those of CODUSA. The local currency financial statements
are restated to constant purchasing power of the currency of the country in which the
subsidiaries operate by using the change in the consumer price index of the country.
Subsequently, all assets and liabilities are translated at the exchange rate in effect at year
end closing. The capital stock is translated at the historical exchange rates, and retained
earnings at the exchange rate in effect at the balance sheet date on which they arise. Income,
costs and expenses are translated at the exchange rate in effect on the date they are
recognized. The resulting translation effects are presented in stockholders equity.The financial statements of foreign subsidiaries included in the 2003 and 2002 consolidated
financial statements are restated in the constant currency of the country in which they operate
and translated into Mexican pesos using the exchange rate as of the latest balance sheet date
presented. F-9




---



##### 



NOTE 3  ACCOUNTING POLICIES: The significant accounting policies followed by the Company are as follows:  a.
    
    Estimates  The preparation of the financial statements require the Companys management to
make certain estimates and assumptions for valuation purposes and to make certain required
disclosures. Although actual results could differ from those estimates, the Companys
management believes that the estimates and assumptions used are adequate in the circumstances.  b.
    
    Recognition of the effects of inflation  The consolidated financial statements have been
prepared in accordance with Statement B-10 Recognition of the Effects of Inflation on
Financial Information, issued by the Mexican Institute of Public Accountants (MIPA), which
provides guidance for the recognition of the effects of inflation in the financial statements.  i.
    
    The Company restates its statement of operations to reflect the purchasing power of the
Mexican peso as of the most recent reporting date (December 31, 2004), using a restatement
factor derived from the change in the National Consumer Price Index (NCPI) from the month
in which the transaction occurred to the most recent year-end. The financial statements
have been restated to Mexican pesos as of December 31, 2004 purchasing power, using a
restatement factor derived from the change in the NCPI. The financial statements of the
previous years have also been restated in terms of the purchasing power of the Mexican peso
as of the most recent financial reporting date, thus making them comparable. The NCPI
restatement factor for 2004 and 2003 was 1.0519 and 1.0397, respectively.ii.
    
    Capital stock, additional paid-in capital and accumulated deficit represent the
historical cost of these items stated in purchasing power as of the most recent balance
sheet date, calculated by applying factors derived from the change in the NCPI.iii.
    
    The gain or loss on net monetary position represents the inflation gain or loss,
measured in terms of the NCPI, on net monthly monetary assets and liabilities for the year,
expressed in pesos of purchasing power as of the most recent balance sheet date.iv.
    
    Comprehensive financing income (cost) consists of interest income and expense, exchange
gains or losses, and the gain or loss on the net monetary position.v.
    
    Statement B-12 Statement of Changes in Financial Position, issued by the MIPA,
specifies the appropriate presentation of the statement of changes in financial position
when the financial statements have been restated in constant monetary units. Statement
B-12 identifies the sources and applications of resources as the differences between
beginning and ending financial statement balances in constant monetary units. The
Statement also requires that monetary and foreign exchange gains and F-10




---



##### 



losses not be treated as non-cash items in the determination of resources provided by
operations.  c.
    
    Cash equivalents  Cash equivalents consist of highly liquid investments with original
maturities of three months or less, and are stated at the lower of acquisition cost, plus
accrued yields, or their estimated net realizable value.  d.
    
    Inventories and cost of sales  Inventories are stated at the lower average cost or net
realizable value, which is similar to the most recent purchase price or production cost. Cost
of sales is stated at replacement cost at the time of sale.  e.
    
    Spare parts and materials  Spare parts and materials are used in the production process and
are valued at the lower of weighted average cost or market. Additionally, they are restated
to constant purchasing power using factors derived from the change in the NCPI.  f.
    
    Property, plant and equipment  Property, plant and equipment are initially recorded at
acquisition cost and are restated to constant purchasing power using factors derived from the
change in the NCPI. For fixed assets of non-Mexican origin, acquisition cost is restated to
constant currency using the inflation of the country of origin and then converted into Mexican
pesos at the 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, as follows: YearsBuildings
    
    
    25-50Industrial machinery and equipment
    
    
    23-40Transportation equipment
    
    
    1-5Computer equipment
    
    
    1-3Office furniture and equipment
    
    
    5-10
  These assets are evaluated annually for potential impairment.Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major
overhauls to fixed assets are capitalized and amortized over the period in which benefits are
expected to be received.Comprehensive financing cost incurred during the period of construction and installation of
property, plant and equipment is capitalized and restated applying factors derived from the
change in the NCPI.g.
    
    Impairment of long-lived assets   Through December 31, 2003, the Company evaluated potential
impairment losses related to long-lived assets by assessing whether the unamortized carrying
amount can be recovered over the remaining useful life of the assets by comparing F-11




---



##### 



such carrying value to the undiscounted future expected cash flows generated by the assets,
excluding interest charges. If the sum of the expected future
undiscounted cash flow was less
than the carrying amount of the assets, a loss was recognized equal to the difference between the
fair value and carrying value of the assets. Long-lived assets were reviewed for impairment
whenever events or changes in circumstances indicated that the carrying amount may not be
recoverable.Effective January 1, 2004, the Company adopted Statement C-15, Impairment in the Value of
Long-Lived Assets and their Disposal, issued by the MIPA, which establishes general criteria for
the identification and, if applicable, recording of impairment losses or the decrease in value of
long-lived tangible and intangible assets, including goodwill. The Company performed its annual
impairment evaluation of long-lived assets during 2004 and determined
a charge of $463,689, which
is recorded in the statement of operations within other expenses (See Note 8).h.
    
    Intangible assets  Intangible assets are recognized provided they are identifiable, provide
future economic benefits and there is control over those benefits. Intangible assets with
indefinite useful lives are not amortized. Definite lived intangible assets are amortized
systematically based on the best estimate of their useful lives determined on the basis of
expectations for future economic benefits. The carrying value of intangible assets is subject
to an annual impairment evaluation.i.
    
    Financial instruments  Financial instruments held for trading or available for sale and are
valued at fair value (which is similar to market value) with gains or losses recognized in the
statements of operations. Fair value is the amount for which a financial asset can be
exchanged or a financial liability can be paid in an arms-length transaction between
interested and willing parties.j.
    
    Derivative financial instruments  Investments in derivative financial instruments for
trading or for hedging purposes are recorded as assets or liabilities at fair value. Realized
and unrealized gains or losses on those investments are recorded in the statement of
operations. In accordance with Statement C-2 Financial Instruments, derivative financial
instruments that qualify for hedge accounting are recorded on the balance sheet on the same
basis of the hedged assets or liabilities, and changes in value are recorded in each period in
the statement of operations. Derivative financial instruments that do not qualify for hedge
accounting are recorded in the balance sheet at their fair value and changes in the fair value
are recorded in each period in the statement of operations. At December 31, 2004 and 2003, the
Company had no derivative financial instruments.k.
    
    Pension plans and seniority premiums  Pension plans and seniority premiums to which
employees are entitled upon termination of employment after 15 years of service, are non
contributory and are recorded as costs of the year in which the respective services are
rendered, based on actuarial calculations using the projected unit credit method (See Note
12). F-12




---



##### 



Other compensation based on seniority to which employees are entitled in the event of dismissal
or death, in accordance with the Federal Labor Law, are charged to income in the year in which
they become payable.l.
    
    Debt issuance costs  Debt issuance costs, which are included in other assets, are
capitalized and restated by applying the change in the NCPI. Amortization is calculated as a
proportion between the period the debt is outstanding and the maturity period of the debt. In
2004, the unamortized balance was charged to income for the period, as a result of the
exchange of outstanding debt for restructured debt.m.
    
    Income tax and employee statutory profit sharing  Income tax is recorded by the
comprehensive method of assets and liabilities, which consists of recording deferred tax for
all temporary differences between the book and tax values of assets and liabilities (See Note
17). A valuation allowance is recorded for deferred tax assets when it is likely that they
will not be realized. Asset Taxes (AT) paid is charged in the statement of operation due to uncertainty of
its recoverability.Deferred employee statutory profit sharing (ESPS) is recorded only for temporary differences
between the net book and tax profit for the period applicable to PTU that can reasonably be
presumed to give rise to a future benefit or liability.n.
    
    Contingencies  Liabilities for contingencies are recognized when it is probable that a
liability has been incurred before the date of the balance sheet and that the amount can be
reasonably estimated.ñ.
    
    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 of fixed assets.o.
    
    Stockholders equity  Common stock, legal reserve and retained earnings represent the value
of those items in terms of purchasing power at the end of the latest period presented, and are
determined applying by factors derived from the NCPI to the historical values.Additional paid-in capital represents the excess of payments for shares subscribed over their par
value, and is restated applying NCPI factors.p.
    
    Loss from holding non monetary assets  loss from holding non monetary assets represents the
initial accrued result on monetary position and the result of holding non-monetary assets
pertaining to inventory and fixed assets, as well as the effect of the respective deferred
tax, stated in Mexican pesos of purchasing power at the end of the latest period presented. F-13




---



##### 



q.
    
    Comprehensive loss  Comprehensive loss represents the net loss for the period presented in
the consolidated statements of operations, plus the effects of holding non-monetary assets,
the profit (loss) from translation of foreign currency, and other items required by specific
accounting standards to be reflected in stockholders equity, but which do not represent
capital contributions, reductions or distributions, and is restated by applying NCPI factors.r.
    
    Net income (loss) per share  Net income (loss) per common share is calculated by dividing
the net income (loss) of majority stockholders for the period by the weighted average number
of shares outstanding during the period.s.
    
    Revenue recognition  Sales are recognized upon delivery of products and the receipt of
customer acceptance. Revenues are recognized only when the Company has transferred to the
buyer the significant risk and rewards of ownership of the goods, and when the amount of
revenue and the cost incurred or to be incurred in the transaction can be reliably measured.t.
    
    Segment information  The provisions contained in Statement B-5, Financial Information by
Segment are mandatory for public entities listed on the Mexican Stock Exchange (Bolsa
Mexicana de Valores). Statement B-5 requires that companies look to their internal
organizational structure and internal reporting system for purposes of identifying segments.
For all years presented the Company operates in three reporting segments (See Note 22).u.
    
    Exchange rate information (unaudited)   In 2004, the average exchange rate between Mexican
pesos and U.S. dollars was $11.3091, and the December 31, 2004 period end exchange rate
between Mexican pesos and U.S. dollars was $11.1495. NOTE 4  CASH AND CASH EQUIVALENTS: 2004
    
    
    2003Cash
    
    $
    302,364
    
    
    $
    311,973Cash equivalents
    
    
    532,568
    
    
    
    368,655$
    834,932
    
    
    $
    680,628
 F-14




---



##### 



NOTE 5  ACCOUNTS RECEIVABLE: 2004
    
    
    2003Trade accounts receivable
    
    $
    1,752,146
    
    
    $
    1,843,745Recoverable taxes
    
    
    143,214
    
    
    
    98,030Other
    
    
    79,149
    
    
    
    98,2011,974,509
    
    
    
    2,039,976Allowance for doubtful accounts
    
    
    (171,007
    )
    
    
    (152,399
    )$
    1,803,502
    
    
    $
    1,887,577
 NOTE 6  INVENTORIES: 2004
    
    
    2003Finished goods
    
    $
    184,437
    
    
    $
    219,267Production-in-process
    
    
    8,723
    
    
    
    11,251Raw materials
    
    
    332,888
    
    
    
    344,005Spare parts and materials
    
    
    267,565
    
    
    
    254,412Molds and dies
    
    
    94,704
    
    
    
    77,007Other
    
    
    26,084
    
    
    
    28,005914,401
    
    
    
    933,947Allowance for obsolete inventories
    
    
    (29,848
    )
    
    
    (29,815
    )884,553
    
    
    
    904,132Advances to suppliers
    
    
    74,586
    
    
    
    48,124Merchandise-in-transit
    
    
    119,115
    
    
    
    196,829$
    1,078,254
    
    
    $
    1,149,085
 NOTE 7  RESTRICTED CASH: Represents $165,678 (US$14 million) in 2003, which was provided from the proceeds received from
the sale of the warehouse described in Note 16 and the sale of the Companys equity interest in
Productora Nacional de Papel, S. A. de C. V. as described in Note 18. In September 2004, the
Company used this amount to prepay a loan from Bancomext, S.N.C. (Bancomext). F-15




---



##### 



NOTE 8  PROPERTY, PLANT AND EQUIPMENT: 2004
    
    
    2003Buildings
    
    $
    3,535,660
    
    
    $
    3,533,391Industrial machinery and equipment (*)
    
    
    17,930,767
    
    
    
    18,560,616Transportation, computer, office equipment and furniture
    
    
    1,269,734
    
    
    
    1,253,40922,736,161
    
    
    
    23,347,416Accumulated depreciation and amortization
    
    
    (12,485,831
    )
    
    
    (12,295,185
    )10,250,330
    
    
    
    11,052,231Land
    
    
    800,049
    
    
    
    804,246Construction-in-progress
    
    
    50,553
    
    
    
    49,318$
    11,100,932
    
    
    $
    11,905,795
 Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was $397,871, $392,066
and $471,148, respectively. 
 (*)
    
    For the year ended December 31, 2004, under the provisions of Statement C-15, the Company
recognized and impairment charge of $463,689, which was reflected in the consolidated statement
of operations as other expenses. The related deferred income tax effect was $139,107 and was
credited to income for the year.  The 2004 impairment reserve related to the following: Industrial machinery and equipment
    
    $
    18,394,456Impairment reserve
    
    
    463,689Depreciation
    
    
    10,291,025Industrial machinery and equipment, net of impairment and depreciation
    
    $
    7,639,742
 During 2003 and 2002, the Company reviewed the recoverable value of its long-lived assets in use,
based on future cash flows resulting from production and sale operations during the remaining
useful life of the fixed assets evaluated, which is from 20 to 35 years after 2003. The effect of
that evaluation resulted in an impairment provision of $636,139 and $1,624,566 in 2003 and 2002,
respectively, recorded in the consolidated statement of operations within other expenses. The
deferred income tax effect was a credit to income in the amounts of $203,564 and $528,317 in 2003
and 2002, respectively. As of December 31, 2004 and 2003, the Company had temporarily idle assets with a net carrying
amount of $10,972 and $97,814, respectively. F-16




---



##### 



At December 31, the Companys capitalized lease assets are as follows: 2004
    
    
    2003Industrial machinery and equipment
    
    $
    354,287
    
    
    $
    372,674Accumulated depreciation
    
    
    (57,844
    )
    
    
    (46,543
    )$
    296,443
    
    
    $
    326,131
 As a result of its financial restructuring which was finalized in February 2005, CODUSA and its
subsidiaries granted security interests over their principal fixed assets (See Note 10). In
addition, various loans are collateralized with the machinery and equipment. The carrying value of capitalized comprehensive financing costs at December 31, 2004 and 2003 was
$53,309 and $72,948, respectively. NOTE 9  OTHER ASSETS: Intangible asset
    
    
    Debtrelated to seniority
    
    
    issuance2004
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalCost:Balances as of January 1, 2004
    
    $
    106,302
    
    
    $
    634,007
    
    
    $
    174,076
    
    
    $
    914,385Net movement
    
    
    83,320
    
    
    
    (1,446
    )
    
    
    31,992
    
    
    
    123,866Balances as of December 31, 2004
    
    
    189,622
    
    
    
    632,561
    
    
    
    216,068
    
    
    
    1,038,251Accumulated amortization:Balances as of January 1, 2004
    
    
    
    
    
    
    309,799
    
    
    
    36,610
    
    
    
    346,409Amortization for the period
    
    
    
    
    
    
    322,762
    
    
    
    29,153
    
    
    
    351,915Balances as of December 31, 2004
    
    
    
    
    
    
    632,561
    
    
    
    65,763
    
    
    
    698,324Net balances as of December 31, 2004
    
    $
    189,622
    
    
    $
    
    
    
    $
    150,305
    
    
    $
    339,927
 F-17




---



##### 



Intangible asset
    
    
    Debtrelated to seniority
    
    
    issuance2003
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalCost:Balances as of January 1, 2003
    
    $
    70,923
    
    
    $
    648,663
    
    
    $
    178,988
    
    
    $
    898,574Net movement
    
    
    35,379
    
    
    
    (14,656
    )
    
    
    (4,912
    )
    
    
    15,811Balances as of December 31, 2003
    
    
    106,302
    
    
    
    634,007
    
    
    
    174,076
    
    
    
    914,385Accumulated amortization:Balances as of January 1, 2003
    
    
    
    
    
    
    222,337
    
    
    
    5,743
    
    
    
    228,080Amortization for the period
    
    
    
    
    
    
    87,462
    
    
    
    30,867
    
    
    
    118,329Balances as of December 31, 2003
    
    
    
    
    
    
    309,799
    
    
    
    36,610
    
    
    
    346,409Net balances as of December 31, 2003
    
    $
    106,302
    
    
    $
    324,208
    
    
    $
    137,466
    
    
    $
    567,976
 In 2003 and 2002, the amortization of debt issuance cost was $87,462 and $130,054,
respectively. In 2004, the Company wrote-off debt issuance costs in the amount of $322,762, due to
advanced maturity of the related bonds, and to the debt restructuring. NOTE 10  FINANCINGS:  a.
    
    Short-term and long-term debt not capitalized to equity as of December 31, is as follows: 2004
    
    
    2003Short-term debt
    
    $
    42,152
    
    
    $
    8,978,136Current portion of long-term debt
    
    
    135,994
    
    
    
    126,353Long-term debt
    
    
    6,951,969
    
    
    
    415,833$
    7,130,115
    
    
    $
    9,520,322
  b.
    
    Financial restructuring In November 2002, the Company defaulted on payments of principal and interest under its unsecured
indebtedness. In December 2002, the Company retained financial advisors to advice it in evaluating
debt-restructuring alternatives to implement a long-term solution to the Companys F-18




---



##### 



capital structure and debt service requirements. The Company also began discussions with its bank
creditors and certain holders of its debt securities. On April 30, 2004, the Company entered into a plan support agreement with certain bank creditors
and holders of its notes holding an aggregate of 55% of the outstanding principal amount of its
unsecured debt. Under the terms of the plan support agreement, the parties were obligated to
pursue and implement a financial restructuring along the lines contained in the agreement in
principle with these creditors, including by means of a cash tender offer and certain exchange
offers and, under certain circumstances, a prepackaged plan of reorganization under U.S. bankruptcy
law. The participating creditors agreed that they would tender their unsecured debt in the offers
and vote their unsecured debt in favor of the prepackaged plan of reorganization under U.S.
bankruptcy law. The plan support agreement contained certain obligations of the Company and the
participating creditors. These obligations were not met by the agreed upon dates and certain
participating creditors terminated the plan support agreement on May 17, 2004. On May 18, 2004, the Company filed a voluntary petition under Mexicos Business Reorganization Act
(Ley de Concurso Mercantile, or the LCM with the First Federal District Court in Durango, Mexico,
or the Mexican court. On May 20, 2004, the Companys foreign representative commenced a proceeding
under section 304 of the United States Bankruptcy Code with the United States Bankruptcy Court for
the Southern District of New York (the 304 Proceeding) on the Companys behalf. None of the
Companys subsidiaries filed for concurso mercantil or other bankruptcy protection. On May 25, 2004, following the Companys filing under the Business Reorganization Act (the
concurso proceeding), the New York Stock Exchange announced that the trading of the Companys
ADSs, 2006 notes and 2008 notes would be suspended immediately. On July 15, 2004, the Companys
ADSs, 2006 notes and 2008 notes were delisted from the New York Stock Exchange. On August 13, 2004, the Company reached an agreement in principle with creditors collectively
holding approximately 68% of its unsecured debt regarding the terms of a proposed plan of
reorganization and a proposed new plan support agreement. On August 25, 2004, the Mexican court declared the Company to be in commercial reorganization under
the LCM. On November 17, 2004, the Mexican court certified the list of recognized claims in the
Companys concursoproceeding. On December 23, 2004, the conciliator (conciliadora) appointed by the Mexican Federal Institute of
Commercial Reorganization Specialists (Instituto Federal de Especialistas de Concursos Mercantiles)
in the Companys concursoproceeding submitted its plan of reorganization to the holders of
recognized claims and the plan was executed by the Company and the holders of recognized claims
representing 65% of the total number of recognized claims. The plan of reorganization provided that, in exchange for their debt, the Companys unsecured
financial creditors would receive new debt equal to approximately 85% of the outstanding principal
amount of the Companys unsecured debt. In addition to the new debt, the plan of F-19




---



##### 



reorganization provided that the unsecured financial creditors would receive shares of the
Companys series B common stock, no par value, or Series B Shares, representing an aggregate of
approximately 17% of the Companys capital stock on a fully diluted basis. On January 11, 2005, the conciliator submitted the executed plan of reorganization to the Mexican
court, and on February 7, 2005, the Mexican court approved the plan of reorganization. On January 19, 2005, the U.S. bankruptcy court overseeing the Companys 304 Proceeding entered an
order permanently enjoining its creditors from taking action against the Company in respect of
their claims that were restructured in the concursoproceeding, as the well as recognizing and
giving effect to the Companys plan of reorganization and the order from the Mexican court
confirming the same. On February 23, 2005, the Companys plan of reorganization was consummated. As a result:  
    
    Bank creditors of the Company with claims against it in the aggregate amount of
$1,611,298 (US$136.6 million) received 2,392,957 of the Companys Series B Shares,
representing 2.16% of the Companys issued and outstanding capital stock, and the principal
amount of the debt outstanding with respect to these claims was amended and restated under
the Restructured Credit Agreement. Under the Restructured Credit Agreement, notes in an
aggregate principal amount of $1,294,579 (US$116.1 million) were issued to the holders of
these claims. These notes bear interest at a rate of LIBOR plus 2.75% per annum, payable
quarterly in arrears and the principal amount of these notes will be amortized quarterly
until the maturity of these notes on December 30, 2012.
    
    Unsecured creditors of the Company with claims against it in the aggregate amount of
$5,689,892 (US$510.3 million) related to the Companys 125/8% Senior
Notes due 2003, or 2003 notes, its 131/8% Senior Notes due 2006, or
2006 notes, its 131/2% Senior Notes due 2008, or 2008 notes, its 133/4% Senior Notes due 2009,
or 2009 notes, and the note issued under its Euro Commercial Paper Program, or ECP note,
received 16,412,961 of the Companys Series B Shares, representing 14.84% of its issued and
outstanding capital stock, and an aggregate principal amount of $4,836,492 (US$433.8
million) of its 2012 notes in respect to these claims. The 2012 notes bear interest at a
rate of 7.50% per annum until December 31, 2005, 8.50% per annum from January 1, 2006
through December 31, 2006, and 9.50% per annum thereafter, payable quarterly in arrears,
and mature on December 30, 2012. F-20




---



##### 



c.
    
    Total short-term and long-term debt by composition as of December 31, after reclassifications
described in Note 2a, is as follows: 2004
    
    
    2003Restructured debtSenior Notes (1)
    
    $
    4,789,107
    
    
    $
    5,973,279Bank loans (2)
    
    
    1,247,336
    
    
    
    1,555,751Letters of credit (2)
    
    
    47,243
    
    
    
    78,470Euro Commercial Paper (1)
    
    
    47,385
    
    
    
    59,102$
    6,131,071
    
    
    $
    7,666,602Non-restructured debtNotes payable
    
    
    
    
    
    
    568,538Financial lease agreements (3)
    
    
    118,664
    
    
    
    204,813Other long-term debt (4)
    
    
    880,380
    
    
    
    1,080,369$
    999,044
    
    
    $
    1,853,720Total debt not capitalized to equity
    
    $
    7,130,115
    
    
    $
    9,520,322Debt to be capitalized to equity (5)15% of principal to be capitalized (15%)
    
    $
    1,081,949
    
    
    
    Interest to be capitalized
    
    $
    2,077,021
    
    
    
    $
    3,158,970
    
    

    
    Total debt
    
    $
    10,289,085
    
    
    $
    9,520,322
 
 (1)
    
    Senior Notes and Euro Commercial Paper Senior Notes consist of four issues, maturing in 2003, 2006, 2008 and 2009, as further described below: 2003 Notes. At December 31, 2004, before recognizing the effects of the Companys financial
restructuring, the Company had outstanding $203,255 (US$18.2 million) aggregate principal amount of
its 2003 notes. The 2003 notes matured on August 1, 2003 and were not paid. In addition, the
Company did not make interest payments on its 2003 notes following November 29, 2002. At December
31, 2004, before recognizing the effects of its financial restructuring, the aggregate amount of
accrued and unpaid interest of the 2003 notes was $260,554 (US$23.4 million). As part of the
Companys financial restructuring, on February 23, 2005, principal of and accrued and unpaid
interest on its 2003 notes was converted into an aggregate principal amount of US$15.5 million of
the 2012 notes and 563,348 of the Series B Shares. 2006 Notes. At December 31, 2004, before recognizing the effects of the financial
restructuring, the Company had outstanding $3,364,284 (US$301.7 million) aggregate principal amount
of its 2006 notes. The Company did not make interest payments on its 2006 notes F-21




---



##### 



following November 29, 2002. At December 31, 2004, before recognizing the effects of its
financial restructuring, the aggregate amount of accrued and unpaid interest of the 2006 notes was
$4,371,505 (US$392.1 million). As part of the Companys financial restructuring, on February 23,
2005, the principal of and accrued and unpaid interest on its 2006 notes was converted into an
aggregate principal amount of US$256.5 million of its 2012 notes and 9,559,019 of its Series B
Shares. 2008 Notes. At December 31, 2004, before recognizing the effects of its financial
restructuring, the Company had outstanding $115,542 (US$10.4 million) aggregate principal amount of
the 2008 notes. The Company did not make interest payments on its 2008 notes following November
29, 2002. At December 31, 2004, before recognizing the effects of its financial restructuring, the
aggregate amount of accrued and unpaid interest of the 2008 notes was $151,218 (US$13.6 million).
As part of its financial restructuring, on February 23, 2005, the principal of and accrued and
unpaid interest on its 2008 notes was converted into an aggregate principal amount of US$8.8
million of its 2012 notes and 334,333 of its Series B Shares. 2009 Notes. At December 31, 2004, before recognizing the effects of its financial
restructuring, the Company had outstanding $1,951,163 (US$175 million) aggregate principal amount
of its 2009 notes. The Company did not make interest payments on the 2009 notes. At December 31,
2004, before recognizing the effects of its financial restructuring, the aggregate amount of
accrued and unpaid interest of the 2009 notes was $2,631,773 (US$236 million). As part of its
financial restructuring, on February 23, 2005, the principal of and accrued and unpaid interest on
its 2009 notes was converted into an aggregate principal amount of US$148.8 million of its 2012
notes and 5,899,859 of its Series B Shares. Euro Commercial Paper. At December 31, 2004, before recognizing the effects of the financial
restructuring, the Company had one series of notes outstanding under the Euro Commercial Paper
Program in an aggregate amount of $55,748 (US$5.0 million). As part of the financial
restructuring, on February 23, 2005, the principal of and accrued and unpaid interest on these
notes was converted into an aggregate principal amount of US$4.3 million of the 2012 notes and
56,402 of the Series B Shares. The Senior Notes and the Euro Commercial Paper were restructured in connection with the Concurso
Mercantil process and the aggregate principal amounts of these instruments were exchanged for Notes
due 2012 with an aggregate principal amount of $4,836,492 (US$433.8 million), which bear quarterly
interest at the rates of 7.50% in 2005, 8.50% in 2006 and 2007 and 9.50% in subsequent years. (2) Bank loans and letters of credit Banamex Loan. The Company borrowed an aggregate principal amount of $1,048,053 (US$94
million) from Banamex under a loan agreement. This loan was payable in 10 quarterly installments
beginning in June 2002 and bore interest at a rate of LIBOR + 2.8% payable quarterly. This loan
matured in September 2004 and was not paid. At December 31, 2004, before recognizing the effects of
its financial restructuring, the outstanding principal amount under this loan was $839,955 (US$75.3
million). The Company did not make principal or F-22




---



##### 



interest payments under this loan following November 29, 2002. At December 31, 2004, before
recognizing the effects of its financial restructuring, the aggregate amount of accrued and unpaid
interest under this loan was $201,757 (US$18.1 million). As part of its financial restructuring,
on February 23, 2005, the Company issued 318,455 of the Series B Shares to Banamex, and a note in
the aggregate principal amount of US$64 million was issued under the Restructured Credit Agreement
with respect to the remaining principal of and accrued and unpaid interest on this loan. Banamex Note. The Company borrowed an aggregate principal amount of $81,391 (US$7.3 million)
from Banamex under a promissory note. This promissory note bore interest at a rate of 5.2% per
annum payable semi-annually. This promissory note matured in December 2002 and was not paid. At
December 31, 2004, before recognizing the effects of its financial restructuring, the outstanding
principal amount under this promissory note was $56,862 (US$5.1 million). The Company did not make
principal or interest payments under this promissory note following November 29, 2002. At December
31, 2004, before recognizing the effects of its financial restructuring, the aggregate amount of
due and unpaid interest under this promissory note was $16,534 (US$1.5 million). As part of its
financial restructuring, on February 23, 2005, the Company issued 99,856 of the Series B Shares to
Banamex, and a note in the aggregate principal amount of US$4.3 million was issued under the
Restructured Credit Agreement with respect to the remaining principal of and accrued and unpaid
interest on this note. California Commerce Bank Loans. The Company borrowed an aggregate principal amount of
$297,469 (US$26.7 million) from California Commerce Bank under two loan agreements. The first
California Commerce Bank loan agreement in the principal amount of $130,226 (US$11.7 million) bore
interest at a rate of LIBOR +2.75%. The first California Commerce Bank loan agreement matured in
January 2003 and was not paid. The second California Commerce Bank loan agreement in the amount of
$167,243 (US$15 million) bore interest at a rate of LIBOR + 3.25%. The second California Commerce
Bank loan agreement matured in May 2004 and was not paid. The Company did not make principal or
interest payments under the California Commerce Bank loan agreements following November 29, 2002.
At December 31, 2004, before recognizing the effects of its financial restructuring, the aggregate
amount of due and unpaid principal under the California Commerce Bank loan agreements was $269,595
(US$24.2 million) and the aggregate amount of due and unpaid interest under the California Commerce
Bank loan agreements was $36,321 (US$3.3 million). As part of its financial restructuring, on
February 23, 2005, the Company issued 199,872 of the Series B Shares to California Commerce Bank,
and a note in the aggregate principal amount of US$20.6 million was issued under the Restructured
Credit Agreement with respect to the remaining principal of and accrued and unpaid interest on the
California Commerce Bank loan agreements. JPMorgan Chase Loan. The Company borrowed an aggregate principal amount of $557,475 (US$50
million) from JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) under a loan agreement. The
JPMorgan Chase loan agreement was payable in five semiannual installments beginning in December
2000 and bore interest at a rate of LIBOR + 1.5% payable quarterly. This loan matured in December
2002 and was not paid. The Company did not make principal or interest payments under this loan
following November 29, 2002. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of due and unpaid principal under this loan was $111,495 (US$10
million) and the aggregate amount of due and F-23




---



##### 



unpaid interest under this loan was $6,843 (US$0.6 million). As part of its financial
restructuring, on February 23, 2005, the Company issued 163,890 of the Series B Shares to creditors
under this loan agreement, and a note in the aggregate principal amount of US$8.5 million was
issued under the Restructured Credit Agreement with respect to the remaining principal of and
accrued and unpaid interest on this loan. Bank of America, N.A. Loan. The Companys former subsidiary, Durango Georgia Receivables
Company, borrowed an aggregate principal amount of $245,289 (US$22 million) from Bank of America,
N.A. under a loan agreement. This loan was payable in five monthly installments beginning in
August 2002, and bore interest at a rate of LIBOR + 3.0%. The Company guaranteed this loan.
Durango Georgia Receivables Company filed for protection from its creditors under Chapter 11 of the
U.S. bankruptcy code in November 2002. Bank of America, N.A. called the Companys guarantee in
February 2003. As a result, the obligations under this loan were recorded as indebtedness of the
Company in these financial statements. The Company did not make principal or interest payments
under this guarantee. At December 31, 2004, before recognizing the effects of its financial
restructuring, the aggregate amount of due and unpaid principal under this loan was $189,541
(US$17.0 million) and the aggregate amount of due and unpaid interest under this loan was $20,848
(US$1.9 million). As part of its financial restructuring, on February 23, 2005, the Company issued
292,019 of its Series B Shares to the creditor under this loan agreement, and a note in the
aggregate principal amount of US$14.5 million was issued under the Restructured Credit Agreement
with respect to the remaining principal of and accrued and unpaid interest on its guarantee
obligations. First JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to SunTrust Leasing Corporation in the aggregate principal amount of $29,164
(US$2.6 million) for the benefit of the Companys former subsidiary, Durango Georgia Paper Company.
This letter of credit was drawn on April 19, 2000. The Company 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 the Companys guarantee on January 15, 2003. As a result, the
reimbursement obligation under the letter of credit was recorded as indebtedness of the Company in
these financial statements. The Company did not make principal or interest payments under this
reimbursement obligation. Under the terms of the reimbursement agreement, past due obligations
under the reimbursement agreement bore interest at a rate of 7.25% per annum. At December 31,
2004, before recognizing the effects of its financial restructuring, the aggregate amount of due
and unpaid principal under this reimbursement obligation was $29,164 (US$2.6 million) and the
aggregate amount of due and unpaid interest under this reimbursement obligation was $3,774 (US$0.3
million). As part of its financial restructuring, on February 23, 2005, the Company issued 53,910
of the Series B Shares to JPMorgan Chase Bank, and a note in the aggregate principal amount of
US$2.2 million was issued under the Restructured Credit Agreement with respect to the remaining
principal of and accrued and unpaid interest on the Companys guarantee obligations. Second JPMorgan Letter of Credit. JPMorgan Chase Bank (f/k/a Chase Manhattan Bank) issued a
letter of credit to Pitney Bowes Credit Corporation in the aggregate principal amount of $34,563
(US$3.1 million) for the benefit of the Companys former subsidiary, Durango Georgia Paper Company.
This letter of credit was drawn on April 19, 2000. The Company guaranteed F-24




---



##### 



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 the Companys guarantee on January
15, 2003. As a result, the reimbursement obligation under this letter of credit was recorded as
indebtedness of the Company in these financial statements. Under the terms of the reimbursement
agreement, past due obligations under the reimbursement agreement bore interest at a rate of 7.25%
per annum. At December 31, 2004, before recognizing the effects of its financial restructuring,
the aggregate amount of due and unpaid principal under this reimbursement obligation was $26,419
(US$2.4 million) and the aggregate amount of due and unpaid interest under this reimbursement
obligation was $3,261 (US$0.3 million). As part of its financial restructuring, on February 23,
2005, the Company issued 46,001 of the Series B Shares to JPMorgan Chase Bank, and a note in the
aggregate principal amount of US$2.0 million was issued under the Restructured Credit Agreement
with respect to the remaining principal of and accrued and unpaid interest on the Companys
guarantee obligations. (3) Financial leasing Arrendadora Bank of America, N.A. Leases. The Company has entered into financial lease
agreements with Arrendadora Bank of America, N.A. for the acquisition of certain machinery. The
Company issued promissory notes in respect of the future minimum lease payments under these
financial lease agreements in an aggregate principal amount of $192,886 (US$17.3 million) with
maturities between February 2005 and August 2005. The promissory notes bear interest at rates
ranging from LIBOR +3.0% to LIBOR +3.5% payable quarterly and are secured by a pledge of the
leased machinery. The Company have sub-leased the machinery to certain of the Companys
subsidiaries. As of December 31, 2004, the aggregate principal amount outstanding under these
promissory notes was $42,152 (US$3.8 million). GE Capital Leasing Leases. The Companys subsidiary, Empaques de Cartón Titán, S. A. de C. V.
(Titán), has entered into financial lease agreements with GE Capital Leasing for the acquisition
of machinery. Titán issued two promissory notes in respect of the future minimum lease payments
under these financial lease agreements in an aggregate principal amount of $111,495 (US$10 million)
which are payable in 28 quarterly installments with the final payments due in October 2008 and
April 2009, respectively. The promissory notes bear interest at a rate of LIBOR +3.25%. The
promissory notes are secured by a pledge of the leased machinery and are guaranteed by CODUSA. As
of December 31, 2004, the aggregate principal amount outstanding under these promissory notes was
$76,512 (US$6.9 million). (4) Other long-term debt Bancomext Loans. The Companys subsidiary, Grupo Pipsamex, S. A. de C. V. (Grupo Pipsamex),
borrowed an aggregate principal amount of $891,960 (US$80 million) from Bancomext under a loan
agreement. In 2004, the Company defaulted under this loan agreement and negotiated the
restructuring of this loan agreement with Bancomext. This loan agreement was restructured on
September 29, 2004. In connection with the restructuring, the Company applied US$28.0 million of
the proceeds of the sale of its subsidiary, Productora Nacional de Papel, S. A. de C. V.
(Pronal), and Grupo Pipsamexs warehouse in Mexico City to the principal amount and accrued
interest under this loan agreement. The restructured loan is payable F-25




---



##### 



in 40 quarterly installments beginning in December 2004 and bears interest at a rate of LIBOR +
5.1535%, payable quarterly. This loan is secured by a first priority security interest in
substantially all of the assets of Grupo Pipsamex and certain of its subsidiaries and is guaranteed
by CODUSA. As of December 31, 2004, the aggregate principal amount outstanding under this loan
agreement was $627,473 (US$56.3 million). The Companys subsidiary, Fábrica Mexicana de Papel, S.A. de C.V., borrowed an aggregate principal
amount of $171,702 (US$15.4 million) from Bancomext under a loan agreement. In 2004, the Company
defaulted under this loan agreement and negotiated the restructuring of this loan agreement with
Bancomext. This loan agreement was restructured on September 29, 2004. In connection with the
restructuring, the Company applied US$12.0 million of the proceeds of the sale of its subsidiary,
Pronal, and Grupo Pipsamex warehouse in Mexico City to the principal amount and accrued interest
under this loan agreement. The restructured loan is payable in 40 quarterly installments beginning
in December 2004 and bears interest at a rate of LIBOR +5.153%, payable quarterly. This loan is
secured by a second priority security interest in substantially all of the assets of Fábrica
Mexicana de Papel, S.A. de C.V. and certain other subsidiaries of Grupo Pipsamex and is guaranteed
by CODUSA. As of December 31, 2004, the aggregate principal amount outstanding under this loan
agreement was $95,554 (US$8.6 million). Bank of Albuquerque Loan. The Companys subsidiary, Durango McKinley Paper Company, borrowed
an aggregate principal amount of $267,588 (US$24.0 million) from the Bank of Albuquerque under a
loan agreement. In addition, the Bank of Albuquerque has issued letter of credits in an aggregate
amount of $117,070 (US$10.5 million) under this loan agreement. This loan agreement was used to
refinance a credit facility that the Companys former subsidiary, Durango Paper Company, had with
the Bank of America, N.A. The principal on the term loan is payable in 24 quarterly installments
beginning August 2002 and bears interest at a rate of LIBOR + 2.75%. The obligations of Durango
McKinley Paper Company under the Bank of Albuquerque loan agreement are secured by the accounts,
inventory and equipment of Durango McKinleyPaper 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, 2004, the aggregate principal amount outstanding
under this loan agreement was $156,093 (US$14.0 million). Commerzbank Loan. The Companys subsidiary, Ponderosa Industrial de México, S. A. de C. V.
(Ponderosa), borrowed an aggregate principal amount of $161,530 (10.7 million) from AKA
Ausfuhrkredit-Gesellschaft m.b.H. or Commerzbank, under a loan agreement. This loan is payable in
15 semi-annual installments beginning in January 2003 and bears interest at a rate of EUROLIBOR +
1.15%. The obligations of Ponderosa under this loan agreement are secured by the certain equipment
of Ponderosa acquired with the proceeds of this loan. In addition, the obligations are guaranteed
by CODUSA. As of December 31, 2004, the aggregate principal amount outstanding under this loan was
$116,915 (7.9 million). NAFIN Loan. The Companys subsidiary, Compañía Papelera de Atenquique, S. A. de C. V.
(Atenquique), borrowed an aggregate principal amount of $8,920 (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%. F-26




---



##### 



This loan is secured by a first priority security interest in certain equipment and fixtures
of Atenquique. As of December 31, 2004, the aggregate principal amount outstanding under this loan
agreement was $1,260 (US$0.1 million). On May 13, 2005, the Company prepaid the balance of this
loan without penalty. (5) The reduction in the carrying value of debt the amounting to $1,081,949 (15% of principal
amount capitalized) plus accrued interest capitalized of $2,077,021 which combined totaled
$3,158,970; will be exchanged for an aggregate of 17% of the Companys capital stock. In connection with the restructuring process, the Company incurred legal, consulting, financial
advisory, and other expenses amounting to $144,624 in 2004 ($287,048 in 2003), which were recorded
within other expenses.  d.
    
    As of December 31, 2004, long-term debt maturities are as follows: Year ended December 31,2006
    
    $
    246,4472007
    
    
    284,0032008
    
    
    273,4112009
    
    
    239,1882010
    
    
    233,4252011 and thereafter
    
    
    5,675,495$
    6,951,969
  e.
    
    At December 31, 2004, the minimum rental commitments under capital leases are as follows: Total minimum lease obligations
    
    $
    120,863Unearned interest
    
    
    (2,199
    )Present value of lease obligations
    
    
    118,664Current portion of lease obligations
    
    
    62,039Long-term portion of lease obligations
    
    $
    56,625
 Capital lease obligations, which include a purchase option at the end of the lease term, are
payable as follows: F-27




---



##### 



Year ended December 31,2005
    
    $
    62,0392006
    
    
    17,6872007
    
    
    17,6872008
    
    
    17,6872009
    
    
    3,564$
    118,664
 NOTE 11  FINANCIAL INSTRUMENTS:  a.
    
    Financial instruments  The estimated fair value amounts of the Companys financial
instruments have been determined by the Company using available market information or other
appropriate valuation methodologies that require considerable judgment in developing and
interpreting the estimates of fair value.The carrying amount of the Companys cash equivalents, accounts receivable, accounts payable and
current notes payable approximate fair value because they have relatively short-term maturities
and bear interest at variable rates, as appropriate.The long term debt consists of debt instruments that bear interest at fixed or variable rates.As of December 31, 2004, the fair value of the Companys long-term debt was determined on the
basis of CODUSAs agreement of Concurso Mercantil which was then being negotiated and
formalized with CODUSAs unsecured creditors.b.
    
    Concentration of credit risk  The financial instruments that are subject to a concentration
of credit risk are principally cash and cash equivalents and trade accounts receivable. The
Company deposits and invests its excess cash in recognized financial institutions. The
concentration of the credit risk with respect to accounts receivable is limited due to the
large number of customers comprising the Companys customer base and their dispersion across
different locations in Mexico and the U.S. There were no customers to whom sales exceeded 10%
of consolidated net sales for any of the periods presented. NOTE 12  PENSION PLANS AND SENIORITY PREMIUMS AND POSTRETIREMENT OBLIGATIONS: Pension Plans and Seniority Premiums México  The Company maintains a pension plan for certain employees. In addition, in accordance
with the Mexican Labor Law, the Company provides seniority premium benefits to employees under
certain circumstances. These benefits consist of a lump sum payment of 12 days wages for each
year worked, calculated using the most recent salary, not to exceed twice the legal minimum wage
established by law. The pension plans and seniority premiums are unfunded. F-28




---



##### 



The present values of these obligations at December 31, are as follows: 2004
    
    
    2003Accumulated benefit obligation
    
    $
    204,458
    
    
    $
    209,819Projected benefit obligation
    
    $
    231,513
    
    
    $
    188,354Unrecognized items:Variances for assumptions and adjustments based on
experience
    
    
    5,846
    
    
    
    11,176Transition amount
    
    
    (124,773
    )
    
    
    (96,013
    )Net projected liability
    
    
    112,586
    
    
    
    103,517Additional minimum liability
    
    
    91,872
    
    
    
    106,302$
    204,458
    
    
    $
    209,819Intangible asset
    
    $
    91,872
    
    
    $
    106,302
 The real rates (net of inflation) used in the actuarial calculations for the years ended December
31, were as follows: 2004
    
    
    2003
    
    
    2002Discount rate
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %Salary increases
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
 The amortization periods for the unamortized items are as follows: Remaining Years2004
    
    
    2003Transition asset
    
    
    17
    
    
    
    18Variances in assumptions and adjustments based on experience
    
    
    17
    
    
    
    18
 In connection with the reorganization of the Companys operations, certain administrative and
operating personnel were terminated during 2003 and as a result, payments incurred totaling
$62,338, were recognized and included within other expenses. United States of America -The subsidiaries in the United States of America have established the
following defined contribution plans: a 401(k) retirement savings plan, health insurance plan,
disability plan, and life insurance plan, among others. For the years ended December 31, 2004 and
2003, total expenses related to these plans were $28,311 and $35,341, respectively. F-29




---



##### 



As of December 31, 2004 and 2003, the Company did not have any defined benefits plans; therefore,
during 2003 the additional liability related to seniority premiums, which was presented separately
at stockholders equity, was transferred to retained earnings in the amount of $154,051. Postretirement obligations Since 2004, the Company started granting to its employees, postretirement benefits. Therefore, the
Company recognizes since 2004, those labor liabilities for postretirement obligations. The present value of these obligations at December 31, 2004 is as follows: Accumulated postretirement benefit obligation
    
    $
    101,074Postretirement other benefit obligation
    
    $
    100,672Unrecognized prior service cost to be amortized in 17 years
    
    
    (102,832
    )Net projected liability
    
    
    (2,160
    )Additional minimum liability
    
    
    103,234$
    101,074Intangible asset
    
    $
    97,750Other comprehensive income
    
    $
    5,473
 Total labor obligations presented in balance sheet are as follows: 2004
    
    
    2003Seniority premiums and pensions
    
    $
    204,458
    
    
    $
    209,819Postretirement obligations
    
    
    101,074
    
    
    
    $
    305,532
    
    
    $
    209,819
 Total intangible asset  labor obligations are as follow: 2004
    
    
    2003Seniority premiums and pensions
    
    $
    91,872
    
    
    $
    106,302Postretirement obligations
    
    
    97,750
    
    
    
    $
    189,622
    
    
    $
    106,302
 F-30




---



##### 



Net period cost for the years ended December 31, is as follows: 2004
    
    
    2003Service cost
    
    $
    7,172
    
    
    $
    5,768Amortization of transition asset, variances for
assumptions and adjustments based on experience
    
    
    16,515
    
    
    
    8,854Financial cost
    
    
    14,250
    
    
    
    9,392$
    37,937
    
    
    $
    24,014
 NOTE 13  STOCKHOLDERS EQUITY:  a.
    
    Common shares at par value as of December 31 are comprised as follows: 2004InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Series A
    
    
    46,613,171
    
    
    $
    699,761
    
    
    $
    1,832,187
    
    
    $
    2,531,948Variable capital:Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,777,639
    
    
    
    2,456,512Total shares
    
    
    91,835,193
    
    
    $
    1,378,634
    
    
    $
    3,609,826
    
    
    $
    4,988,460
 2003InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Series A
    
    
    46,610,100
    
    
    $
    699,714
    
    
    $
    1,832,187
    
    
    $
    2,531,901Variable capital:Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,777,639
    
    
    
    2,456,512Total shares
    
    
    91,832,122
    
    
    $
    1,378,587
    
    
    $
    3,609,826
    
    
    $
    4,988,413
 F-31




---



##### 



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, Board of Directors approved the conversion of 2,240,000 treasury shares;
consequently, variable capital was reduced by $121,679 ($33,627 at par value). On April 30,
2004, Board of Directors cancelled the conversion of the 2,240,000 treasury shares and
increased the fixed share capital by $282,360 and authorized the issuance of 18,808,989
treasury shares.c.
    
    On May 17, 2004, Board of Directors approved the contribution of $47 to its fixed share
capital and the sale of 3,071 treasury shares.d.
    
    As of December 31, 2004, the Company had unsubscribed fixed share capital of $282,313
represented by 18,805,918 treasury shares.e.
    
    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, 2004 and 2003, the legal
reserve, in historical nominal pesos, was $251,267.f.
    
    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 2004, the rate was
33% (34% in 2003) and will be reduced by one percentage point each year until reaching 28% in
2007. Any tax paid on such distribution, may be credited against pre-paid taxes and the
income tax payable of the year in which the tax on the dividend is paid and the two fiscal
years following such payment.g.
    
    The balances of the tax account related to stockholders equity as of December 31, are as
follows: 2004
    
    
    2003Contributed capital account
    
    $
    3,369,435
    
    
    $
    3,369,435Consolidated after tax profits account
    
    
    1,893,841
    
    
    
    1,893,841Consolidated reinvested after tax profits account
    
    
    917,014
    
    
    
    917,014$
    6,180,290
    
    
    $
    6,180,290
 F-32




---



##### 



NOTE 14  FOREIGN CURRENCY TRANSACTIONS AND BALANCES:  a.
    
    At December 31, the foreign currency monetary position is as follows: 2004
    
    
    2003Thousands of US dollars:Monetary assets
    
    
    55,092
    
    
    
    39,219Monetary liabilities
    
    
    (960,713
    )
    
    
    (929,657
    )Monetary (liability) position, net
    
    
    (905,621
    )
    
    
    (890,438
    )Equivalent in Mexican pesos
    
    ($
    10,097,221
    )
    
    ($
    10,006,030
    )Thousands of Euros:Monetary (liability) position, net
    
    
    (10,251
    )
    
    
    (10,346
    )Equivalent in Mexican pesos
    
    ($
    155,439
    )
    
    ($
    146,282
    )
  b.
    
    Non-monetary assets of foreign origin at December 31, 2004 are as follows: Balance inforeign
    
    Equivalentcurrency
    
    in MexicanCurrency
    
    (thousands)
    
    pesosInventories
    
    US dollar
    
    
    19,556
    
    
    $
    218,043Industrial machinery and
equipment:United States of America
    
    US dollar
    
    
    536,820
    
    
    
    5,985,273Brazil
    
    Real
    
    
    183,446
    
    
    
    770,068Japan
    
    Yen
    
    
    4,564,261
    
    
    
    497,048Germany
    
    Euro
    
    
    32,122
    
    
    
    487,071Canada
    
    Canadian dollar
    
    
    12,343
    
    
    
    114,728Other
    
    
    
    
    55,719
    
    
    
    642,322
 F-33




---



##### 



c.
    
    The condensed financial information of the principal foreign countries, as of December 31
before intercompany eliminations, is as follows: (In thousands ofUS dollars)2004
    
    
    2003
    
    
    2002United States of AmericaNet sales
    
    
    212,347
    
    
    
    146,646
    
    
    
    291,700Income from operations
    
    
    3,352
    
    
    
    4,471
    
    
    
    (17,570
    )Net (loss)
    
    
    (1,867
    )
    
    
    (54,559
    )
    
    
    (96,610
    )Current assets
    
    
    206,049
    
    
    
    30,216
    
    
    
    45,203Total assets
    
    
    278,272
    
    
    
    115,022
    
    
    
    132,544Current liabilities
    
    
    71,118
    
    
    
    18,960
    
    
    
    33,522Total liabilities
    
    
    92,265
    
    
    
    48,204
    
    
    
    65,183
  d.
    
    Transactions denominated in foreign currency were as follows: (In thousands ofUS dollars)2004
    
    
    2003
    
    
    2002Export sales
    
    
    205,617
    
    
    
    166,230
    
    
    
    302,174Interest expense
    
    
    (90,306
    )
    
    
    (96,455
    )
    
    
    (81,441
    )Interest income
    
    
    68
    
    
    
    31
    
    
    
    613Import purchases
    
    
    (238,801
    )
    
    
    (167,303
    )
    
    
    (337,821
    )Acquisition of machinery and equipment
    
    
    (555
    )
    
    
    (35,486
    )
    
    
    (20,978
    )
  e.
    
    The exchange rates in effect at the dates of the consolidated balance sheets and issuance of
the consolidated financial statements were as follows: December 31April 14,2004
    
    
    2003
    
    
    2005US dollar
    
    $
    11.1495
    
    
    $
    11.2372
    
    
    $
    11.0615Euros
    
    
    15.1633
    
    
    
    14.1390
    
    
    
    14.0708
 F-34




---



##### 



NOTE 15  TRANSACTIONS AND BALANCES WITH RELATED PARTIES:  a.
    
    Transactions with related parties, for the years ended December 31, carried out in the
ordinary course of business, were as follows: 2004
    
    
    2003
    
    
    2002Interest income
    
    $
    13,509
    
    
    $
    26,378
    
    
    $
    22,042Sale of paper
    
    
    4,895
    
    
    
    12,761
    
    
    
    Sale of industrial machinery and equipment
and other equipment
    
    
    
    
    
    
    17,034
    
    
    
    Freight expenses
    
    
    
    
    
    
    44,517
    
    
    
    Air transportation services
    
    
    35,053
    
    
    
    
    
    
    
    5,592Other (expenses) income
    
    
    (979
    )
    
    
    3,359
    
    
    
    
  b.
    
    Accounts receivable from related parties as of December 31, are as follows: 2004
    
    
    2003Short-term receivable -Administradora Corporativa y Mercantil, S.A. de C.V. (1 and 4)
    
    $
    196,391
    
    
    $
    184,416Durango
Georgia Receivables Company (2 and 4)
    
    
    204,966
    
    
    
    204,966Durango Paper Company (2 and 4)
    
    
    61,609
    
    
    
    61,609Líneas Aéreas Ejecutivas de Durango, S. A. de C. V.(3)
    
    
    1,095
    
    
    
    14,718Other
    
    
    
    
    
    
    306464,061
    
    
    
    466,015Allowance for doubtful accounts
    
    
    (450,991
    )
    
    
    (450,991
    )$
    13,070
    
    
    $
    15,024
 
 (1)
    
    Administradora Corporativa y Mercantil, S.A. de C.V (ACM)  From time to time, ACM, a
company owned and controlled by the Rincón family, the majority Companys shareholders,
borrows funds from the Company to fund principal and interest payments on its indebtedness.
The outstanding balance on these loans was $12.0 million at December 31, 2004. These loans
bear interest at a rate of 5% per annum and mature on May 17, 2006. In 2004, the Company
accrued interest income in an aggregate amount of $9.4 million on these loans.(2)
    
    Durango Paper Company  On October 7, 2002, the Company sold its subsidiary, Durango Paper
Company, and certain promissory notes to Operadora Omega Internacional, S.A. de C.V., or
Operadora Omega, whose capital stock was owned by members of the Rincón family. The sale was
made for an aggregate amount of US$100 thousand. F-35




---



##### 



Prior to this sale, the Company had guaranteed certain obligations of Durango Paper Companys
subsidiaries, specifically the Bank of America, N.A. loan agreement, the J.P. Morgan letters
of credit, which in the aggregate, totaled a principal amount of US$25.2 million ($281.0
million). In 2003, these creditors called these guarantees. As a result, the Company
recorded $275.8 million as due from related parties in 2003 and recorded an allowance for
doubtful accounts in the full amount of this obligation.(3)
    
    Líneas Aéreas Ejecutivas de Durango, S.A. de C.V.  The Company obtains flight services
from Líneas Aéreas, a company owned and controlled by the Rincón family. Líneas Aéreas owns
two business jets and provides transportation services to the Companys subsidiaries and
third parties. For the year ended December 31, 2004, the Company purchased services from
Líneas Aéreas for an aggregate amount of $35.1 million.In 2003, Líneas Aéreas borrowed $14.7 million from the Company. This loan bears interest at a
rate of 15% per annum and matures on December 31, 2006. As of December 31, 2004, the
outstanding balance of this loan was $1.1 million. In 2004, Líneas Aéreas paid the Company
interest.in.an.aggregate.amount of$$4.1 million.(4)
    
    During 2003, the Company recorded an allowance for doubtful accounts in connection with the
account receivable from ACM, Durango Georgia Receivables Company and Durango Paper Company. Since the Companys controlling shareholders own ACM, the
$184,416 charge was recorded in retained earnings. Transactions with Directors and their Affiliates  The Company sells newsprint to El Universal, a
daily newspaper. Juan Francisco Ealy Ortiz, one of the Companys directors, is an executive
officer of El Universal. During the year ended December 31, 2004, the Companys net sales to El
Universal were approximately $144.1 million (US$13.0 million). F-36




---



##### 



NOTE 16  OTHER
EXPENSES, net: 2004
    
    
    2003
    
    
    2002Loss on sale of property, plant and equipment (1)
    
    ($
    22,108
    )
    
    ($
    210,027
    )
    
    ($
    31,073
    )Severance payments due to reorganization
    
    
    
    
    
    
    (62,338
    )
    
    
    Debt restructuring expenses
    
    
    (144,624
    )
    
    
    (287,048
    )
    
    
    Write off of debt issuance costs
    
    
    (322,762
    )
    
    
    

    
    
    
    Reserve for fixed assets value
    
    
    
    
    
    
    (636,139
    )
    
    
    (1,624,566
    )Impairment of long-lived assets
    
    
    (463,689
    )
    
    
    
    
    
    
    Loss from operations of DPC (3)
    
    
    
    
    
    
    (331,444
    )
    
    
    (1,587,373
    )Gain on repurchase of debt (2)
    
    
    620,779
    
    
    
    
    
    
    
    Other expenses, net
    
    
    (71,767
    )
    
    
    (61,273
    )
    
    
    (19,861
    )($
    404,171
    )
    
    ($
    1,588,269
    )
    
    ($
    3,262,873
    )
 
 (1)
    
    On November 25, 2003, the Company sold property for $135,900 (US$11.5 million). As part of
the sale, the Company reserved the right to use approximately a third of the property for a
period of five years at no cost. This sale resulted in a loss of $203,954.(2)
    
    On August 5, 2004, HG Estate LLC and St.
Marys Railroad Corporation sold certain notes in an
aggregate principal amount of US$48.1 million ($536.3 million) issued by Durango Paper Company
in favor of HG Estate LLC and St. Marys Railroad Corporation, to the indirect partially-owned
subsidiary Compañía Norteamericana de Inversiones en Celulosa y Papel, S.A. de C.V., for
US$7.5 million ($ 86 million) which the parties agreed was the fair market value of these
notes. The Company recorded a gain of $620,779 as a result of the
purchase of these notes.(3)
    
    In 2003, this amount includes $275,792 of expenditures for certain guarantees granted by the
Company on a bank loan and some letters of credit issued by DPC, which were called by the
creditors (see Note 1.b). NOTE 17  INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEES STATUTORY PROFIT SHARING (ESPS): In accordance with Mexican tax laws, the Company is subject to income tax (IT) and asset tax
(AT). The difference between taxable income for income tax and pre-tax income for accounting
purposes is due principally to the differences in inflation accounting for book and income tax
purposes, foreign currency translation effects, differences between book and tax depreciation and
amortizations, non deductible or taxable items and temporary differences for certain items that are
reported in different periods for financial reporting and income tax purposes. F-37




---



##### 



As a result of the amendments to the Income Tax (IT) Law in effect as of November 13, 2004, the IT
rate will be gradually reduced to 30%, 29% and 28% in 2005, 2006 and 2007, respectively.
Therefore, the effect of those statutory income tax rate reductions were considered in valuing
deferred income taxes with a resulting decrease in the income tax liability of $22,569 thus
reducting net loss by the same amount. AT is calculated by applying the 1.8% rate to the net average of the majority of inflation restated
assets and certain liabilities, and is payable only to the extent that it exceeds IT payable for
the same period. If in any year AT exceeds IT payable, the AT payment for such excess may be
reduced by the amount by which IT exceeded AT in the three preceding years and any required payment
is carried forward and applied against the excess of IT over AT over the following ten years. The Company incurs consolidated IT and AT payments with its Mexican subsidiaries in 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 IT and AT payments of both CODUSA and its subsidiaries are made as
if the Company had not opted for tax consolidation.  a.
    
    IT (provision) benefit consists of the following: 2004
    
    
    2003
    
    
    2002as
restatedCurrent
    
    ($
    22,038
    )
    
    ($
    161,336
    )
    
    ($
    191,734
    )Deferred
    
    
    514,481
    
    
    
    76,103
    
    
    
    828,014Benefit from tax consolidation
    
    
    8,646
    
    
    
    85,917
    
    
    
    70,878$
    501,089
    
    
    $
    684
    
    
    $
    707,158
 F-38




---



##### 



b.
    
    The reconciliation of the statutory and effective IT rates expressed as a percentage of
income (loss) from continuing operations before IT and ESPS for the years ended December 31,
2004, 2003 and 2002 is: 2004
    
    
    2003
    
    
    2002as
restatedStatutory IT rate
    
    
    33
    %
    
    
    34
    %
    
    
    35
    %Plus (less) the effect of:Non-deductible expenses
    
    
    (5.43
    %)
    
    
    (1.30
    %)
    
    
    (0.24
    %)Other
    
    
    10.23
    %
    
    
    (14.59
    %)
    
    
    (0.75
    %)Effects of inflation
    
    
    7.05
    %
    
    
    0.93
    %
    
    
    (0.61
    %)Effect of the rate reduction on deferred IT
    
    
    16.59
    %
    
    
    0.49
    %
    
    
    4.70
    %Change in valuation allowance of recoverable
deferred IT asset and AT
    
    
    33.01
    %
    
    
    (19.51
    %)
    
    
    (22.40
    %)Effective IT rate
    
    
    94.45
    %
    
    
    0.02
    %
    
    
    15.70
    %
  c.
    
    At December 31, 2004 and 2003 the main components of the net deferred IT liability balance are: 2004
    
    

2003
(1)as
restatedDeferred IT liability (asset):Property, plant and equipment
    
    $
    2,543,315
    
    
    $
    3,035,370Inventories
    
    
    34,678
    
    
    
    (50,360
    )Allowance for doubtful accounts
    
    
    (63,486
    )
    
    
    (48,896
    )Accrued expenses
    
    
    (91,660
    )
    
    
    (65,292
    )Other assets
    
    
    43,086
    
    
    
    41,656Other, net
    
    
    (44,373
    )
    
    
    (9,038
    )Deferred IT from temporary differences
    
    
    2,421,560
    
    
    
    2,903,440Tax loss carryforwards
    
    
    (1,258,738
    )
    
    
    (1,694,754
    )Recoverable
AT carryforwards
    
    
    (329,647
    )
    
    
    (332,767
    )833,175
    
    
    
    875,919Valuation allowance
    
    
    608,617
    
    
    
    1,139,390Net long-term deferred IT liability
    
    $
    1,441,792
    
    
    $
    2,015,309
  (1)
    
    Certain reclassifications amongst line items have been made
which did not impact the total net deferred income tax liability.  d.
    
    Due to the uncertainty of the recovery and use of recoverable AT and unamortized tax loss
carryforwards the Company established a valuation allowance for those
amounts it does not expect to recover. F-39




---



##### 



e.
    
    At December 31, 2004 and 2003, the Company has taxable temporary differences related to
deferred ESPS, mainly inventories and property, plant and equipment, for which the deferred
ESPS liabilities were not recognized since the Company believes that they will not materialize
due to the continuity of its operations (i.e will be replaced in the future with similar
temporary differences).  f.
    
    Consolidated unamortized tax loss carryforwards and AT
recoverable of Mexican companies of the group for which the deferred IT
asset and prepaid IT, respectively, have been recognized may be recoverable subject to certain
conditions. Inflation restated amount. December 31, 2004 and their respective expiration dates
are as follows: Year of
    
    Tax loss
    
    
    RecoverableExpiration
    
    carryforwards
    
    
    AT2005
    
    $
    232,854
    
    
    $
    13,7532006
    
    
    158,143
    
    
    
    27,6382007
    
    
    104,953
    
    
    
    27,4462008
    
    
    154,965
    
    
    
    26,6212009
    
    
    101,779
    
    
    
    20,7952010
    
    
    118,070
    
    
    
    25,0942011
    
    
    130,625
    
    
    
    23,3632012
    
    
    1,524,155
    
    
    
    60,5132013
    
    
    1,459,847
    
    
    
    56,4202014
    
    
    423,966
    
    
    
    5,568$
    4,409,357
    
    
    $
    287,211
  g.
    
    For the years ended December 31, 2004, 2003 and 2002, the change in gain (loss) from holding
non monetary assets includes the effect of the deferred income tax of
($78,757), $211,095 and
$345,767, respectively. NOTE 18  DISCONTINUED OPERATIONS: As a result of the Companys financial and operating restructuring, in 2003, the Board of Directors
authorized the discontinuation and/or sale of certain subsidiaries or significant assets. The
related operating results have been presented as discontinued operations for the years ended on
December 31, 2004, 2003 and 2002. Discontinued operations are as follows:  a.
    
    On February 27, 2003, the Company sold the assets of its molded pulp division for
approximately $629,800 (US$53.7 million), resulting in a gain of $352,354, which is included
in the net loss of discontinued operations in the accompanying statements of operations for
the year ended December 31, 2003. Additionally, according to the purchase agreement, the F-40




---



##### 



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 $342,800 (US$28.0 million), which gave rise to a $470,689 loss; this amount 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. Based on the negotiations
with the potential buyer, the Company reduced the book value of the net assets to be sold by
$369,523, which is included in the net loss of discontinued operations in the accompanying
consolidated statement of operations for the year ended December 31, 2003. However the letter
of intent expired on October 25, 2004 with no agreement. In 2004, the Companys Board of
Directors decided to continue negotiations with interested potential
buyers of this plant. The
balances for the years ended December 31, 2004 and 2003 and operations as of December 31,
2004, 2003 and 2002 are as follows: F-41




---



##### 



2004
    
    
    2003Cash and cash equivalents
    
    $
    7,329
    
    
    $
    3,453Trade accounts receivable  Net
    
    
    62,770
    
    
    
    59,774Inventories  Net
    
    
    33,595
    
    
    
    25,030Prepaid expenses
    
    
    799
    
    
    
    302Total current assets
    
    
    104,493
    
    
    
    88,559Property, plant and equipment  Net
    
    
    249,286
    
    
    
    265,959Other assets  Net
    
    
    10
    
    
    
    10Total long-term assets
    
    
    249,296
    
    
    
    265,969Total assets
    
    $
    353,789
    
    
    $
    354,528Current portion of long-term debt
    
    $
    21,326
    
    
    $
    31,689Trade accounts payable
    
    
    31,644
    
    
    
    41,237Accrued expenses and taxes
    
    
    73,942
    
    
    
    16,145Total current liabilities
    
    
    126,912
    
    
    
    89,071Long-term debt
    
    
    95,968
    
    
    
    117,012Deferred income taxes
    
    
    48,249
    
    
    
    82,361Pension plans and seniority premiums
    
    
    1,124
    
    
    
    747Total long-term liabilities
    
    
    145,341
    
    
    
    200,120Total liabilities
    
    $
    272,253
    
    
    $
    289,191Net assets of discontinued operations
    
    $
    81,536
    
    
    $
    65,337
 F-42




---



##### 



d.
    
    The statements of operations reflect the effects of discontinued operations, which are
comprised as follows: 2004
    
    
    2003
    
    
    2002Net sales
    
    $
    335,089
    
    
    $
    728,674
    
    
    $
    891,023Cost of sales
    
    
    280,641
    
    
    
    739,647
    
    
    
    644,534Gross profit (loss)
    
    
    54,448
    
    
    
    (10,973
    )
    
    
    246,489Operating expenses  Net
    
    
    30,781
    
    
    
    43,975
    
    
    
    75,975Income (loss) from operations
    
    
    23,667
    
    
    
    (54,948
    )
    
    
    170,514Net comprehensive financing income (cost)
    
    
    44,116
    
    
    
    (142,303
    )
    
    
    (167,562
    )Other income (expenses)  Net
    
    
    308
    
    
    
    (26,421
    )
    
    
    91,301Impairment of long-lived assets
    
    
    
    
    
    
    (369,523
    )
    
    
    (106,201
    )Income (loss) from discontinued operations
    
    
    68,091
    
    
    
    (593,195
    )
    
    
    (11,948
    )Revenue from sales of discontinued operations
    
    
    
    
    
    
    972,608
    
    
    
    Cost of sales of assets of discontinued operations
    
    
    
    
    
    
    1,090,943
    
    
    
    Loss on sales of discontinued operations
    
    
    
    
    
    
    (118,335
    )
    
    
    IT and ESPS
    
    
    34,044
    
    
    
    133,790
    
    
    
    (96,254
    )Net income (loss) from discontinued operations
    
    $
    102,135
    
    
    $
    (577,740
    )
    
    $
    (108,202
    )Depreciation and amortization
    
    $
    15,227
    
    
    $
    39,630
    
    
    $
    46,305
 NOTE 19  COMMITMENTS:  a.
    
    Some of the Mexican subsidiaries lease certain equipment under non-cancelable operating
leases. Rental expenses totaled $49,963, $53,168 and $62,818 for the years ended December 31,
2004, 2003 and 2002, respectively. As of December 31, 2004, estimated future minimum lease
payments were as follows: Year
ended December 312005
    
    $
    26,7892006
    
    
    19,9472007
    
    
    18,9472008
    
    
    16,9472009 and thereafter
    
    
    52,108$
    134,738
 F-43




---



##### 



b.
    
    McKinley Paper Company leases certain equipment under non-cancelable operating leases. Rental
expenses under these leases were $3,707 and $4,737 for the years ended December 31, 2004 and
2003, respectively. As of December 31, 2004, there are no significant future minimum lease
payments. NOTE 20  CONTINGENCIES:  a.
    
    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 $165,296 for alleged differences
in the payments of rights for extraction and use of national waters in 2001 and 2000. The
Company filed an appeal with the Federal Tax and Administrative Court and is currently
awaiting the courts ruling. The Companys management believes that there are insufficient
grounds for the legal suit and that the court will rule in its favor.b.
    
    Similarly, subsequent to the sale of Productora Nacional de Papel, S. A. de C. V., the
Mexican National Water Commission billed the Company $1,932 in taxes with respect to the
fiscal years ended 1998 and 1999 for alleged differences in the payment of rights by the use
or advantage of goods of the public domain of the Mexican Republic, such as receiving residual
water unloadings. The Company filed an appeal with the Federal Tax and Administrative Court
and is currently awaiting the acceptance of this appeal.c.
    
    As a result of operations with related foreign entities, tax differences could arise if the
tax authorities, upon review, consider that the transfer prices and amounts used by the
Company are not similar to those which would have been used with or between independent
parties in comparable transactions.d.
    
    The Company has filed a request for an injunction against the Mexican tax authorities
claiming the unconstitutionality of certain changes in the federal tax law as approved in the
tax amendments which went into effect on November 13, 2004, specifically, regarding the new
requirement to deduct cost of sales rather than purchases as had been allowed previously.
Although the Companys management and its legal advisors believe favorable rulings would be
issued to the Company, the related impact has not been quantified.e.
    
    The Company would be obligated to pay severance payments to its employees in case of
dismissal under certain circumstances under the Ley Federal del Trabajo (Federal Labor Law).
As of December 31, 2004, there are no obligations for such severance payments.f.
    
    The Companys Mexican operations are subject to federal, state and local laws and
regulations, including the Mexican General Law of Ecological Stabilization and Environment
Protection (Ley General del Equilibrio Ecológico y de Protección al Ambiente) and the rules
and regulations published under this law. Companies engaged in industrial activities are
subject to the regulatory jurisdiction of the Mexican Ministry of the Environment and Natural
Resources. F-44




---



##### 



In 1988, the Company agreed with Mexican environmental regulatory authorities on a compliance
plan that the Company proceeded to implement. The Companys paper mills are in compliance with
general standards promulgated by the Mexican regulatory authorities. In 1995, the Company
purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint venture of
industrial water users in Monterrey, Nuevo León. The venture paper mills in Mexico are subject
to periodic environmental audits by the Mexican Ministry of the Environmental and Natural
Resources. The Company has frequently been recognized for its environmental record and its role
in implementing modern forest management techniques. However, there can be no assurance that
relevant Mexican authorities will continue to find the Companys environmental procedures
adequate, or that more stringent environmental laws will not be enacted by Mexico in the future.
Were enforcements of existing laws to increase, or new environmental laws to be enacted, the
Company could incur material compliance costs.The Companys U.S. operations are subject to federal, state and local provisions regulating the
discharge of materials into the environment and otherwise related to the protection of the
environment. Compliance with these provisions, and primarily the Federal Clean Air Act, Clean
Water Act, Comprehensive Environment Response, Compensation and Liability Act of 1980, as amended
by the Superfund Amendments and Reauthorization Act of 1986, or CERCLA, and Resources
Conservation and Recovery Act, or RCRA, has required the Company to invest substantial funds to

modify facilities to assure compliance with applicable environmental regulations.The Company is committed to protecting the health and welfare of the Companys employees, the
public, and the environment and the Company 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, the Company intends to use modern
technology for air and water emissions. These forward-looking programs will minimize the impact
that changing regulations have on capital expenditures for environmental compliance.g.
    
    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. NOTE 21  SUBSEQUENT EVENTS:  a.
    
    As discussed in Note 10c, on February 8, 2005, the Federal District Court of Durango, Mexico,
approved a financial restructuring plan through Concurso Mercantil process proposed by the
Company and supported by a majority of its unsecured creditors. Therefore, at December 31,
2004, the Company classified the maturities of its unsecured bank debt and debenture liability
as short-term and long-term in accordance with the terms of the restructuring agreement. F-45




---



##### 



On February 23, 2005, the financial restructuring agreements were concluded and executed by the
Company and its unsecured creditors.Additionally, the restructuring agreements established the payment of 15% of the restructured debt
through the issuance of 18,805,918 common nominative Series B shares without par value of CODUSA,
which were issued on February 28, 2005 and resulted in an increase in common stock of $3,158,970
(US$283.3 million). For disclosure purposes, set forth below are the consolidated condensed
balance sheet showing the proforma effect of this capitalization in the respective captions: (Unaudited)Actual
    
    
    Pro forma2004
    
    
    2004Current assets
    
    $
    3,840,978
    
    
    $
    3,840,978Fixed assets
    
    
    11,100,932
    
    
    
    11,100,932Other assets
    
    
    589,223
    
    
    
    589,223Total assets
    
    $
    15,531,133
    
    
    $
    15,531,133Short-term liabilities
    
    $
    1,796,449
    
    
    $
    1,796,449Long-term liabilities
    
    
    12,092,546
    
    
    
    8,933,576Stockholders equity
    
    
    1,642,138
    
    
    
    4,801,108Total liabilities and stockholders equity
    
    $
    15,531,133
    
    
    $
    15,531,133
  b.
    
    On April 11, 2005, the Company entered into agreement to acquire all of the capital stock of
Empaques del Norte, S.A. de C.V. for $64,667 (US$5.8 million). The purchase price will be
made in five installments between April 2005 and May 2006.
Payment of the first four installments
has been made. Under the purchase agreement, the seller retains title to these shares until
all installment payments have been made. Empaques del Norte, S.A. de C.V. owns a corrugated
container plant with an annual production capacity of 25,000 short tons.  c.
    
    On April 18, 2005 (Unaudited), the Company purchased substantially all of the capital stock of Líneas
Aéreas Ejecutivas de Durango, S.A. de C.V., or Líneas Aéreas, for $100 from certain members of
the Rincón family and some of their children. Líneas Aéreas owns two business jets and
provides transportation services to the Companys subsidiaries and third parties.  d.
    
    Sale of Ponderosa (Unaudited)  On July 15, 2005, our subsidiaries, Ponderosa
Industrial de México, S.A. de C.V. and Compañía
Forestal de Durango, S.A. de C.V., sold the assets of our Chihuahua
particleboard plant for US$30 million. As a result of this sale,
the capacity of our other segment was reduced by 200 thousand short
tons, we ceased producing particleboard and we no longer have any
discontinued operations. NOTE 22  SEGMENT INFORMATION: The Company has disclosed its
operating segments based on its components for which separate
financial information is available and which is regularly reviewed by the chief operating decision
maker in deciding how to allocate resources and in assessing performance. Reportable segments
consist of one or more operating segments with similar economic characteristics, F-46




---



##### 



distribution systems and regulatory environment. The information provided for segment reporting is
based on internal reports used by management. The following summarizes the aggregation of the Companys operating segments into reportable
segments: Paper  This segment includes the production and sale of containerboard (linerboard and corrugating
medium), newsprint, uncoated free sheet, kraft paper and coated bleached board. This segment
includes the operating results of the Grupo Durango division and the Grupo Pipsamex division in
Mexico and Durango Paper Company and Durango McKinley Paper Companys paper operations in the
United States. The Company sold Durango Paper Company in October 2002 and no longer produces kraft
paper and coated bleached board. Packaging  This segment includes the production and sale of corrugated containers, multi-wall
sacks and bags and paper tubes. This segment includes the operating results of the packaging
division in Mexico and the U.S. The Company sold its paper tube manufacturing operation to Tubos y
Especialidades de México, S.A. de C.V., a related party, in
April 2003 for $2.1 million. As a
result, the Company no longer produces paper tubes. Other  This segment includes the production and sale of plywood and particleboard. a. Information by operating segments of continuing operations: 2004Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    3,488,253
    
    
    $
    4,257,187
    
    
    $
    106,975
    
    
    $
    7,852,415
    
    
    $
    
    
    
    $
    7,852,415Intersegment sales
    
    
    3,936,342
    
    
    
    296,093
    
    
    
    104
    
    
    
    4,232,539
    
    
    
    (4,232,539
    )
    
    
    Total sales
    
    
    7,424,595
    
    
    
    4,553,280
    
    
    
    107,079
    
    
    
    12,084,954
    
    
    
    (4,232,539
    )
    
    
    7,852,415Depreciation and amortization
    
    
    285,761
    
    
    
    133,768
    
    
    
    7,495
    
    
    
    427,024
    
    
    
    
    
    
    
    427,024Income from operations
    
    
    55,484
    
    
    
    386,031
    
    
    
    1,162
    
    
    
    442,677
    
    
    
    
    
    
    
    442,677Total assets
    
    
    21,130,978
    
    
    
    30,766,829
    
    
    
    1,205,576
    
    
    
    53,103,383
    
    
    
    (37,926,039
    )
    
    
    15,177,344Capital expenditures
    
    
    117,297
    
    
    
    64,682
    
    
    
    25,300
    
    
    
    207,279
    
    
    
    
    
    
    
    207,279Impairment
    
    
    463,689
    
    
    
    
    
    
    
    
    
    
    
    463,689
    
    
    
    
    
    
    
    463,689Interest income
    
    
    620,854
    
    
    
    1,869,686
    
    
    
    1,200
    
    
    
    2,491,740
    
    
    
    (2,451,539
    )
    
    
    40,201Interest expense
    
    
    (923,240
    )
    
    
    (2,608,343
    )
    
    
    (4,177
    )
    
    
    (3,535,760
    )
    
    
    2,414,151
    
    
    
    (1,121,669
    )Income tax
    
    $
    1,055,052
    
    
    ($
    695,002
    )
    
    
    $126,321
    
    
    $
    486,371
    
    
    $
    
    
    
    $
    486,371
 F-47




---



##### 



2003Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    2,929,828
    
    
    $
    4,134,918
    
    
    $
    85,801
    
    
    $
    7,150,547
    
    
    $
    
    
    
    $
    7,150,547Intersegment sales
    
    
    2,605,530
    
    
    
    140,254
    
    
    
    16,955
    
    
    
    2,762,739
    
    
    
    (2,762,739
    )Total sales
    
    
    5,535,358
    
    
    
    4,275,172
    
    
    
    102,756
    
    
    
    9,913,286
    
    
    
    (2,762,739
    )
    
    
    7,150,547Depreciation and amortization
    
    
    278,470
    
    
    
    125,354
    
    
    
    11,594
    
    
    
    415,418
    
    
    
    
    
    
    
    415,418Income (loss) from operations
    
    
    (116,492
    )
    
    
    452,637
    
    
    
    (15,259
    )
    
    
    320,886
    
    
    
    
    
    
    
    320,886Total assets
    
    
    19,399,699
    
    
    
    27,196,052
    
    
    
    1,008,726
    
    
    
    47,604,477
    
    
    
    (31,209,174
    )
    
    
    16,395,303Capital expenditures
    
    
    78,723
    
    
    
    32,519
    
    
    
    563
    
    
    
    111,805
    
    
    
    
    
    
    
    111,805Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    427,603
    
    
    
    1,452,720
    
    
    
    8,491
    
    
    
    1,888,814
    
    
    
    (1,844,684
    )
    
    
    44,130Interest expense
    
    
    (702,101
    )
    
    
    (2,355,965
    )
    
    
    (562
    )
    
    
    (3,058,628
    )
    
    
    1,811,272
    
    
    
    (1,247,356
    )Income tax
    
    $
    (375,180
    )
    
    $
    323,948
    
    
    $
    51,916
    
    
    $
    684
    
    
    
    
    
    
    $
    684
 2002Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    4,235,382
    
    
    $
    4,141,442
    
    
    $
    98,533
    
    
    $
    8,475,357
    
    
    $
    
    
    
    $
    8,475,357Intersegment sales
    
    
    2,879,371
    
    
    
    98,362
    
    
    
    47,932
    
    
    
    3,025,665
    
    
    
    (3,025,665
    )Total sales
    
    
    7,114,753
    
    
    
    4,239,804
    
    
    
    146,465
    
    
    
    11,501,022
    
    
    
    (3,025,665
    )
    
    
    8,475,357Depreciation and amortization
    
    
    348,397
    
    
    
    118,960
    
    
    
    10,620
    
    
    
    477,977
    
    
    
    
    
    
    
    477,977Income (loss) from operations
    
    
    8,911
    
    
    
    520,082
    
    
    
    (955
    )
    
    
    528,038
    
    
    
    
    
    
    
    528,038Total assets
    
    
    17,804,205
    
    
    
    21,106,832
    
    
    
    1,138,466
    
    
    
    40,049,503
    
    
    
    (23,277,859
    )
    
    
    16,771,644Capital expenditures
    
    
    224,495
    
    
    
    154,948
    
    
    
    99,649
    
    
    
    479,092
    
    
    
    
    
    
    
    479,092Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    86,598
    
    
    
    965,922
    
    
    
    21,458
    
    
    
    1,073,978
    
    
    
    (1,032,055
    )
    
    
    41,923Interest expense
    
    
    (392,461
    )
    
    
    (1,735,965
    )
    
    
    (905
    )
    
    
    (2,129,331
    )
    
    
    943,505
    
    
    
    (1,185,826
    )Income tax
    
    $
    (13,816
    )
    
    $
    603,215
    
    
    $
    117,759
    
    
    
    707,158
    
    
    
    
    
    
    $
    707,158
  b.
    
    General information of continuing operations by product: Net revenues
    
    2004
    
    
    2003
    
    
    2002Packaging
    
    $
    3,921,159
    
    
    $
    3,822,587
    
    
    $
    3,734,900-Corrugated container
    
    
    336,028
    
    
    
    309,283
    
    
    
    399,063-Paper sacks
    
    
    
    
    
    
    3,048
    
    
    
    7,479
 F-48




---



##### 



2004
    
    
    2003
    
    
    2002Paper--Containerboard
    
    
    1,573,381
    
    
    
    1,250,687
    
    
    
    1,160,178-Newsprint
    
    
    924,639
    
    
    
    710,546
    
    
    
    730,401-Uncoated free sheet
    
    
    990,233
    
    
    
    968,595
    
    
    
    931,653- Kraft paper
    
    
    
    
    
    

    
    
    
    
    418,260- Coated bleached board
    
    
    
    
    
    
    
    
    
    
    994,890Other segments
    
    
    106,975
    
    
    
    85,801
    
    
    
    98,533Consolidated total
    
    $
    7,852,415
    
    
    $
    7,150,547
    
    
    $
    8,475,357
  c.
    
    General segment information of continuing operations by geographical area: 2004Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    9,693,685
    
    
    $
    51,824,523
    
    
    $
    206,695United States of America
    
    
    2,391,269
    
    
    
    1,278,860
    
    
    
    584Intersegment eliminations
    
    
    (4,232,539
    )
    
    
    (37,926,039
    )
    
    
    Consolidated total
    
    $
    7,852,415
    
    
    $
    15,177,344
    
    
    $
    207,279
 2003Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    7,812,029
    
    
    $
    44,414,574
    
    
    $
    94,918United States of America
    
    
    2,101,257
    
    
    
    3,189,903
    
    
    
    16,887Intersegment eliminations
    
    
    (2,762,739
    )
    
    
    (31,209,174
    )
    
    
    Consolidated total
    
    $
    7,150,547
    
    
    $
    16,395,303
    
    
    $
    111,805
 2002Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    8,068,391
    
    
    $
    36,051,246
    
    
    $
    317,173United States of America
    
    
    3,432,631
    
    
    
    3,998,257
    
    
    
    161,919
 F-49




---



##### 



2002Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresIntersegment eliminations
    
    
    (3,025,665
    )
    
    
    (23,277,859
    )
    
    
    Consolidated total
    
    $
    8,475,357
    
    
    $
    16,771,644
    
    
    $
    479,092
  d.
    
    Additional revenue analysis:Annual revenues from the following client groups to which the Company sells are: 2004
    
    
    2003
    
    
    2002Packaging -Food and beverage
    
    $
    2,980,744
    
    
    $
    2,843,145
    
    
    $
    3,595,752Agribusiness
    
    
    458,776
    
    
    
    521,546
    
    
    
    502,096Agriculture
    
    
    305,851
    
    
    
    256,938
    
    
    
    262,289Maquila sector
    
    
    235,270
    
    
    
    279,947
    
    
    
    281,024Paper sacks -Cement
    
    
    208,673
    
    
    
    159,614
    
    
    
    249,882Lime and plaster
    
    
    67,878
    
    
    
    55,062
    
    
    
    53,883Paper -Editorial
    
    
    1,596,076
    
    
    
    1,609,407
    
    
    
    1,692,507Scholastic
    
    
    479,779
    
    
    
    239,833
    
    
    
    188,290Forest -Furniture manufacturers
    
    
    106,975
    
    
    
    85,801
    
    
    
    98,533Other
    
    
    1,412,393
    
    
    
    1,099,254
    
    
    
    1,551,101Total
    
    $
    7,852,415
    
    
    $
    7,150,547
    
    
    $
    8,475,357
 NOTE 23  NEW ACCOUNTING PRINCIPLES: Effective January 1, 2005, the dispositions contained in following Statements issued by the MIPA
went into effect: Statement B-7, Business Acquisitions, establishes, among other things, that the purchase method
of accounting is the only acceptable method to account for business acquisitions. In addition, it
modifies the accounting treatment of the goodwill, ceasing its amortization but subject to annual
impairment tests. Statement B-7 also provides specific guidance for the acquisition of the
minority interest and transfer of assets or stock amongst entities under common control. Amendments to the Statement C-2, Financial Instruments, which requires that the fair value
adjustments for available for sale financial instruments be recognized in equity. Statement C-10, Derivative Financial Instruments and Hedging Operations, provides guidance for
recording, valuing and disclosures applicable to all derivative financial instruments. In addition,
it will require that the hedge effectiveness of cash flow hedges and of net investment in F-50




---



##### 



foreign subsidiaries be assessed and that the effective portion of the gains or losses on hedging
instruments be recognized within comprehensive income (loss). New dispositions of Statement D-3, Labor Obligations, which establish rules for the estimating
and recording the liabilities related to severance payments due to employees upon dismissal. The
Company estimated a severance liability as of January 1, 2005 of $4,109 related to this concept. The Company estimates that the adoption of these new standards will not have a significant impact
on its results of operations or financial position. NOTE 24 - RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP: The Companys consolidated financial statements are prepared in accordance with Mexican GAAP, which
differs in certain significant respects from U.S. GAAP. The Mexican GAAP consolidated financial
statements include the effects of inflation as provided for under Statement B-10. The application
of this Statement represents a comprehensive measure of the effects of price level changes in the
Mexican economy, and is considered to result in a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes. Therefore, the
following reconciliation to U.S. GAAP does not include the reversal of such inflationary effects. Restatement of US GAAP deferred income tax amounts:   (i)
    
    The valuation allowance for deferred income tax assets  Previously, in establishing a valuation allowance, the Company fully reserved the total balance of the deferred
income tax assets related to tax loss carryforwards without taking into consideration the reversal of existing taxable temporary differences during the tax loss carryforward periods. The Company has
concluded that the evaluation of recoverability of the deferred income tax assets originated by tax loss carryforwards should
be evaluated on an individual company basis taking into consideration the reversal of taxable temporary differences for both Mexican and U.S. GAAP. Tax planning strategies were considered where prudent and
feasible. Given the economic situation of the Company, other potential sources of future taxable income were not considered.  (ii)
    
    Other items  Previously, the tax basis used in the
calculation of certain temporary differences, principally related to fixed
assets, inventories and tax loss carryforwards were price-level
adjusted using incorrect rates. Also, in certain cases, the tax rates used in the
measurement of deferred taxes were incorrect. Finally, there were
certain individually insignificant items that were identified during
the process of reevaluating the deferred tax of years which we
corrected as part of the restatement. The effect of the adjustments
on previously reported US GAAP consolidated net income (loss) and
stockholders equity is as follows: 2003
    
    
    2002US GAAP net income (loss) as previously reported
    
    
    ($2,335,145
    )
    
    
    ($2,412,800
    )Deferred
income tax adjustments:Correction
to valuation allowance change period to period
    
    
    (115,098
    )
    
    
    71,779Correction
of tax inflation indexing of NOLs
    
    
    (13,738
    )
    
    
    180,471Correction
of book and tax basis of fixed assets and inventories due to inconsistent inflation
indexing
    
    
    (147,255
    )
    
    
    71,009Use of
incorrect tax rates
    
    
    (42,951
    )
    
    
    42,951Other
individually insignificant items
    
    
    (14,969
    )
    
    
    12,740US GAAP net income (loss) as restated
    
    
    ($2,669,156
    )
    
    
    ($2,033,850
    )Stockholders equity under US GAAP as previously reported
    
    
    ($1,254,400
    )Deferred income taxes:Adjustment to the valuation allowance
    
    
    990,631Adjustment for other items
    
    
    22,613Stockholders equity (deficit) under US GAAP as restated
    
    
    ($241,156
    )
 The principal differences between Mexican GAAP and U.S. GAAP are presented in the following pages
with an explanation of certain adjustments that affect the consolidated net income and
shareholders equity. Reconciling items are presented net of any gain or loss from monetary
position.           Reconciliation of consolidated statements of operations: Years ended December 31,2004
    
    

2003as
restated
    
    

2002as
restatedMajority interest net loss as reported under Mexican GAAP
    
    
    
    $
    60,790
    (1)
    
    ($
    3,519,115
    )
    
    ($
    3,905,103
    )Deferred income taxes
    
    i
    
    
    (150,551
    )
    
    
    (267,761
    )
    
    
    (380,211
    )Deferred employee profit sharing
    
    i
    
    
    115,458
    
    
    
    266,413
    
    
    
    (50,774
    )Purchase accounting adjustment - depreciation
    
    ii
    
    
    107,976
    
    
    
    165,070
    
    
    
    165,070Effect of fifth amendment to Statement B-10
    
    iii
    
    
    (54,731
    )
    
    
    (70,854
    )
    
    
    (67,374
    )Debt issuance costs and repurchase of bonds
    
    iv
    
    
    299,625
    
    
    
    46,998
    
    
    
    12,605Capitalized financing costs
    
    v
    
    
    36,630
    
    
    
    12,528
    
    
    
    34,123Effect of Statement B-15 on restatement to constant currency
    
    vi
    
    
    
    
    
    
    (1,005
    )
    
    
    29,033Adjustment to impairment of long-lived assets
    
    vii
    
    
    316,624
    
    
    
    269,839
    
    
    
    817,057Adjustment to loss on sale of subsidiaries
    
    viii
    
    
    
    
    
    
    259,168
    
    
    
    1,484,710Equity swaps
    
    ix
    
    
    
    
    
    
    
    
    
    
    (53,515
    )Deferred start-up, research and development costs
    
    x
    
    
    3,702
    
    
    
    97,888
    
    
    
    (110,081
    )Effect of U.S. GAAP adjustments on minority interest
    
    xi
    
    
    (3,379
    )
    
    
    (3,401
    )
    
    
    (9,390
    )Reversal of loss on sale of discontinued operations
    
    xii
    
    
    
    
    
    
    75,076
    
    
    
    U.S. GAAP net income (loss)
    
    
    
    $
    732,144
    
    
    ($
    2,669,156
    )
    
    ($
    2,033,850
    )
 (1) As restated F-51




---



##### 



Reconciliation of consolidated shareholders equity: Years ended December 31,2004
    
    

2003as
restatedTotal shareholders equity corresponding to
majority interest as reported under Mexican GAAP
    
    
    
    $
    1,564,662
    (1)
    
    $
    1,593,353Deferred income taxes
    
    i
    
    
    54,136
    
    
    
    283,444Deferred employee profit sharing
    
    i
    
    
    (741,144
    )
    
    
    (856,601
    )Purchase accounting adjustments:
    
    iiAccumulated negative goodwill
    
    
    
    
    (4,302,639
    )
    
    
    (4,302,639
    )Accumulated depreciation
    
    
    
    
    942,258
    
    
    
    834,282Effect of fifth amendment to Statement B-10:
    
    iiiFixed assets
    
    
    
    
    3,308,019
    
    
    
    2,992,815Accumulated depreciation
    
    
    
    
    (2,000,762
    )
    
    
    (1,799,828
    )Debt issuance costs and repurchase of bonds
    
    iv
    
    
    239,152
    
    
    
    (60,473
    )Capitalized financing costs
    
    v
    
    
    111,618
    
    
    
    74,988Effect of Statement B-15 on restatement to constant currency
    
    vi
    
    
    
    
    
    
    19,247Adjustment to impairment on long-lived assets
    
    vii
    
    
    1,299,511
    
    
    
    982,887Deferred start-up, research and development costs:
    
    x
    
    
    (110,081
    )
    
    
    (110,081
    )§ Accumulated amortization
    
    
    
    
    101,589
    
    
    
    97,887Effect of U.S. GAAP adjustments on minority interest
    
    xi
    
    
    6,182
    
    
    
    9,563Total U.S. GAAP shareholders equity (deficit)
    
    
    
    $
    472,501
    
    
    ($
    241,156
    )
 (1) As restated Provided below is an analysis of the changes in shareholders equity under U.S. GAAP: Years ended December 31,2004
    
    
    2003as restatedBalance at beginning of the year (as restated)
    
    ($
    241,156
    )
    
    $
    2,501,599Net income (loss) under U.S. GAAP
    
    
    732,144
    
    
    
    (2,669,156
    )Deficit from restatement
    
    
    (68,919
    )
    
    
    (22,149
    )Cumulative translation adjustment
    
    
    50,385
    
    
    
    132,966Allowance for accounts receivable due from shareholders
    
    
    
    
    
    
    (184,416
    )Increase in capital stock
    
    
    47
    
    
    
    Balance at end of the year
    
    $
    472,501
    
    
    ($
    241,156
    )
 F-52




---



##### 



Comprehensive loss Comprehensive loss under Mexican GAAP is as follows: Years ended December 31,2004
    
    
    2003
    
    
    2002Majority interest net loss under Mexican GAAP
    
    $
    60,790
    
    
    ($
    3,519,115
    )
    
    ($
    3,905,103
    )Other comprehensive (loss) income, net:Other comprehensive (loss) income
    
    
    (89,528
    )
    
    
    663,080
    
    
    
    101,566Net majority comprehensive loss
    
    ($
    28,738
    )
    
    ($
    2,856,035
    )
    
    ($
    3,803,537
    )Cumulative other comprehensive loss
    
    ($
    7,542,647
    )
    
    ($
    7,453,119
    )
    
    ($
    8,116,199
    )
 The components of cumulative other comprehensive loss as of December 31, 2004, 2003 and 2002
under Mexican GAAP, are as follows: Cumulativeinitial
    
    
    Additional
    
    
    Effects of
    
    
    (Loss) from
    
    
    Cumulativeeffect of
    
    
    liability
    
    
    translation
    
    
    holding
    
    
    otherdeferred
    
    
    for seniority
    
    
    of foreign
    
    
    non monetary
    
    
    comprehensiveincome tax
    
    
    premiums
    
    
    subsidiaries
    
    
    assets (1)
    
    
    lossBalances at January 1, 2002
    
    ($
    3,240,795
    )
    
    ($
    154,051
    )
    
    $
    129,993
    
    
    ($
    4,952,912
    )
    
    ($
    8,217,765
    )Current period changes
    
    
    
    
    
    
    
    
    
    
    (38,180
    )
    
    
    139,746
    
    
    
    101,566Balances at December 31, 2002
    
    
    (3,240,795
    )
    
    
    (154,051
    )
    
    
    91,813
    
    
    
    (4,813,166
    )
    
    
    (8,116,199
    )Current period changes
    
    
    
    
    
    
    154,051
    
    
    
    95,446
    
    
    
    413,583
    
    
    
    663,080Balance at December 31, 2003
    
    
    (3,240,795
    )
    
    
    
    
    
    
    187,259
    
    
    
    (4,399,583
    )
    
    
    (7,453,119
    )Current period changes
    
    
    
    
    
    
    
    
    
    
    69,635
    
    
    
    (159,163
    )
    
    
    (89,528
    )Balance at December 31, 2004
    
    ($
    3,240,795
    )
    
    $
    
    
    
    $
    256,894
    
    
    ($
    4,558,746
    )
    
    ($
    7,542,647
    )
 
 (1)
    
    For 2004 and 2003, (loss) gain from holding non-monetary assets includes deferred tax
effect of ($78,757) and $211,095, respectively, as a result of the application of Statement
D-4. F-53




---



##### 



Effects of the U.S. GAAP adjustments on discontinued operations The following reconciles the
net income (loss) under Mexican GAAP to U.S. GAAP for each of the
periods presented, reflecting the U.S. GAAP adjustments related to the
business disposed of as disclosed in Note 18. Reconciliation of consolidated statements of operations: Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss) as reported under Mexican GAAP
    
    
    
    $
    102,135
    
    
    ($
    577,740
    )
    
    ($
    108,202
    )Deferred income taxes
    
    i
    
    
    199
    
    
    
    152,955
    
    
    
    84,144Deferred employee profit sharing
    
    i
    
    
    13,367
    
    
    
    
    
    
    
    (69,079
    )Purchase accounting adjustments - depreciation
    
    ii
    
    
    11,279
    
    
    
    (14,027
    )
    
    
    24,355Effect of fifth amendment to Statement B-10
    
    iii
    
    
    69
    
    
    
    
    
    
    
    (1,207
    )DPC liability
    
    
    
    
    
    
    
    
    265,451
    
    
    
    (570,213
    )Adjustment to impairment of long-lived assets
    
    vii
    
    
    (14,472
    )
    
    
    
    
    
    
    104,009Reversal of loss on sale of discontinued operations
    
    xii
    
    
    
    
    
    
    75,076
    
    
    
    U.S. GAAP net income (loss)
    
    
    
    $
    112,577
    
    
    ($
    98,285
    )
    
    ($
    536,193
    )
  i.
    
    Deferred income tax and employee profit sharing Statement of Financial Accounting Standards No. 109, Accounting For Income Taxes (SFAS No.
109), requires an asset and liability approach for financial accounting and reporting for income
tax under the following basic principles: (a) a current tax liability or asset is recognized for
the estimated taxes payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects attributable to temporary
differences and tax loss and tax credit carryforwards, (c) the measurement of current and deferred
tax assets and liabilities is based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated, and (d) the measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits for which available evidence indicates
that it is more likely than not that the tax benefit will not be realized. Under this method,
deferred tax and employee profit sharing are recognized with respect to all temporary differences,
and the benefit from utilizing tax loss carryforwards and asset tax credits is recognized in the
year in which the losses or credits arise (subject to a valuation allowance with respect to any tax
benefits which, in managements opinion, are more likely than not to be realized). The subsequent
realization of this benefit does not affect the income tax provision. Temporary differences under SFAS No. 109 are determined based on the difference between the indexed
tax-basis amount of the asset or liability and the related restated amount reported in the
financial statements. The deferred income tax expense or benefit is calculated as the difference
between (a) the deferred tax assets and liabilities at the end of the current period, and (b) the
deferred tax assets and liabilities reported at the end of the prior period remeasured to units of
current general purchasing power at the end of the current period, whereas, under Mexican GAAP
Statement D-4, the change in the deferred tax asset or liability is first measured on a historical
cost basis and the components of the change including monetary gains or losses are allocated
between tax provision, deficit from restatement and monetary gain or loss. F-54




---



##### 



The significant components of income and asset tax expense from continuing operations under U.S.
GAAP, by jurisdiction, were as follows: Years ended December 31,2004
    
    
    2003as restated
    
    
    2002as restatedIncome and asset tax expense (benefit):CurrentDomestic
    
    $
    28,110
    
    
    $
    75,419
    
    
    $
    120,854DeferredDomestic
    
    
    (273,978
    )
    
    
    36,692
    
    
    
    (679,799
    )Foreign
    
    
    (70,232
    )
    
    
    209,196
    
    
    
    373,073(344,210
    )
    
    
    245,888
    
    
    
    (306,726
    )Income and
asset tax (benefit) provision  continuing operations
    
    ($
    316,100
    )
    
    $
    321,307
    
    
    ($
    185,872
    )
 For the years ended
December 31, 2004, 2003 and 2002, the net benefit in the income
statements for discontinued operations was $34,112, $290,712, and
$85,152, respectively. The income tax and profit sharing effects of significant items comprising the Companys net
deferred income tax and profit sharing assets and liabilities under U.S. GAAP are as follows: 2004
    
    
    2003as restatedDeferred income tax
liabilities (assets):Inventory
    
    $
    256,613
    
    
    $
    330,796Inventory Rule 106
    
    
    (221,935
    )
    
    
    (377,561
    )Property, plant and equipment
    
    
    2,363,557
    
    
    
    2,654,264Other assets
    
    
    45,005
    
    
    
    36,194Allowance for doubtful accounts
    
    
    (63,485
    )
    
    
    (44,010
    )Accrued expenses
    
    
    (124,133
    )
    
    
    (134,783
    )Other
    
    
    50,767
    
    
    
    25,691Asset tax credits
    
    
    (329,650
    )
    
    
    (332,767
    )Tax loss carryforwards
    
    
    (1,258,737
    )
    
    
    (1,694,754
    )Total net
deferred income tax liability  continuing operations
    
    
    718,002
    
    
    
    463,070Valuation allowance
    
    
    669,654
    
    
    
    1,268,7981,387,656
    
    
    
    1,731,868Discontinued
operations, net
    
    
    48,249
    
    
    
    82,359Total net deferred income tax
liability
    
    $
    1,435,905
    
    
    $
    1,814,227
 F-55




---



##### 



December 312004
    
    
    2003Deferred employee profit sharing liabilities (assets):Inventory
    
    $
    85,123
    
    
    $
    103,374Inventory Rule 106
    
    
    (73,978
    )
    
    
    (117,988
    )Property, plant and equipment
    
    
    740,563
    
    
    
    840,435Other assets
    
    
    29,300
    
    
    
    (3,177
    )Allowance for doubtful accounts
    
    
    (16,680
    )
    
    
    (13,754
    )Accrued expenses
    
    
    
    
    
    
    (32,006
    )Other
    
    
    (42,553
    )
    
    
    (25,491
    )Valuation allowance
    
    
    
    
    
    
    72,471Total net deferred employee profit sharing liability from continuing operations
    
    
    721,775
    
    
    
    823,864Discontinued
operations, net
    
    
    19,369
    
    
    
    32,737Total net deferred employee profit sharing liability
    
    $
    741,144
    
    
    $
    856,601
 F-56




---



##### 



For the years ended December 31, 2004 and 2003, the difference in net deferred income tax liabilities
between Mexican and U.S. GAAP was as follows: Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceDeferred income tax liability:At
December 31, 2002
    
    $
    2,197,463
    
    
    $
    1,857,353
    (1)
    
    $
    340,110At December 31, 2003
    
    
    2,097,671
    
    
    
    1,814,227
    (1)
    
    
    283,444Net change
    
    ($
    99,792
    )
    
    ($
    43,126
    )
    
    ($
    56,666
    )Deferred income tax liability:At December 31, 2003
    
    
    2,097,671
    
    
    
    1,814,227
    (1)
    
    
    283,444At December 31, 2004
    
    $
    1,490,041
    (1)
    
    $
    1,435,905
    
    
    $
    54,136Net change
    
    ($
    607,630
    )
    
    ($
    378,322
    )
    
    ($
    229,308
    )
 (1) As restated F-57




---



##### 



The net change in the deferred tax liabilities during 2004 and 2003 was allocated to the following
components: Deferred tax liability in 2004: Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax
expense line item
    
    ($
    548,525
    )
    
    ($
    378,322
    )
    
    ($
    170,203
    )Gain on
monetary position
    
    
    19,652
    
    
    
    
    
    
    
    19,652Total income
statement effect
    
    
    (528,873
    )(1)
    
    
    (378,322
    )
    
    
    (150,551
    )Loss from
holding non-monetary assets(2)
    
    
    (78,757
    )
    
    
    
    
    
    
    (78,757
    )Total change
in deferred tax liability
    
    ($
    607,630
    )(1)
    
    ($
    378,322
    )
    
    ($
    229,308
    )
 Deferred tax liability in 2003: Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax
expense line item
    
    ($
    213,861
    )
    
    ($
    43,126
    )(1)
    
    ($
    170,735
    )Loss on
monetary position
    
    
    (97,026
    )
    
    
    
    
    
    
    (97,026
    )Total income
statement effect
    
    
    (310,887
    )
    
    
    (43,126
    )
    
    
    (267,761
    )Gain from
holding non-monetary assets(2)
    
    
    211,095
    
    
    
    
    
    
    
    211,095Total change
in deferred tax liability
    
    ($
    99,792
    )
    
    ($
    43,126
    )(1)
    
    ($
    56,666
    )
 F-58




---



##### 



Deferred tax liability in 2002: Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax
expense line item
    
    ($
    828,014
    )
    
    ($
    391,878
    )(2)
    
    ($
    436,136
    )Gain on
monetary position
    
    
    55,925
    
    
    
    
    
    
    
    55,925Total income
statement effect
    
    
    (772,089
    )
    
    
    (391,878
    )
    
    
    (380,211
    )Gain from
holding non-monetary assets(2)
    
    
    345,699
    
    
    
    
    
    
    
    345,699Total change
in deferred tax liability
    
    ($
    426,390
    )
    
    ($
    391,878
    )(2)
    
    ($
    34,512
    )
   (1)
    
    As restated(2)
    
    Represents the deferred income tax effect resulting from the difference
in restating the Companys non-monetary assets of foreign origin
using the Mexican peso against foreign currencies and by applying
inflation rates of the countries from which the non-monetary assets
originate versus applying the Mexican NCPI. ii. Purchase accounting adjustments For various acquisitions that took place in 1998 and 1999, under Mexican GAAP, the Company has
recorded negative goodwill, representing the excess of the book value of the net assets acquired
over the purchase price. Such negative goodwill is being amortized into income over the period in
which the Company expects to integrate these operations into the Company. Under Mexican GAAP,
negative goodwill was fully amortized into earnings by 2001. Under U.S. GAAP, these acquisitions have been accounted for under the purchase method and,
consequently, the purchase price has been allocated to assets acquired and liabilities assumed
based on the relative fair values. As a result under U.S. GAAP, negative goodwill was recorded as
a reduction in the carrying value of the long-term assets (primarily fixed assets). As such, the
U.S. GAAP net income adjustment reflects the difference in depreciation of long-lived assets that
results from differences in the carrying value between U.S. GAAP and Mexican GAAP of these assets. iii. Effect of fifth amendment to Statement B-10 As mentioned in Note 3f., the Company restates its non-monetary assets of foreign origin based on
the change of the Mexican Peso against foreign currencies and by applying inflation rates of the
countries from which the non-monetary assets originate. This methodology is not consistent with
Rule 3-20 of Regulation S-X regarding the use of the same reporting currency for all periods.
Under U.S. GAAP, these assets, which are used in Mexico, would be adjusted by the Mexican NCPI and
depreciation would be calculated on this basis. iv. Debt issuance costs and repurchase of bonds Under Mexican GAAP, consent fees, other fees and expenses incurred in connection with the issuance
of debt may be capitalized and amortized over the term of the debt using a straight-line method.
However, for U.S. GAAP purposes some of these costs should be expensed as incurred. F-59




---



##### 



In addition, during 2004, for Mexican GAAP purposes, the Company wrote-off $322,762 representing
the unamortized debt issuance cost, as part of the restructuring process of its debt. For U.S.
GAAP, this was a 2005 transaction, and as such, the Company should continue to amortize these costs
using the effective interest method, through the date of the restructuring. v. Capitalized financing costs Under Mexican GAAP the capitalization of financing costs as part of the cost of assets under
construction include interest costs, gains or losses from monetary position and foreign exchange
losses. U.S. GAAP requires the capitalization of interest during construction on qualifying assets. In an
inflationary economy, such as Mexico, it is acceptable practice to capitalize interest net of the
monetary gain on the related Mexican Peso debt, but not to capitalize the monetary gain on U.S.
Dollar or other stable currency debt. In addition, U.S. GAAP does not allow the capitalization of
foreign exchange losses. vi. Effect of Statement B-15 on restatement to constant currency Statement B-15 requires that the restatement of prior year amounts of foreign subsidiaries be
determined by first restating prior year foreign currency amounts by the inflation of the foreign
country and then retranslating such amounts at the exchange rate as of the date of the latest
balance sheet presented (December 31, 2004). Under U.S. GAAP, the primary financial statements should be presented in the same constant
reporting currency for all periods. Prior to the adoption of Statement B-15, prior year
consolidated amounts were adjusted for the effects of inflation in Mexico and such adjustments were
considered to be an integral part of preparing price level adjusted financial statements. The
methodology established by Statement B-15 separates the adjustment process for the effects of
inflation on prior year amounts for foreign and domestic subsidiaries, which results in the
presentation of amounts, which are not in a constant unit of measure. The difference in the
methodologies used to restate a balance to December 31, 2004 purchasing power is included as a
one-line adjustment in the reconciliation to U.S. GAAP of net income (loss) and shareholders
equity. F-60




---



##### 



2003
    
    
    2002Consolidated statements of operations:As previously reported, indexed for effects
of inflation in Mexico
    
    $
    (3,520,120
    )
    
    ($
    3,876,070
    )As reported under Statement B-15
    
    
    (3,519,115
    )
    
    
    (3,905,103
    )($
    1,005
    )
    
    $
    29,033Consolidated shareholders equity:As previously reported, indexed for effects of
inflation in Mexico
    
    $
    1,612,600
    
    
    $
    4,770,588As reported under Statement B-15
    
    
    1,593,353
    
    
    
    4,787,855$
    19,247
    
    
    ($
    17,267
    )
 vii. Adjustment to
impairment of long-lived assets The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long  Lived
Assets (SFAS 144). An evaluation of impairment is undertaken whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. Under SFAS 144, the
impairment criteria 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, if available or the present value
of expected future cash flows. Under both Mexican GAAP and U.S. GAAP, the Company tested certain longlived assets for recoverability in response to significant
adverse changes in business climate occurring during each of the
years presented. Under U.S. GAAP, certain assets
being evaluated for recoverability had lower book values than under Mexican GAAP due to other U.S. GAAP adjustments such as the allocation of negative goodwill from acquisitions and the specific index inflation restatement. As such,
the impairment charges recorded under Mexican GAAP during 2004, 2003
and 2002 were greater than
the impairment charges calculated under U.S. GAAP. As a result, the Company recognized an adjustment
to U.S. GAAP net income (loss) of $316,624, $269,839, and $817,057 in 2004, 2003, and 2002,
respectively. These impairments relate primarily to machinery and equipment. F-61




---



##### 



viii. Adjustment to loss on sale of subsidiaries In October 2002, the Company sold the shares of Durango Paper Co. (DPC) to Operadora Omega, S.A. de
C.V. Additionally, during 2003 the Company sold its investments in Pronal and the assets of its
molded pulp division, and approved a plan to sell a particleboard plant located in Chihuahua.
Historically, under U.S. GAAP the carrying value of such subsidiaries was different to the carrying
value recorded under Mexican GAAP due to deferred income taxes, negative goodwill and the reversal
of loss on sale of fixed assets. As such, the Company reversed the amount of the U.S. GAAP
cumulative adjustments relating to these businesses. In accordance with SFAS No. 144, Accounting
for the Impairment or disposal of Long  Lived Assets, the sale of these components of the Company
have been presented as discontinued operations in the consolidated statement of operations as of
December 31, 2002 and 2003 ix. Equity swaps In prior years, the Company entered into Equity Share Swap Transactions (collectively, Equity
Swaps) with financial institutions, with respect to its American Depository Receipts (ADRs) at
prices ranging from US$10.4489 to US$14.2813. The Equity Swaps had notional amounts of US$5.15 at
December 31, 2001, respectively, bearing interest at LIBOR plus 2.95% payable semiannually and were
due in 2002. The Company had no outstanding swaps at December 31, 2004, 2003 and 2002. Under Mexican GAAP, the Company has recorded the fair value of the Equity Swaps on the balance
sheet, with a corresponding adjustment to shareholders equity. For U.S. GAAP purposes, this Equity Swap should be recorded at fair value and changes in fair
values recorded in earnings for the period, as it did not qualify for hedge accounting under SFAS
133, Accounting for Derivative Instruments and Hedging Activities. The U.S. GAAP 2002 net income adjustment reflects the difference under Mexican and U.S. GAAP
regarding the termination of the Equity Swap contracts. x. Deferred start-up research and development costs In 2002, under Mexican GAAP the Company deferred certain costs in relation to the reconstruction of
a manufacturing plant (Ponderosa Industrial de México, S.A. de C.V.) and the development of a new
paper manufacturing process. Under U.S. GAAP, SFAS No. 2, 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, the adjustment in 2002 for the start-up and research and development
costs represents the reversal of the amounts capitalized under Mexican GAAP in such year. F-62




---



##### 



The adjustment to U.S. GAAP in net income for 2004 and 2003 represents the reversal of the
amortization recorded under Mexican GAAP for those start up, research and development costs that
should not be capitalized for U.S. GAAP purposes. xi. Minority Interest This adjustment represents the minority interest in part of the U.S. GAAP adjustments described
above for non-wholly owned subsidiaries. xii. Reversal of loss on sale of discontinued operations As described in Note 1 in October 2002, the Company sold its shares of DPC. Additionally, as
disclosed in Note 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. Historically, under U.S. GAAP the carrying value of such subsidiaries and discontinued operations
differed from the carrying value recorded under Mexican GAAP due to deferred income taxes, negative
goodwill, fixed asset impairment, and the reversal of loss on sale of fixed assets. As such, the
Company reversed the amount of the U.S. GAAP cumulative prior period adjustments relating to DPC,
Pronal, the molded pulp division and the particleboard plant. In accordance with SFAS No. 144, the
sale of theses components of the Company have been presented as discontinued operations in the
condensed statement of operations for all periods presented. F-63




---



##### 



SUPPLEMENTAL U.S. GAAP DISCLOSURES a. Condensed information The following tables present the Companys condensed balance sheets as of December 31, 2004 and
2003 and statements of operations for the three years ended December 31, 2004, 2003 and 2002,
reflecting U.S. GAAP adjustments. All amounts have been indexed to December 31, 2004 constant
Mexican Pesos, using the Mexican NCPI factor: F-64




---



##### 



CONDENSED CONSOLIDATED BALANCE SHEETS: At December 31,2004
    
    
    2003as restatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    834,932
    
    
    $
    683,688Accounts receivable, net
    
    
    1,803,502
    
    
    
    1,892,300Inventories, net
    
    
    1,078,254
    
    
    
    1,152,577Deferred
income tax and employee profit sharing
    
    
    65,480
    
    
    
    Short-term
assets of discontinued operations
    
    
    104,493
    
    
    
    88,559Other
    
    
    19,797
    
    
    
    38,998Total current assets
    
    
    3,906,458
    
    
    
    3,856,122Property, plant and equipment
    
    
    10,458,937
    
    
    
    10,712,235Long-term
assets of discontinued operations
    
    
    249,296
    
    
    
    265,970Other assets
    
    
    570,587
    
    
    
    661,389Total assets
    
    $
    15,185,278
    
    
    $
    15,495,716Liabilities
and shareholders equity (deficit)Current liabilities:Short-term debt, notes payable and current
portion of long-term debt
    
    $
    226,964
    
    
    $
    9,105,723Accrued liabilities and other payables
    
    
    1,442,573
    
    
    
    2,955,326Deferred income tax and employee profit sharing
    
    
    
    
    
    
    198,842Current liabilities of discontinued operations
    
    
    126,912
    
    
    
    121,807Total current liabilities
    
    
    1,796,449
    
    
    
    12,381,698Long-term debt
    
    
    6,951,969
    
    
    
    420,153Seniority premiums
    
    
    305,532
    
    
    
    209,819Deferred income tax and employee profit sharing
    
    
    2,174,911
    
    
    
    2,356,890Other long-term debt
    
    
    3,247,911
    
    
    
    106,459Long-term liabilities of discontinued operations
    
    
    164,710
    
    
    
    200,120Total long-term liabilities
    
    
    12,845,033
    
    
    
    3,293,441Total liabilities
    
    
    14,641,482
    
    
    
    15,675,139Minority interest
    
    
    71,295
    
    
    
    61,733Shareholders equity (deficit)
    
    
    472,501
    
    
    
    (241,156
    )Total
liabilities and shareholders equity (deficit)
    
    $
    15,185,278
    
    
    $
    15,495,716
 F-65




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS: Years ended December 31,2004
    
    
    2003as restated
    
    
    2002as restatedNet sales
    
    $
    7,852,415
    
    
    $
    7,185,558
    
    
    $
    6,849,206Cost of sales
    
    
    6,729,880
    
    
    
    6,168,601
    
    
    
    5,426,462Gross profit
    
    
    1,122,535
    
    
    
    1,016,957
    
    
    
    1,422,744Selling, general and administrative expenses
    
    
    664,762
    
    
    
    1,128,070
    
    
    
    1,144,078Severance and gain on sale of non-strategic
assets
    
    
    
    
    
    
    
    
    
    
    393,924Operating income (loss)
    
    
    457,773
    
    
    
    (111,113
    )
    
    
    (115,258
    )Financing cost:Interest expense
    
    
    1,084,979
    
    
    
    1,188,271
    
    
    
    1,050,801Interest income
    
    
    (40,201
    )
    
    
    (44,630
    )
    
    
    (41,143
    )Foreign exchange (gain) loss, net
    
    
    (60,545
    )
    
    
    864,019
    
    
    
    1,050,078Gain from monetary position, net
    
    
    (471,345
    )
    
    
    (286,427
    )
    
    
    (440,337
    )512,888
    
    
    
    1,721,233
    
    
    
    1,619,399Other income (expenses), net
    
    
    359,144
    
    
    
    (421,949
    )
    
    
    61,825Income (loss) before income tax provisions,
equity in income of associated companies,
minority interest and discontinued operations
    
    
    304,029
    
    
    
    (2,254,295
    )
    
    
    (1,672,832
    )Provision for:Income and asset tax (benefit) expense
    
    
    (316,100
    )
    
    
    321,307
    
    
    
    (185,872
    )Minority interest
    
    
    3,210
    
    
    
    (2,737
    )
    
    
    12,803Equity in income of associated companies
    
    
    (2,648
    )
    
    
    (1,994
    )
    
    
    (2,106
    )Net income
(loss) from continuing
operations
    
    
    619,567
    
    
    
    (2,570,871
    )
    
    
    (1,497,657
    )Discontinued operations, net
    
    
    112,577
    
    
    
    (98,285
    )
    
    
    (536,193
    )Net income (loss)
    
    $
    732,144
    
    
    ($
    2,669,156
    )
    
    ($
    2,033,850
    )
 F-66




---



##### 



b. Cash flow information Under U.S. GAAP, pursuant to
SFAS No. 95, Statement of Cash Flows, a statement of cash flow is a
required component of a complete set of financial statements in lieu of a statement of changes in
financial position. SFAS No. 95 establishes specific presentation requirements and additional
disclosures but does not provide guidance with respect to inflation adjusted financial statements.
Based on requirements of the Securities and Exchange Commission (the SEC), the effect of
inflation restatements and foreign exchange gains and losses on cash flow has been included in a
separate line after cash flows from financing activities. The U.S. GAAP statements of
cash flows for the years ended December 31, 2004, 2003 and 2002 are as
follows: Years ended December 31,2004
    
    
    2003as restated
    
    
    2002as restatedOperating activities:U.S. GAAP
net income (loss) from continuing operations
    
    $
    629,837
    
    
    ($
    2,570,871
    )
    
    ($
    1,497,657
    )Adjustment to reconcile net income to net
cash flows provided by operating activities:Depreciation and amortization
    
    
    330,327
    
    
    
    373,864
    
    
    
    354,887Minority interest
    
    
    3,380
    
    
    
    
    
    
    
    12,805Deferred income taxes
    
    
    (344,210
    )
    
    
    243,465
    
    
    
    (300,818
    )Deferred employee profit sharing
    
    
    (102,091
    )
    
    
    (266,413
    )
    
    
    50,774Allowance for doubtful accounts
    
    
    47,227
    
    
    
    69,949
    
    
    
    13,518Inventory obsolescence allowance
    
    
    1,900
    
    
    
    2,151
    
    
    
    3,769Gain from monetary position
    
    
    (471,344
    )
    
    
    (371,848
    )
    
    
    (504,795
    )Equity Swap
    
    
    
    
    
    
    
    
    
    
    53,515Loss (gain) on sale of non-strategic assets
    
    
    36,529
    
    
    
    210,027
    
    
    
    54,923Impairment on long-lived assets
    
    
    132,593
    
    
    
    617,724
    
    
    
    885,237Debt assumption
    
    
    
    
    
    
    72,277
    
    
    
    Unrealized foreign exchange loss, net
    
    
    21,002
    
    
    
    820,558
    
    
    
    1,161,565Amortization of debt issuance costs and
other financing costs
    
    
    24,137
    
    
    
    
    
    
    
    Other
    
    
    16,472
    
    
    
    24,014
    
    
    
    150,784325,759
    
    
    
    (775,103
    )
    
    
    438,507
 F-67




---



##### 



Years ended December 31,2004
    
    
    2003as restated
    
    
    2002as restatedChanges in operating assets and liabilities:Accounts receivable, net
    
    ($
    90,650
    )
    
    ($
    1,058,263
    )
    
    ($
    889,550
    )Inventories, net
    
    
    68,931
    
    
    
    81,937
    
    
    
    (491,317
    )Prepaid expenses
    
    
    (4,896
    )
    
    
    
    
    
    
    (25,616
    )Other liabilities
    
    
    368,436
    
    
    
    1,643,761
    
    
    
    1,913,858Cash flow
provided by (used in) operating activities before discontinued
operations
    
    
    667,580
    
    
    
    (107,668
    )
    
    
    945,882Discontinued
operations
    
    
    113,601
    
    
    
    (222,757
    )
    
    
    (536,192
    )Cash flows provided by (used in)
operating activities:
    
    
    781,181
    
    
    
    (330,425
    )
    
    
    409,690Financing activities:Bank loans
    
    
    500
    
    
    
    
    
    
    
    4,076,119Payments of long-term debt
    
    
    (467,164
    )
    
    
    (427,048
    )
    
    
    (2,579,882
    )Payment of debt issuance cost
    
    
    
    
    
    
    
    
    
    
    (52,623
    )Capital increase
    
    
    47
    
    
    
    
    
    
    
    Cash flows (used in) provided by financing
activities
    
    
    (466,617
    )
    
    
    (427,048
    )
    
    
    1,443,614Investing activities:Acquisitions of fixed assets
    
    
    (202,026
    )
    
    
    (112,258
    )
    
    
    (493,093
    )Proceeds from sale of non-strategic assets
    
    
    15,548
    
    
    
    243,063
    
    
    
    106,069Investments in subsidiaries
    
    
    
    
    
    
    
    
    
    
    (785,651
    )Acquisitions of minority interest
    
    
    
    
    
    
    
    
    
    
    25,624Restricted
cash
    
    
    165,678
    
    
    
    (165,678
    )
    
    
    Other assets
    
    
    (33,733
    )
    
    
    19,568
    
    
    
    (376,426
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    972,608
    
    
    
    Cash flows used in investing activities
    
    
    (54,533
    )
    
    
    957,303
    
    
    
    (1,523,477
    )Effect of inflation and exchange rate changes
on cash and cash equivalents
    
    
    (108,787
    )
    
    
    204,202
    
    
    
    (592,847
    )Net increase (decrease) in cash and cash
equivalents
    
    
    151,244
    
    
    
    404,032
    
    
    
    (263,020
    )Cash and cash equivalents at beginning of year
    
    
    683,688
    
    
    
    279,656
    
    
    
    542,676Cash and cash equivalents at end of year
    
    $
    834,932
    
    
    $
    683,688
    
    
    $
    279,656
 F-68




---



##### 



Supplemental cash flow disclosures: Years ended December 312004
    
    
    2003
    
    
    2002Cash paid during the year for:Interest, net of capitalized interest
    
    $
    35,291
    
    
    $
    151,232
    
    
    $
    845,470Income and asset tax
    
    
    106,431
    
    
    
    172,274
    
    
    
    205,971
 Supplemental balance sheet information  
    
    Employee benefits Liabilities and costs related to pension plans and seniority premiums are recorded under Mexican
GAAP according to Statement D-3, Labor Liabilities, as described in Note 3 k. Under U.S. GAAP,
the requirements of SFAS No. 87, Employers Accounting for Pensions, as amended by SFAS No. 132,
Employees Disclosures about Pensions and Other Postretirement Benefits, for recording liabilities
and costs relating to pension plans and seniority premiums using actuarial computations are similar
to those of Statement D-3. The following sets forth the changes in benefit obligations, and the funded status of such plans
for 2004 and 2003, reconciled with the amounts reported in the consolidated balance sheets under
U.S. GAAP. December 312004
    
    
    2003Accumulated benefit obligation:Continuing operations
    
    $
    204,458
    
    
    $
    209,819Discontinued operations
    
    
    
    
    
    
    747$
    204,458
    
    
    $
    210,566Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    235,520
    
    
    $
    225,333Less  projected benefit obligation of discontinued
operations at beginning of year
    
    
    
    
    
    
    26,619235,520
    
    
    
    251,952Service cost
    
    
    7,143
    
    
    
    6,398Interest cost
    
    
    14,250
    
    
    
    9,105Actuarial loss
    
    
    16,514
    
    
    
    (16,933
    )Benefits paid and variations in assumptions
    
    
    (39,914
    )
    
    
    (17,002
    )Projected benefit obligations, end of year
    
    $
    231,513
    
    
    $
    233,520
 F-69




---



##### 



December 312004
    
    
    2003Unfunded liability
    
    $
    231,513
    
    
    $
    233,520Unrecognized transition obligation and other
    
    
    (77,489
    )
    
    
    (86,110
    )Net projected liability
    
    $
    154,024
    
    
    $
    147,410
 December 312004
    
    
    2003Amounts recognized in balance sheets:Accrued benefit liability
    
    $
    204,458
    
    
    $
    209,819Intangible pension asset  labor obligations
    
    
    (91,872
    )
    
    
    (106,302
    )Net amount recognized under U.S. and Mexican GAAP
    
    $
    112,586
    
    
    $
    103,517
 There were no plan assets during 2004 nor 2003. Postretirement
obligations Since 2004, the Company
started granting to its employees, postretirement benefits.
Therefore, the Company recognizes since 2004, those labor liabilities
for postretirement obligations. The present value of these
obligations at December 31, 2004 is as follows: Accumulated
postretirement benefit obligation
    
    $
    101,074Postretirement
other benefit obligation
    
    $
    100,672Unrecognized
prior service cost to be amortized in 17 years
    
    
    (102,832
    )Net
projected liability
    
    
    (2,160
    )Additional
minimum liability
    
    
    103,234$
    101,074
    )
 Total labor obligations
showed in Balance Sheet are as follows: 2004
    
    
    2003Seniority
premiums and pensions
    
    $
    204,458
    
    
    $
    209,819Postretirement
obligations
    
    
    101,074
    
    
    
    $
    305,532
    
    
    $
    209,819
  
    
    Valuation and qualifying accounts: The following table presents the roll forward of the allowance for doubtful accounts for the years
ended December 31, 2004, 2003 and 2002: Years ended December 312004
    
    
    2003
    
    
    2002Balance at the beginning of the period
    
    
    ($152,399
    )
    
    
    ($144,429
    )
    
    
    ($157,177
    )Effects of inflation
    
    
    7,139
    

    
    
    11,099
    
    
    
    9,748Increase in the allowance
    
    
    (47,227
    )
    
    
    (69,949
    )
    
    
    (13,518
    )Write-offs
    
    
    21,480
    
    
    
    50,880
    
    
    
    16,518Balance at the end of the period
    
    
    ($171,007
    )
    
    
    ($152,399
    )
    
    
    ($144,429
    )
 F-70




---



##### 



The following table presents the roll forward of the inventory obsolescence allowance for the years
ended December 31, 2004, 2003 and 2002: Years ended December 312004
    
    
    2003
    
    
    2002Balance at the beginning of the period
    
    
    ($29,815
    )
    
    
    ($44,723
    )
    
    
    ($51,595
    )Effects of inflation
    
    
    1,471
    
    
    
    1,738
    
    
    
    2,781Increase in the allowance
    
    
    (1,900
    )
    
    
    (2,236
    )
    
    
    (3,769
    )Write-offs
    
    
    396
    
    
    
    15,406
    
    
    
    7,860Balance at the end of the period
    
    
    ($29,848
    )
    
    
    ($29,815
    )
    
    
    ($44,723
    )
          Minority Interest Under Mexican GAAP, the
minority interest in consolidated subsidiaries is presented as a
separate component with stockholders equity in the consolidated
balance sheet. For U.S. GAAP purposes, the minority interest is not included
in stockholders equity.          2005 Subsequent event
 debt restructuring As mentioned in Note 10.b, a
financial restructuring was achieved. For U.S. GAAP purposes, the
accounting for this transaction is effective with the approval by the
Creditors on February 23, 2005. Although this is a 2005
transaction, the financial
assistance granted by the Companys creditors was deemed to be a
troubled debt restructuring since the Company was experiencing
financial difficulties, and there were concessions granted to it
based on the guidelines established by EITF 02-4 and
FAS 15. Accordingly, the Company followed FAS 15 to account
for this restructuring at fair value. The differences between the
fair value of the new debt plus equity granted and the carrying value
of the old debt should be recorded in the consolidated statement of
operations in 2005. U.S. GAAP  New Accounting pronouncements In December 2004, and as amended in April 2005, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which
replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer
will be an alternative to financial statement recognition. SFAS 123R is effective for fiscal years
beginning after June 15, 2005. Early application of SFAS 123R is encouraged, but not required. The
adoption of SFAS 123R did not have a material impact on the Companys consolidated results of
operations or financial position. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 153, Exchanges of Nonmonetary Assets (An amendment to APB Opinion No. 29) (SFAS
153). This statement addresses the measurement of exchanges of nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted. The Company is
currently evaluating the potential impact of this statement. On November 30, 2004,
the FASB ratified EITF 03-13, Applying the conditions in
paragraph 42 of FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, in determining
whether to report discontinued operations (EITF paragraph
42A (elimination of cash flows) and paragraph 42B (no significant
continuing involvement) of FSA 144. EITF 03-13 is effective
for all periods beginning after December 15, 2004. The Company
is evaluating the impact that this statement may have on its
financial position or results of operations.  F-71




---



##### 



In June 2005, the FASB published SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154), which changes the
requirements for the accounting for and reporting of a change in accounting principle and redefines
restatement as the revising of previously issued financial statements to reflect the correction of

an error. SFAS No. 154 requires retrospective application to prior periods financial statements
of changes in accounting principle, unless it is impracticable to determine the period-specific
effects of the cumulative effect of the change. This Statement also carries forward without change
the guidance contained in Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This Statement does not change the
transition provisions of any existing accounting pronouncement. SFAS No. 154 will be effective for
accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005. The Company is evaluating the impact that this statement may have on its financial position
or results of operations.    
 F-72