##### 



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 1-13148
 Corporación Durango, S.A. de C.V.
 Exact name of Registrant as specified in its charter
 Durango Corporation
 Translation of Registrants name into English
 United Mexican States
 Jurisdiction of incorporation or organization
 
 (Address and telephone number of principal executive offices)
       o þ
  o þ
  o þ
 o o þ
  o þ
  o þ
 
 þ o




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##### 



INTRODUCTION
  Presentation of Financial Information
 Currency and Exchange Rates
  Banco de Mexico
 Financial Statements
  Instituto Mexicano de Contadores Públicos, A.C. Indice Nacional de Precios al Consumidor
   Rounding
  1




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##### 



Market Data
 Cámara Nacional de la Industria de la Celulosa y el Papel
 Special Note Regarding Forward-Looking Statements
   
    
    our substantial debt and significant debt service obligations;
    
    the cyclicality of the paper and packaging industries;
    
    the competitive nature of the industries in which we are operating;
    
    our ability to keep key personnel required to operate our business;
    
    developments in, or changes to, the laws, regulations and governmental
policies governing our business, including environmental liabilities;
    
    changes in the dollar-peso exchange rate, interest rates and other domestic
and international market and industry conditions;
    
    limitations on our access to sources of financing on competitive terms;
    
    our need for substantial capital; and
    
    interest rate levels.
  2




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##### 



PART I
 Item 1. Identity of Directors, Senior Management and Advisors.
  Item 2. Offer Statistics and Expected Timetable.
  Item 3. Key Information.
 Selected Consolidated Financial Data
    At and for the year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of constant pesos, except per share data)Statement of Income Data:Mexican GAAP:Net sales
    
    Ps
    8,143.3
    
    
    Ps
    8,039.3
    
    
    Ps
    7,327.3
    
    
    Ps
    8,632.7
    
    
    Ps
    11,395.6Cost of sales
    
    
    7,096.3
    
    
    
    6,889.5
    
    
    
    6,300.0
    
    
    
    7,402.1
    
    
    
    9,482.1Gross profit
    
    
    1,047.0
    
    
    
    1,149.8
    
    
    
    1,027.3
    
    
    
    1,230.6
    
    
    
    1,913.5Selling, general and
administrative expenses
    
    
    677.7
    
    
    
    694.1
    
    
    
    698.2
    
    
    
    675.1
    
    
    
    802.0Operating income
    
    
    369.3
    
    
    
    455.7
    
    
    
    329.1
    
    
    
    555.5
    
    
    
    1,111.4Other income (expense)  net
    
    
    5.2
    
    
    
    (417.9
    )
    
    
    (1,638.8
    )
    
    
    (3,322.8
    )
    
    
    478.0Net comprehensive financing
cost (result):Interest expense
    
    
    (592.4
    )
    
    
    (1,158.3
    )
    
    
    (1,288.1
    )
    
    
    (1,219.1
    )
    
    
    (1,202.0
    )Interest income
    
    
    42.6
    
    
    
    41.5
    
    
    
    44.7
    
    
    
    42.4
    
    
    
    75.2Exchange gain (loss)  net
    
    
    334.6
    
    
    
    62.6
    
    
    
    (892.8
    )
    
    
    (1,085.0
    )
    
    
    356.5Gain on monetary position
    
    
    198.7
    
    
    
    469.4
    
    
    
    399.5
    
    
    
    440.4
    
    
    
    335.2
 3




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##### 



At and for the year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of constant pesos, except per share data)Total net comprehensive
financing cost (result)
    
    
    (16.5
    )
    
    
    (584.8
    )
    
    
    (1,736.7
    )
    
    
    (1,821.3
    )
    
    
    (435.0
    )Income (loss) from continuing
operations before income
taxes, employee statutory
profit sharing, and equity in
income of associated
companies
    
    
    357.9
    
    
    
    (547.1
    )
    
    
    (3,046.3
    )
    
    
    (4,588.6
    )
    
    
    1,154.4Income tax benefit (expense)
    
    
    (304.0
    )
    
    
    502.7
    
    
    
    2.3
    
    
    
    721.5
    
    
    
    (44.5
    )Employee statutory
profit-sharing expense
    
    
    (0.7
    )
    
    
    
    
    
    
    (1.9
    )
    
    
    (1.2
    )
    
    
    (5.3
    )Income (loss) from continuing
operations before equity in
income of associated
companies
    
    
    53.2
    
    
    
    (44.4
    )
    
    
    (3,045.9
    )
    
    
    (3,868.3
    )
    
    
    1,104.5Equity in income of
associated companies
    
    
    1.9
    
    
    
    2.7
    
    
    
    2.1
    
    
    
    2.2
    
    
    
    Income (loss) from continuing
operations
    
    
    55.1
    
    
    
    (41.7
    )
    
    
    (3,043.8
    )
    
    
    (3,866.1
    )
    
    
    1,104.5Income (loss) from
discontinued operations 
net
    
    
    108.8
    
    
    
    105.5
    
    
    
    (597.0
    )
    
    
    (111.8
    )
    
    
    166.2Extraordinary loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (334.7
    )Consolidated net income (loss)
    
    
    163.9
    
    
    Ps
    63.9
    
    
    Ps
    (3,640.8
    )
    
    Ps
    (3,977.9
    )
    
    Ps
    936.1Basic and diluted earnings
per share (1)
    
    Ps
    1.65
    
    
    Ps
    0.70
    
    
    Ps
    (39.10
    )
    
    Ps
    (42.32
    )
    
    Ps
    9.90Basic and diluted earnings
per share from continuing
operations (1)
    
    Ps
    0.63
    
    
    Ps
    (0.48
    )
    
    Ps
    (32.7
    )
    
    Ps
    (41.16
    )
    
    Ps
    11.69Weighted-average number of
shares outstanding
    
    
    108,528,665
    
    
    
    91,834,192
    
    
    
    92,942,916
    
    
    
    94,072,122
    
    
    
    94,072,122U.S. GAAP:(2) (3)Net sales
    
    Ps
    8,143.3
    
    
    Ps
    8,113.9
    
    
    Ps
    7,424.6
    
    
    Ps
    7,077.3
    
    
    Ps
    8,261.6Operating income (loss)
    
    
    458.3
    
    
    
    473.0
    
    
    
    (114.8
    )
    
    
    (119.1
    )
    
    
    1,213.2Income (loss) before
provisions for income and
asset taxes, minority
interest, special items and
discontinued operations
    
    
    566.9
    
    
    
    314.3
    
    
    
    (2,327.9
    )
    
    
    (1,728.5
    )
    
    
    379.4Net income (loss)
    
    
    1,344.9
    
    
    
    756.9
    
    
    
    (2,760.1
    )
    
    
    (2,101.6
    )
    
    
    372.5Basic and diluted earnings
per share (4)
    
    
    12.39
    
    
    
    8.24
    
    
    
    (29.70
    )
    
    
    (22.34
    )
    
    
    3.96Basic and diluted earnings
per share from continuing
operations (4)
    
    
    11.38
    
    
    
    6.97
    
    
    
    (28.60
    )
    
    
    (16.45
    )
    
    
    3.09Balance Sheet Data:Mexican GAAP:Cash and cash equivalents
    
    Ps
    700.4
    
    
    Ps
    859.9
    
    
    Ps
    697.9
    
    
    Ps
    250.8
    
    
    Ps
    572.5Total current assets
    
    
    3,657.0
    
    
    
    3,946.6
    
    
    
    3,951.9
    
    
    
    3,989.4
    
    
    
    4,790.0Property, plant and
equipment, net
    
    
    10,913.1
    
    
    
    11,433.2
    
    
    
    12,260.1
    
    
    
    13,002.4
    
    
    
    16,802.3Total assets
    
    
    14,830.4
    
    
    
    15,988.2
    
    
    
    17,244.1
    
    
    
    19,536.8
    
    
    
    23,938.9
 4




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##### 



At and for the year ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in millions of constant pesos, except per share data)Short-term debt, including
current portion of long-term
debt
    
    
    257.6
    
    
    
    182.0
    
    
    
    9,405.3
    
    
    
    8,539.4
    
    
    
    688.1Long-term debt
    
    
    6,505.1
    
    
    
    7,178.2
    
    
    
    422.1
    
    
    
    1,110.2
    
    
    
    8,076.3Common stock
    
    
    5,445.3
    
    
    
    5,154.6
    
    
    
    5,154.5
    
    
    
    5,280.3
    
    
    
    5,280.3Total majority stockholders
equity
    
    
    4,654.6
    
    
    
    1,583.9
    
    
    
    1,612.7
    
    
    
    4,916.6
    
    
    
    8,798.8Total minority stockholders
equity
    
    
    58.3
    
    
    
    80.1
    
    
    
    73.7
    
    
    
    77.3
    
    
    
    47.3Total stockholders equity
(net assets)
    
    
    4,712.9
    
    
    
    1,663.9
    
    
    
    1,686.4
    
    
    
    4,993.9
    
    
    
    8,846.1U.S. GAAP:(2)Total assets
    
    Ps
    14,979.6
    
    
    Ps
    15,691.0
    
    
    Ps
    16,011.3
    
    
    Ps
    19,093.9
    
    
    Ps
    20,527.8Total stockholders equity
(net assets)
    
    
    1,681.8
    
    
    
    482.4
    
    
    
    (254.7
    )
    
    
    2,584.9
    
    
    
    5,592.5Other Financial Data:Mexican GAAP:Resources generated by (used
in) operating activities
    
    Ps
    143.1
    
    
    Ps
    849.0
    
    
    Ps
    (482.6
    )
    
    Ps
    (174.0
    )
    
    Ps
    1,126.9Resources generated by (used
in) financing activities
    
    
    (551.1
    )
    
    
    (625.7
    )
    
    
    (60.7
    )
    
    
    922.4
    
    
    
    (597.8
    )Resources generated by (used
in) investing activities
    
    
    248.5
    
    
    
    (61.4
    )
    
    
    990.4
    
    
    
    (1,070.1
    )
    
    
    (866.3
    )Capital expenditures
    
    
    (134.8
    )
    
    
    (214.2
    )
    
    
    (114.7
    )
    
    
    (493.1
    )
    
    
    (920.9
    )U.S. GAAP:Cash flow provided by (used
in) operating activities
    
    Ps
    (53.7
    )
    
    Ps
    796.4
    
    
    Ps
    (343.5
    )
    
    Ps
    423.2
    
    
    Ps
    1,352.6Cash flow provided by (used
in) financing activities
    
    
    (38.0
    )
    
    
    (482.2
    )
    
    
    (441.3
    )
    
    
    1,491.7
    
    
    
    (1,116.5
    )Cash flow provided by (used
in) investing activities
    
    
    555.6
    
    
    
    (56.3
    )
    
    
    989.2
    
    
    
    (1,574.2
    )
    
    
    (571.6
    )
 
 (1)
    
    See note 3u 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 23 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 23 to our audited consolidated financial statements.(4)
    
    See note 23 to our audited consolidated financial statements. Dividends
  Exchange Rate Information
  5




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##### 



Noon Buying RatePeriodYear ended December 31,
    
    High
    
    Low
    
    Average(1)
    
    End2001
    
    Ps
    9.97
    
    
    Ps
    9.03
    
    
    Ps
    9.34
    
    
    Ps
    9.162002
    
    
    10.42
    
    
    
    9.00
    
    
    
    9.67
    
    
    
    10.432003
    
    
    11.41
    
    
    
    10.11
    
    
    
    10.79
    
    
    
    11.242004
    
    
    11.64
    
    
    
    10.81
    
    
    
    11.31
    
    
    
    11.152005
    
    
    11.41
    
    
    
    10.41
    
    
    
    10.89
    
    
    
    10.63
 Noon Buying RatePeriodMonth Ended
    
    High
    
    Low
    
    Average(2)
    
    EndDecember 31, 2005
    
    Ps
    10.77
    
    
    Ps
    10.41
    
    
    Ps
    10.63
    
    
    Ps
    10.63January 31, 2006
    
    
    10.64
    
    
    
    10.44
    
    
    
    10.54
    
    
    
    10.44February 28, 2006
    
    
    10.53
    
    
    
    10.43
    
    
    
    10.48
    
    
    
    10.45March 31, 2006
    
    
    10.95
    
    
    
    10.46
    
    
    
    10.75
    
    
    
    10.45April 30, 2006
    
    
    11.16
    
    
    
    10.86
    
    
    
    11.05
    
    
    
    11.09May 31, 2006
    
    
    11.30
    
    
    
    10.84
    
    
    
    11.09
    
    
    
    11.29June (through June 27)
    
    
    11.46
    
    
    
    11.28
    
    
    
    11.40
    
    
    
    11.42
 
 (1)
    
    Average of monthend rates.(2)
    
    Average of daily rates. Source
  Risk Factors
  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.
   Our operations are and will continue to be restricted by covenants in our debt agreements.
  6




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##### 






    
    incur additional debt;
    
    pay dividends, acquire shares of stock of our company or certain of our
subsidiaries, make payments on subordinated debt or make investments;
    
    make distributions from our subsidiaries;
    
    issue or sell capital stock of our company or certain of our subsidiaries;
    
    issue guarantees;
    
    sell or exchange assets;
    
    enter into sale and lease-back transactions;
    
    enter into transactions with stockholders and affiliates of our company;
    
    create liens on assets of our company or certain of our subsidiaries; and
    
    effect mergers.
  
    
    our ability to adjust to rapidly changing market conditions, thus making
us more vulnerable in the event 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.
  We are vulnerable to competition in Mexico and the United States from producers of paper and
packaging products with substantial resources.
   7




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##### 



Our operations may be adversely affected by increases in the price of raw materials.
   Fluctuations in energy costs may adversely affect our costs of operations and our revenues.
  Lack of water availability may adversely affect us.
 Comisión Nacional del Agua
  We may be adversely affected by the imposition and enforcement of more stringent environmental and
safety requirements.
 (Secretaría del Medio Ambiente y Recursos
Naturales)
 8




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##### 



If we lose key members of our management team and are unable to attract other qualified personnel,
our business could be adversely affected.
  Our principal stockholders own 78.9% of our shares and may take actions not in the interest of
other holders of our shares
  Risks Relating to Mexico
 Political developments in Mexico may adversely affect our business.
 Partido Acción Nacional Partido Revolucionario Institucional
 Partido de la Revolución Democrática
 Adverse economic developments in Mexico may adversely affect our financial condition and results of
operations.
   9




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##### 



Downturns in the Mexican economy adversely affect us.
  Depreciation of the Mexican peso relative to the dollar may impair our ability to service our debt
and adversely affect our profitability.
 Banco de México
  An increase in inflation may increase our operating costs but not our revenues.
  Risks Relating to Our Series A Shares, CPOs and ADSs
 The market for the ADSs and the Series A Shares is limited
  10




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##### 



concurso mercantil
  Future sales of our Series A Shares directed by Banamex may affect the stock prices of our Series A
Shares and 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.
  Comisión Nacional Bancaria y de Valores
 The protections afforded to minority shareholders in Mexico are different from those afforded to
minority shareholders in the United States.
  11




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##### 



Holders of ADSs are not able to vote at our shareholder meetings.
  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.
   The price of our Series A Shares and ADSs may be affected by economic developments in other
emerging market countries.
  Investors may experience difficulties in enforcing civil liabilities against us or our directors,
officers and controlling persons.
  12




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##### 



Item 4. Information on Our Company.
   
    
    Paper: containerboard (linerboard and corrugating medium), newsprint and uncoated free sheet;
    
    Packaging: corrugated containers and multi-wall sacks; and
    
    Other: plywood.
   sociedad anónima de capital variable
  Paper and Packaging Industry Overview
  
    
    packaging paper, which includes linerboard, corrugating medium, kraft
paper, and tubing and folding cartons;
    
    printing and writing paper, which includes newsprint, bond paper,
business and writing forms and other papers used for photocopying and commercial
printing;
    
    sanitary paper; and
    
    specialty paper.
  13




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##### 



North American Paper and Packaging Industry
  Mexican Paper Industry
 Apparent Demand for Paper Industry
    Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %
    
    % GDPYear
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change
    
    Change2001
    
    
    4,272
    
    
    
    1,884
    
    
    
    237
    
    
    
    5,919
    
    
    
    1.1
    %
    
    
    (0.2
    )%2002
    
    
    4,451
    
    
    
    1,997
    
    
    
    227
    
    
    
    6,221
    
    
    
    5.1
    %
    
    
    0.8
    %2003
    
    
    4,497
    
    
    
    2,090
    
    
    
    197
    
    
    
    6,391
    
    
    
    2.7
    %
    
    
    1.4
    %2004
    
    
    4,766
    
    
    
    2,227
    
    
    
    282
    
    
    
    6,711
    
    
    
    5.0
    %
    
    
    4.2
    %2005
    
    
    4,904
    
    
    
    2,381
    
    
    
    273
    
    
    
    7,012
    
    
    
    4.5
    %
    
    
    3.0
    %
 
  Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change2001
    
    
    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
    
    
    
    1,054
    
    
    
    111
    
    
    
    3,731
    
    
    
    5.2
    %2005
    
    
    2,829
    
    
    
    1,114
    
    
    
    107
    
    
    
    3,836
    
    
    
    2.8
    %
 
 14




---



##### 



Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    Apparent
    
    %Year
    
    Production
    
    Imports
    
    Exports
    
    Demand
    
    Change2001
    
    
    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
    
    
    
    492
    
    
    
    20
    
    
    
    1,233
    
    
    
    2.8
    %2005
    
    
    795
    
    
    
    569
    
    
    
    23
    
    
    
    1,341
    
    
    
    8.4
    %
 
  Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons, except percentages)
 Aggregate
    
    
    
    
    
    
    
    
    
    
    Apparent
    
    
    %Year
    
    Production
    
    
    Imports
    
    
    Exports
    
    
    Demand
    
    
    Change2001
    
    
    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%2005
    
    
    282
    
    
    
    164
    
    
    
    6
    
    
    
    440
    
    
    
    (5.4)%
 
 Pricing
  
    
    the rate of growth of the Mexican economy and the demand for packaging;
    
    prevailing inflation rates in Mexico;
    
    U.S. paper price levels;
    
    prevailing international prices for paper and packaging; and
    
    fluctuations in the peso/dollar exchange rate.
  15




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##### 




    
    resistance specifications;
    
    quality control;
    
    customer service;
    
    printing and graphics specifications;
    
    volume of production runs; and
    
    proximity to customers and industrial centers (due to the transportation cost of converted products).
  Tariffs
   History and Development of Our Company
  16




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##### 



Significant Developments During 2005 and Recent Developments
 Financial Restructuring
  Ley
de Concursos Mercantiles concurso mercantil
  concurso mercantil
 conciliadora Instituto Federal de Especialistas de Concursos
Mercantiles concurso mercantil
   concurso mercantil
  
    
    Bank creditors of our company with claims against our company in the aggregate amount of
US$136.3 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
 17




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##### 



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 12 5/8% Senior Notes due
2003, or 2003 notes, our 13 1/8% Senior Notes due 2006, or 2006 notes, our 13 1/2% Senior
Notes due 2008, or 2008 notes, our 13 3/4% 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.
 Acquisition of Empaques del Norte
  Acquisition of Líneas Aéreas
  Acquisition of Inmobiliaria Industrial
  Sale of Chihuahua Particleboard Plant
  Recapitalization of Series A Shares and Series B Shares
  
    
    each of our outstanding CPOs will represent a financial interest in one share of our common stock;
    
    each of our outstanding ADSs will continue to represent two CPOs; and
    
    we expect that our common stock will be listed on the Mexican Stock Exchange.
 18




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##### 



Debt Reduction Program
  
    
    we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements;
    
    we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount
outstanding under our loan agreement with Bank of Albuquerque;
    
    we have prepaid US$4.8 million to GE Capital Leasing under our capital leases,
representing the full amount outstanding under these leases; and
    
    we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital
lease.
  Tizayuca Mill Lease Agreement
  Subsidiaries and Operating Divisions
  19




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##### 



* CONICEPA =
    
    Compañía Norteamericana de Inversiones
en Celulosa y Papel, S.A. de C.V.
    
    (1)
(2)
(3)
    
    4.92% is controlled through Empaques de Cartón Titán
16.19% is controlled through Compañia Papelera de Atenquique
19.80% is controlled through Empaques de Cartón Titán, and
27.24% is controlled through Corporación Durango
  
    
    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
  
    
    Grupo Durango.The Grupo Durango division produces containerboard. In 2005,
approximately 85% of the 651.1 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 2005,
the Grupo Pipsamex division sold 142.4 thousand short tons of newsprint and 133.0 thousand
short tons of uncoated
 20




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##### 



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 2005, approximately 81% 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 2005 sales of 708.6 thousand short tons consisted almost entirely
of corrugated containers and multi-wall sacks. 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, a forest-based building products manufacturer, markets its
products throughout the NAFTA region. In 2005, Ponderosas continuing operations sold 9.7
thousand short tons of plywood.
  Our Products
 General
  
    
    Papercontainerboard (linerboard and corrugating medium), newsprint and uncoated free
sheet (bond, book stock, miscellaneous free sheet);
    
    Packagingcorrugated containers and multi-wall sacks; and
    
    Otherplywood.
  Production at December 31,Installed Capacity at
    
    
    Mills/Product Type
    
    December 31, 2005
    
    
    Plants
    
    
    2005
    
    
    2004
    
    
    2003(in thousands of shorttons per year)
    
    
    
    
    
    
    (in thousands of short tons)Paper:Containerboard
    
    
    900.0
    
    
    
    6
    
    
    
    924.0
    
    
    
    891.8
    
    
    
    859.9Newsprint
    
    
    160.0
    
    
    
    1
    
    
    
    148.1
    
    
    
    160.4
    
    
    
    131.0Uncoated free sheet
    
    
    155.0
    
    
    
    1
    
    
    
    155.4
    
    
    
    133.1
    
    
    
    143.5Total Paper
    
    
    1,215.0
    
    
    
    8
    
    
    
    1,227.5
    
    
    
    1,185.4
    
    
    
    1,134.3Packaging:Corrugated containers
    
    
    917.0
    (1)
    
    
    19
    (1)
    
    
    662.8
    
    
    
    632.5
    
    
    
    627.6Multi-wall sacks
    
    
    66.0
    
    
    
    3
    
    
    
    43.6
    
    
    
    39.2
    
    
    
    36.9Total Packaging
    
    
    983.0
    
    
    
    22
    
    
    
    706.4
    
    
    
    671.6
    
    
    
    664.6Other products (2)
    
    
    58.0
    
    
    
    3
    
    
    
    9.9
    
    
    
    10.5
    
    
    
    10.2Total Production
    
    
    2,256.0
    
    
    
    33
    
    
    
    1,943.8
    
    
    
    1,867.5
    
    
    
    1,809.1
 21




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##### 



(1)
    
    Includes 58,000 tons of capacity at our Titán Tlalnepantla Plant. On December 30, 2005, we
suffered a casualty loss at this plant as a result of a fire. This plant has been out of
service since that date. We expect to reopen this plant by the end of 2006.(2)
    
    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.  December 31,Product Type
    
    2005
    
    
    2004
    
    
    2003Sales 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
    
    
    342.8
    
    
    Ps
    1,381.3
    
    
    
    341.6
    
    
    Ps
    1,575.9
    
    
    
    312.7
    
    
    Ps
    1,252.6Newsprint
    
    
    142.4
    
    
    
    936.7
    
    
    
    158.1
    
    
    
    955.4
    
    
    
    130.8
    
    
    
    734.2Uncoated free sheet
    
    
    133.0
    
    
    
    1,172.1
    
    
    
    121.1
    
    
    
    1,023.2
    
    
    
    124.4
    
    
    
    1,000.8Total Paper
    
    
    618.1
    
    
    
    3,490.1
    
    
    
    620.7
    
    
    
    3,554.5
    
    
    
    567.9
    
    
    
    2,987.6Packaging:Corrugated containers
    
    
    665.1
    
    
    
    4,153.0
    
    
    
    632.2
    
    
    
    4,027.0
    
    
    
    615.6
    
    
    
    3,928.3Multi-wall sacks
    
    
    42.0
    
    
    
    388.9
    
    
    
    39.9
    
    
    
    347.2
    
    
    
    35.9
    
    
    
    319.6Paper tubes (1)
    
    
    1.5
    
    
    
    10.9
    
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    3.2Total Packaging
    
    
    708.6
    
    
    
    4,552.8
    
    
    
    672.1
    
    
    
    4,374.2
    
    
    
    652.0
    
    
    
    4,251.0Other products
    
    
    9.7
    
    
    
    100.4
    
    
    
    11.7
    
    
    
    110.5
    
    
    
    10.8
    
    
    
    88.7Total Sales Volume
    
    
    1,336.5
    
    
    Ps
    8,143.3
    
    
    
    1,304.5
    
    
    Ps
    8,039.3
    
    
    
    1,230.7
    
    
    Ps
    7,327.3
 
 (1)
    
    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. In
January, 2005, we purchased machinery to manufacture paper tubes. Paper Products
  Product Description and UsageContainerboard
    
    We produce linerboard and corrugating medium,
white-top and mottled white linerboard and paper, and
high-performance linerboard. Our products are used by
corrugated container manufacturers in the production
of a wide variety of corrugated containers.Newsprint
    
    We produce standard, peach and improved newsprint. Our
products are used by newspaper and magazine publishers
and advertisers for newspapers, books, advertisements,
and magazines.Uncoated free sheet
    
    We produce bond, forms, tablet, copy, and book stock
and miscellaneous free sheet. Our products are used by
consumer goods and office supplies producers for
printing and writing paper, office supplies, and
educational books.
  22




---



##### 



Packaging Products
  Product Description and UsageCorrugated containers
    
    We produce corrugated containers manufactured in
converting plants from containerboard. Our products
are used by consumer, industrial and agricultural
goods producers to ship products including home
appliances, electronics, spare parts, grocery
products, produce, books, tobacco and furniture.Multi-wall sacks
    
    We produce flat, expandable, glued, sewn and
laminated sacks. Our products are used by cement,
powdered foods and chemicals manufacturers for
delivery of cement, flour, powdered food, chemical
products, gypsum and lime products.
  Other Products
  Customers
   Paper
    
    Packaging
    
    Other ProductsMexico:
    
    Mexico:
    
    Mexico:El Universal
Compañía
Periodística
Nacional, S.A. de
C.V.
    
    Grupo Vitro, S.A. de C.V.
    
    Maderería El Cueramo, S.A. de C.V.Duro Bag
Comisión Nacional
de Libros de Texto
Gratuitos
    
    Grupo Pepsico, S.A. de C.V.
Kimberly Clark de Mexico,
S.A. de C.V.
    
    Mexicana Pacific, S.A. de C.V.
Triplay Alameda, S.A. de C.V.
Aglomerados y Triplay VIC, S.A. de C.V.Allen del Norte, S.A. de C.V.
Grupo Apasco, S.A. de C.V.
Chiquita, S.A. de C.V.United States:
    
    United States:South
Key
Mission
    
    Harris Packaging
Bronco Packaging
Bana, Inc.
Victor Pkg  Dallas
 Sales and Marketing
  23




---



##### 



Raw Materials
  Recycled Fiber
   Pulp
  24




---



##### 



ejidos,
 Water
   Electric Power
   Distribution and Supply of Our Products
    25




---



##### 



Our Competition
      Environmental Matters
 (Ley General del
Equilibrio Ecológico y de Protección al Ambiente)
  26




---



##### 



Insurance
  Property, Plant and Equipment
  Short tonsper yearPaper:ContainerboardCentauro Mill (Durango)
    
    
    275,000Atenquique Mill (Jalisco)
    
    
    145,000McKinley Mill (New Mexico, U.S.)
    
    
    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)
    
    
    155,0001,215,000Pulp:Unbleached Softwood PulpAtenquique Mill (Jalisco)
    
    
    80,000Bleached Chemical Thermomecanical PulpPipsamex Pulp Mill (Durango) (3)
    
    
    79,000Thermomecanical Pulp (TMP)Tuxtepec Pulp Mill (Oaxaca)
    
    
    52,000
 27




---



##### 



Short tonsper yearBleached 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) (1)
    
    
    59,000Monterrey Plant (Nuevo León)
    
    
    56,000Culiacán Plant (Sinaloa) (1)
    
    
    39,000Guadalajara Plant (Jalisco) (1)
    
    
    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) (1)(3)(4)
    
    
    58,000Eyemsa Izcalli Plant (Edo. de México)
    
    
    47,000Eyemsa Tlalnepantla Plant (Edo. de México)
    
    
    46,000Eyemsa Tapachula Plant (Chiapas)
    
    
    52,000Eyemsa Tepatitlán Plant (Jalisco)
    
    
    50,000Empaques del Norte Plant (Monterrey)
    
    
    25,000Durango McKinley Paper Dallas Plant (Texas, U.S.)
    
    
    100,000Total
    
    
    917,000Multi-wall SacksCd. Guzmán Plant (Jalisco)
    
    
    22,000Tula Plant (Hidalgo) (1)
    
    
    22,000Apasco Plant (Edo. de México)
    
    
    22,000Total
    
    
    66,000983,000Other:Plywood Anahuac Mill (Chihuahua) (3)
    
    
    26,000Particleboard Durango Mill (Durango) (3)
    
    
    17,000Plywood Durango Mill (Durango)
    
    
    15,000Total
    
    
    58,000
 
 (1)
    
    Leased facility.(2)
    
    This mill has a total capacity of 210,000 short tons of newsprint; however, as this mill has
the ability to produce 50,000 short tons of containerboard per year on one of its newsprint
machines and we used this machine principally to produce containerboard during the year ended
December 31, 2005, we have reflected this amount as containerboard capacity as of December 31,
2005.(3)
    
    These facilities are not currently in operation.(4)
    
    On December 30, 2005, we suffered a casualty loss at this plant as a result of a fire. This
plant has been out of service since that date. The delivery commitments and customers of this
plant are currently being served by our other corrugated container plants. We expect to
reopen this plant by the end of 2006.  28




---



##### 



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, 2005 and 2004 and
for the years ended December 31, 2005, 2004 and 2003 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 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
  
    
    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 2005 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, 2005, 2004
and 2003;
    
    a discussion of our liquidity and capital resources, including our changes in financial
position for the years ended December 31, 2005, 2004 and 2003, and our long-term
indebtedness;
    
    a discussion of our capital expenditures and our contractual commitments; and
    
    a discussion of the principal differences between Mexican GAAP and U.S. GAAP as they
relate to our financial statements.
 Overview
  29




---



##### 




    
    the substantial reduction in our production capacity and product offerings as a result
of the disposition of Pronal and the molded pulp division of Empaques de Cartón Titán, or
Titán, and our 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 affect the cost of producing our
products;
    
    the growth rates of Mexican GDP and U.S. GDP, which affect the demand for our products,
and consequently our sales volume;
    
    the exchange rate of the peso against the dollar, which affects our net sales in pesos
and our financing costs;
    
    inflation rates in Mexico; and
    
    our ability to use our net operating loss carryforwards.
 Our financial condition and liquidity are and will be influenced by a variety of factors, including:
 
    
    our financial restructuring following our defaults on our unsecured debt in November 2002;
    
    our ability to generate cash flows from our operations;
    
    prevailing domestic and international interest rates and movements in exchange rates,
which affect our debt service requirements;
    
    our limited ability to borrow funds from Mexican and international financial
institutions or to sell our debt securities in the Mexican and international securities
markets, primarily as a result of covenants included in our restructured indebtedness; and
    
    our capital expenditure requirements, which consist primarily of maintenance of our
operating facilities.
 Financial Presentation and Accounting Policies
 Consolidated Financial Statements
  30




---



##### 



Business Segments
  
    
    Paper This segment includes our production and sale of containerboard (linerboard and
corrugating medium), newsprint and uncoated free sheet. This segment includes the operating
results of the Grupo Durango division and the Grupo Pipsamex division in Mexico and Durango
McKinley Paper Companys paper operations in the United States.
    
    Packaging This segment includes the production and sale of corrugated containers,
multi-wall sacks and paper tubes. This segment includes the operating results of the
packaging division in Mexico and the U.S.
    
    Other This segment includes the production and sale of plywood.
  Discontinued Operations
  Critical Accounting Estimates
  Allowance for doubtful accounts
  31




---



##### 



Deferred taxes
   Property, plant and equipment
     32




---



##### 



Pension plans, seniority premiums and indemnities
  Negative goodwill
    Principal Factors Affecting Our Results of Operations and Liquidity
 Our Financial Restructuring
   33




---



##### 




    
    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.
  concurso mercantil concurso
mercantil
 conciliadora Instituto Federal de
Especialistas de Concursos Mercantiles
  
    
    Bank creditors of our company with claims against our company in the amount of US$136.3
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
 34




---



##### 



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.
   Disposition of Certain of Our Operations
  Disposition of Molded Pulp Division
  Disposition of Pronal
   Disposition of Mexico City Warehouse
   Disposition of Chihuahua Particleboard Operations
  35




---



##### 



Effect of Level of Indebtedness and Interest Rates
    Pricing of Our Products
  
    
    industry capacity utilization and significant increases in capacity in the industry;
    
    recycled fiber prices;
    
    demand for packaging products as a result of the level of growth of the Mexican and U.S. economies;
    
    fluctuations in the exchange rate between the peso and the dollar; and
    
    prevailing inflation rates.
 Containerboard.
 Uncoated Free Sheet.
 36




---



##### 



Newsprint.
 Packaging products.
 Cyclicality Affecting the Paper and Packaging Industry, Capacity Utilization and Pricing
   
    
    cyclical trends in general business and economic activity produce swings in demand for
paper and packaging products;
    
    during periods of reduced demand, the high fixed cost structure of the capital intensive
paper industry generally leads producers to compete aggressively on price in order to
maximize capacity utilization;
    
    significant capacity additions, whether through plant expansion or construction, can
take two to three years to implement and are therefore necessarily based upon estimates of
future demand; and
    
    as competition in paper and packaging products is generally focused on price, being a
low-cost producer is critical to improved profitability. This favors producers with larger
plants that maximize economies of scale but construction of high capacity plants may result
in significant increases in capacity that can outstrip demand growth.
   Capacity Utilization
  37




---



##### 



Year Ended December 31,2005
    
    2004
    
    2003Containerboard
    
    
    100
    %
    
    
    99
    %
    
    
    99
    %Newsprint and uncoated free sheet
    
    
    96
    %
    
    
    93
    %
    
    
    94
    %Corrugated containers
    
    
    72
    %
    
    
    71
    %
    
    
    70
    %Multi-wall sacks
    
    
    66
    %
    
    
    59
    %
    
    
    56
    %
 Effects of Fluctuations in Raw Materials Prices
  Recycled Fiber Costs
      Energy Costs
 38




---



##### 



(Comisión
Federal de Electricidad),
 Mexican and United States Demand for Our Products
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(in million of constant pesos)Mexico
    
    Ps
    10,555.4
    
    
    Ps
    10,016.5
    
    
    Ps
    8,072.0United States
    
    
    2,291.4
    
    
    
    2,358.6
    
    
    
    2,072.7Eliminations
    
    
    (4,703.5
    )
    
    
    (4,335.8
    )
    
    
    (2,817.4
    )Total
    
    Ps
    8,143.3
    
    
    Ps
    8,039.3
    
    
    Ps
    7,327.3
  
    
    approximately 68% of our net sales of paper to third parties was to customers in Mexico,
and the remainder was to customers in the United States; and
 
    
    approximately 88% of our net sales of packaging products to third parties was to
customers in Mexico, and the remainder was to customers in the United States.
    Effects of Fluctuations in Exchange Rates between the Peso and the Dollar
  
    
    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;
 39




---



##### 




    
    our costs for some of our raw materials, principally imports of OCC and OPP to Mexico
and certain chemicals required in our production processes, are incurred in dollars or are
dollar-linked; and
    
    we are permitted to deduct our foreign exchange losses in calculating our taxable income
and, conversely, are required to treat foreign exchange gains as taxable income.
     
    
    the interest costs on our dollar-denominated indebtedness in pesos increases, which
negatively affects our results of operations;
    
    the amount of our dollar-denominated indebtedness in pesos increases, and our total
liabilities in pesos increase; and
    
    our financial expenses increase as a result of foreign exchange losses that we must
record.
   
    
    the interest costs on our dollar-denominated indebtedness in pesos decreases, which
positively affects our results of operations;
    
    the amount of our dollar-denominated indebtedness in pesos decreases, and our total
liabilities in pesos decrease; and
    
    our financial expenses tend to decrease as a result of foreign exchange gains that we
must record.
  40




---



##### 



Effects of Inflation
  
    
    most of our costs and expenses are incurred in pesos in Mexico and are subject to
inflationary pressures while most of our sales are denominated in dollars or are
dollar-linked and are made at prices set by reference to international market prices; and
 
    
    our monetary assets and liabilities are restated to give effect to the rate of Mexican
inflation, as expressed by the NCPI, and as a result we record monetary position gains and
losses that depend on our net monetary asset (liability) position and the rate of Mexican
inflation.
   Year Ended December 31,2005
    
    2004
    
    2003(in millions of constant pesos,except percentages)Inflation
    
    
    3.3
    %
    
    
    5.2
    %
    
    
    4.0
    %Gain from monetary position
    
    Ps
    198.7
    
    
    Ps
    469.4
    
    
    Ps
    399.5
 Effect of Taxes on Our Income
  Income Taxes and Employee Statutory Profit Sharing
   Asset Taxes
  41




---



##### 



Tax Loss Carryforwards and Recoverable Asset Taxes
   Tax Loss
    
    
    RecoverableYear of expiration
    
    Carryforwards
    
    
    Asset Taxes(millions of constant pesos)2006
    
    Ps
    158.3
    
    
    Ps
    28.62007
    
    
    107.6
    
    
    
    28.42008
    
    
    149.2
    
    
    
    27.52009
    
    
    70.6
    
    
    
    21.52010
    
    
    63.6
    
    
    
    25.92011
    
    
    87.2
    
    
    
    24.12012
    
    
    361.2
    
    
    
    64.12013
    
    
    1,128.2
    
    
    
    59.72014
    
    
    384.3
    
    
    
    6.42015
    
    
    1,038.0
    
    
    
    1.0Total
    
    Ps
    3,548.2
    
    
    Ps
    287.2
 Recent Developments
 Recapitalization of Series A Shares and Series B Shares
  
    
    each of our outstanding CPOs will represent a financial interest in one share of our common stock;
    
    each of our outstanding ADSs will continue to represent two CPOs; and
    
    we expect that our common stock will be listed on the Mexican Stock Exchange.
  Debt Reduction Program
  42




---



##### 




    
    we have prepaid US$47.0 million to Bancomext under certain outstanding loan agreements;
    
    we have prepaid US$10.0 million to Bank of Albuquerque, representing the full amount
outstanding under our loan agreement with Bank of Albuquerque;
    
    we have prepaid US$4.8 million to GE Capital Leasing under our capital leases,
representing the full amount outstanding under these leases; and
    
    we have prepaid US$4.6 million to GE Capital Corporation under an outstanding capital
lease.
  Pipsamex Capital Increase
  Tizayuca Mill Lease Agreement
  Results of Operations
  In the following discussion, references to increases or decreases in any year are made by
comparison with the corresponding prior year, except as the context otherwise indicates.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003(in millions of constant pesos)Net sales
    
    Ps
    8,143.3
    
    
    Ps
    8,039.3
    
    
    Ps
    7,327.3Cost of sales
    
    
    7,096.3
    
    
    
    6,889.5
    
    
    
    6,300.0Gross profit
    
    
    1,047.0
    
    
    
    1,149.8
    
    
    
    1,027.3Selling, general and administrative expenses
    
    
    677.7
    
    
    
    694.1
    
    
    
    698.2Operating income
    
    
    369.3
    
    
    
    455.7
    
    
    
    329.1Other income (expense), net
    
    
    5.2
    
    
    
    (417.9
    )
    
    
    (1,638.8
    )Net comprehensive financing cost:Interest expense
    
    
    (592.4
    )
    
    
    (1,158.3
    )
    
    
    (1,288.1
    )Interest income
    
    
    42.6
    
    
    
    41.5
    
    
    
    44.7
 43




---



##### 



Year Ended December 31,2005
    
    
    2004
    
    
    2003(in millions of constant pesos)Foreign exchange gain (loss)
    
    
    334.6
    
    
    
    62.6
    
    
    
    (892.8
    )Monetary position gain
    
    
    198.7
    
    
    
    469.4
    
    
    
    399.5(16.5
    )
    
    
    (584.8
    )
    
    
    (1,736.7
    )Loss from continuing operations before
income taxes and employee statutory profit
sharing
    
    
    357.9
    
    
    
    (547.1
    )
    
    
    (3,046.3
    )Income tax benefit
    
    
    (304.0
    )
    
    
    502.7
    
    
    
    2.3Employee statutory profit sharing expense
    
    
    (0.7
    )
    
    
    
    
    
    
    (1.9
    )Loss before equity in income of associated
companies
    
    
    53.2
    
    
    
    (44.4
    )
    
    
    (3,045.9
    )Equity in income of associated companies
    
    
    1.9
    
    
    
    2.7
    
    
    
    2.1Loss from continuing operations
    
    
    55.1
    
    
    
    (41.7
    )
    
    
    (3,043.8
    )Discontinued operations
    
    
    108.8
    
    
    
    105.5
    
    
    
    (597.0
    )Consolidated net income (loss)
    
    Ps
    163.9
    
    
    Ps
    63.9
    
    
    Ps
    (3,640.8
    )
  Year Ended December 31,2005
    
    2004
    
    2003(in millions of constant pesos, except percentages)PaperSales to third parties
    
    Ps
    3,490.1
    
    
    Ps
    3,554.5
    
    
    Ps
    2,987.6Intersegment sales
    
    
    4,199.8
    
    
    
    4,029.7
    
    
    
    2,655.0Total sales
    
    
    7,689.8
    
    
    
    7,584.2
    
    
    
    5,642.6Operating income (loss)
    
    
    122.5
    
    
    
    55.5
    
    
    
    (122.6
    )Operating margin (%)
    
    
    3.5
    %
    
    
    1.6
    %
    
    
    (4.1
    )%Depreciation and amortization
    
    
    276.6
    
    
    
    293.1
    
    
    
    285.7PackagingSales to third parties
    
    Ps
    4,552.8
    
    
    Ps
    4,374.2
    
    
    Ps
    4,251.0Intersegment sales
    
    
    413.3
    
    
    
    306.0
    
    
    
    144.9Total sales
    
    
    4,966.2
    
    
    
    4,680.2
    
    
    
    4,395.9Operating income
    
    
    236.7
    
    
    
    398.9
    
    
    
    467.5Operating margin (%)
    
    
    5.2
    %
    
    
    9.1
    %
    
    
    11.0
    %Depreciation and amortization
    
    
    133.4
    
    
    
    137.4
    
    
    
    128.8OtherSales to third parties
    
    Ps
    100.4
    
    
    Ps
    110.5
    
    
    Ps
    88.7Intersegment sales
    
    
    90.4
    
    
    
    0.1
    
    
    
    17.5Total sales
    
    
    190.8
    
    
    
    110.6
    
    
    
    106.2Operating income (loss)
    
    
    10.1
    
    
    
    1.2
    
    
    
    (15.8
    )Operating margin (%)
    
    
    10.0
    %
    
    
    1.1
    %
    
    
    (17.8
    )%Depreciation and amortization
    
    
    11.6
    
    
    
    7.7
    
    
    
    12.0
 Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
 Net Sales
   44




---



##### 




    
    a 3.1% increase in net sales to third parties of corrugated containers, principally
due to a 5.2% increase in our sales volume of corrugated containers, the effects of which
were partially offset by a 2.0% decline in our average sales price for corrugated
containers; and
    
    a 12.0% increase in net sales to third parties of multi-wall sacks, principally due to a
5.4% increase in our sales volume of multi-wall sacks and a 6.2% increase in our average
sales price for multi-wall sacks.
 Net sales to third parties of our paper segment decreased by 1.8% in 2005, due to:
 
    
    a 12.3% decrease in net sales to third parties of containerboard, principally due to a
12.7% decrease in our average sales price for containerboard, the effects of which were
partially offset by a 0.4% increase in our sales volume of containerboard; and
    
    to a lesser extent, a 2.0% decrease in net sales to third parties of newsprint,
principally due to a 9.9% decrease in our sales volume of newsprint, the effects of which
were partially offset by an 8.9% increase in our average sales price for newsprint.
   Cost of Sales
  Gross Profit and Gross Margin
  Selling, General and Administrative Expenses
  Operating Income
  45




---



##### 



Other Income (Expense), Net
   
    
    a Ps 479.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants;
    
    a Ps 333.5 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 149.4 million restructuring expense recorded in 2004 in connection with our
financial restructuring.
  Net Comprehensive Financing Cost
  Income Tax and Employee Statutory Profit Sharing Benefit (Expenses)
  Income (Loss) from Discontinued Operations
   46




---



##### 




    
    income of Ps 59.3 million generated by our discontinued operations;
    
    a Ps 65.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations; and
    
    a Ps 15.8 million loss recorded on the sale of our Chihuahua particleboard plant.
  
    
    income of Ps 70.4 million generated by our discontinued operations; and
    
    a Ps 35.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations.
 Consolidated Net Income
  Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
 Net Sales
  
    
    the 19.0% increase of net sales to third parties of our paper segment;
    
    the 2.9% 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 19.0% in 2004 due to:
 
    
    a 25.8% increase in net sales to third parties of containerboard, principally due to a
15.2% increase in our average sales price for containerboard and a 9.3% increase in our
sales volume of containerboard;
    
    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
    
    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.
  
    
    a 2.5% 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 0.2% decline in our average sales price for corrugated containers;
and
    
    an 8.7% increase in net sales to third parties of multi-wall sacks, principally due to a
11.0% increase in our sales volume of multi-wall sacks, the effects of which were partially
offset by a 2.1% decline in our average sales price for multi-wall sacks.
 47




---



##### 



Cost of Sales
  Gross Profit and Gross Margin
  Selling, General and Administrative Expenses
  Operating Income
     Other Expenses  Net
  
    
    a Ps 479.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants;
    
    a Ps 333.5 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
 48




---



##### 




    
    a Ps 149.4 million restructuring expense recorded in 2004 in connection with our
financial restructuring.
   
    
    a Ps 656.1 million expense recorded as a result of the impairment of long-lived assets
in use at five of our mills and plants;
    
    a Ps 342.5 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 296.6 million restructuring expense recorded in 2003 in connection with our
financial restructuring, including our payment of US$12.0 million in fees related to
certain forbearance agreements; and
    
    a Ps 217.0 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
  Income Tax and Employee Statutory Profit Sharing Benefit
  Income (Loss) from Discontinued Operations
  
    
    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.
  
    
    income of Ps 70.4 million generated by our discontinued operations; and
 49




---



##### 




    
    a Ps 35.2 million income tax and employee statutory profit sharing benefit recorded with
respect to our discontinued operations.
  
    
    a Ps 612.9 million loss incurred by our discontinued operations, including a Ps 381.8
million impairment charge assessed against the Chihuahua particleboard mill;
    
    a Ps 486.4 million loss recorded on the sale of Pronal;
    
    a Ps 364.1 million gain recorded on the sale of our molded pulp division; and
    
    a Ps 138.2 million income tax and employee statutory profit sharing benefit recorded
with respect to our discontinued operations.
 Consolidated Net Income (Loss)
  Liquidity and Capital Resources
  
    
    working capital requirements;
    
    servicing our indebtedness; and
    
    capital expenditures related to investments in operations, major maintenance and
expansion of plant facilities.
  
    
    cash flows from operating activities;
    
    short-term and long-term borrowings; and
    
    sales of debt securities in domestic and international capital markets.
   Changes in Financial Position
 Net Resources Provided by (Used in) Operating Activities
  50




---



##### 




    
    depreciation and amortization of Ps 421.6 million;
    
    deferred income tax expense of Ps 241.1 million, primarily as a result of the
revaluation of long-lived assets in use at five of our mills and plants; and
    
    a Ps 113.8 million gain as a result of the revaluation of long-lived assets in use at
five of our mills and plants.
  
    
    a Ps 307.7 million loss from discontinued operations, net of items that did not require resources;
    
    a Ps 135.6 million decrease in accrued expenses and taxes, other than income taxes;
    
    a Ps 100.2 million decrease in other liabilities, net; and
    
    a Ps 90.0 million increase in inventories.
  
    
    impairment of long-lived assets of Ps 479.1 million related to five of our mills and plants;
    
    depreciation and amortization of Ps 438.2 million,
    
    amortization of debt-issuance cost of Ps 338.1 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 531.3 million, primarily as a result of the impairment
of our long-lived assets.
   
    
    impairment of long-lived assets of Ps 656.1 million related to five of our mills and plants;
    
    depreciation and amortization of Ps 426.4 million;
    
    loss related to Durango Paper Company of Ps 342.5 million; and
    
    loss on sale of property, plant and equipment of Ps 217.0 million principally related to
the sale of Grupo Pipsamexs warehouse in Mexico City.
 51
         
    
    a Ps 998.3 million increase in interest payable as a result of our failure to pay
interest payments due on our unsecured indebtedness during 2003;
    
    a Ps 93.6 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 81.9 million increase in liabilities of discontinued operations; and
    
    a Ps 52.5 million decrease in inventories, principally resulting from a decrease in
spare parts and finished products.
 Net Resources Used in Financing Activities
    Net Resources Generated by (Used in) Investing Activities
    52




---



##### 



Indebtedness
  Short-Term Indebtedness
  Long-Term Indebtedness
  OutstandingPrincipal Amount atInstrument
    
    December 31, 2005
    
    Final Maturity2012 notes
    
    US$433.8 million
    
    December 2012Restructured Credit Agreement
    
    US$110.3 million
    
    December 2012Bancomext Loan
    
    US$55.6 million
    
    September 2014Bancomext Fabrica Mexicana Loan
    
    US$8.5 million
    
    September 2014 (repaid)Bank of Albuquerque Loan
    
    US$10.0 million
    
    May 2008 (repaid)Commerzbank Loan
    
    6.4 million
    
    January 2010GE Capital Leasing Leases
    
    US$5.3 million
    
    April 2009GE Capital Corporation Lease
    
    US$4.9 million
    
    October 2007
 2012 Notes
  Restructured Credit Agreement
  Other Secured Bank Debt
 Bancomext Loans +
 53




---



##### 



+
 Bank of Albuquerque Loan
 Commerzbank Loan  
 Our Capital Leases
 GE Capital Leasing Leases +
 GE Capital Corporation Lease +
 54




---



##### 



Restrictive Covenants and Available Credit
  
    
    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.
    Off-Balance Sheet Arrangements
  55




---



##### 



Contractual Commitments and Capital Expenditures
 Contractual Commitments
  Payments Due by PeriodLess than One Year
    
    One to Three Years
    
    Three to Five Years
    
    More than Five Years
    
    Total(millions of constant pesos)Indebtedness
    
    Ps
    235.4
    
    
    Ps
    533.6
    
    
    Ps
    477.1
    
    
    Ps
    5,408.2
    
    
    Ps
    6,654.3Interest on indebtedness (1)
    
    
    524.7
    
    
    
    1,604.9
    
    
    
    973.7
    
    
    
    454.2
    
    
    
    3,557.5Capital leases
    
    
    22.2
    
    
    
    80.7
    
    
    
    5.5
    
    
    
    
    
    
    
    108.4Operating leases (2)
    
    
    107.0
    
    
    
    162.1
    
    
    
    99.7
    
    
    
    24.9
    
    
    
    393.7Notes payable
    
    
    48.3
    
    
    
    49.4
    
    
    
    14.4
    
    
    
    
    
    
    
    112.0Total contractual obligations
    
    Ps
    937.6
    
    
    Ps
    2,430.7
    
    
    Ps
    1,570.4
    
    
    Ps
    5,887.3
    
    
    Ps
    10,825.9
 
 (1)
    
    Consists of estimated future payments of interest on our indebtedness, calculated based on
interest rates and foreign exchange rates applicable at December 31, 2005 and assuming that
all amortization payments and payments at maturity on our indebtedness will be made on their
scheduled payment dates.(2)
    
    Consists of estimated future minimum lease payments as of December 31, 2005 under
noncancelable operating leases of equipment to our subsidiaries. Capital Expenditures
  
    
    Ps 152.0 million for the installation of Durango McKinley Paper Companys BHS
corrugating plant in Dallas, Texas, which was completed in 2003;
    
    Ps 159.3 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; and
    
    Ps 110.9 million in 2005 for the purchase of printers for the packaging division and
machinery and equipment for our paper mills.
  56




---



##### 



Years Ended December 31,2006
    
    
    20072003
    
    
    2004
    
    
    2005
    
    
    Estimated
    
    
    Estimated(in millions of constant pesos)Capital expenditures (other than
environmental)
    
    Ps
    109.1
    
    
    Ps
    200.0
    
    
    Ps
    122.8
    
    
    Ps
    183.5
    
    
    Ps
    200.0Environmental capital expenditures
    
    
    5.6
    
    
    
    14.2
    
    
    
    12.0
    
    
    
    16.5
    
    
    
    10.0Total
    
    Ps
    114.7
    
    
    Ps
    214.2
    
    
    Ps
    134.8
    
    
    Ps
    200.0
    
    
    Ps
    210.0
   Differences between Mexican GAAP and U.S. GAAP
  New Accounting Pronouncements
  57




---



##### 



58




---



##### 



Item 6. Directors, Senior Management and Employees.
 Directors
 (estatutos sociales)
    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.  Miguel Rincón (Comisión Nacional Agropecuaría Comercial)
 Jose Antonio Rincón (Hospital General de Durango).
 Mayela Rincón de Velasco (Universidad Juárez del Estado de Durango).
 59




---



##### 



(Colegio de Contadores Públicos de Durango, A.C.)
 Jesús Rincón Asociación Nacional de Productores de Tableros
y Aglomerados Asociación Mexicana de la Industria
Forestal
 Wilfrido Rincón (Consejo
Consultivo Forestal Nacional) Asociación Nacional de Forestales
 Ignacio Rincón (Asociación de Técnicos de la Celulosa y del Papel).
 Ángel Del Palacio ITESM
 Alfonso Fernández de Castro
 Buenaventura G. Saravia ITESM
 Roberto Isaac Hernández ITESM
 Martín Rincón (Asociación Nacional de Distribuidores de
Papel) (Asociación Nacional del Libro)
 Juan Francisco Ealy Ortiz
 Jose Luis Michel Nava
 60




---



##### 



Javier Pérez Rocha
 Rebeca Castaños Castaños
 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.  Gustavo Peyro Medina
 Arturo Díaz Medina .
 Jesús Romo . . ITESM
 61




---



##### 



Gabriel Villegas Salazar
 Compensation of Directors and Officers
   Statutory Auditor
 (comisario)
 
    
    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.
  Audit Committee
    62




---



##### 



Remuneration Committee
      Financing and Planning Committee
      Employees
  63




---



##### 



As of December 312005
    
    2004
    
    2003Mexico (1)
    
    
    7,721
    
    
    
    7,301
    
    
    
    7,283United States
    
    
    285
    
    
    
    282
    
    
    
    304Total
    
    
    8,006
    
    
    
    7,583
    
    
    
    7,587
 
 (1)
    
    Includes 1,453, 1,457 and 1,453 temporary employees as of December 31, 2003, 2004 and 2005,
respectively. Includes 211 and 192 employees of our discontinued operations as of December 31,
2003 and 2004, respectively. Share Ownership of Directors and Officers
  Item 7. Major Stockholders and Related Party Transactions.
 Major Stockholders
   
    
    each of our outstanding CPOs will represent a financial interest in one share of our common stock;
    
    each of our outstanding ADSs will continue to represent two CPOs; and
    
    we expect that our common stock will be listed on the Mexican Stock Exchange.
     64




---



##### 




    
    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.
  Series A Shares
    
    Series B Shares
    
    TotalNumber of Shares
    
    %
    
    Number of shares
    
    %
    
    Number of 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
    
    
    
    78.9
 
 *
    
    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. 65




---



##### 



(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
   Banamex Trust
  66




---



##### 



ACM Pledge
  CPO Trust
   Issuance of Series B Shares
  Related Party Transactions
 Administradora Corporativa y Mercantil, S.A. de C.V.
  Durango Paper Company
  67




---



##### 



Líneas Aéreas Ejecutivas de Durango, S.A. de C.V.
  +
   Transactions with Directors and their Affiliates
    Item 8. Financial Information.
  Legal Proceedings
  Voluntary Concurso Mercantil Petition (Solicitud de Concurso Mercantil Presentada por el Propio
Comerciante), Case No. 3/2004
 concurso mercantil concurso mercantil
 68




---



##### 



concurso mercantil
 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).
 concurso mercantil
 concurso mercantil
 concurso mercantil concurso mercantil concurso
mercantil
 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.
  Comisión Nacional del Agua v. Productora Nacional de Papel, S.A. de C.V.
 Tribunal Federal de Justicia Fiscal y Administrativa
 69




---



##### 



Other Litigation
  Dividend Policy
  Significant Changes
  Item 9. The Offer and Listing.
 General
   concurso mercantil
 Trading on the Mexican Stock Exchange, the New York Stock Exchange and the Pink Sheets
 Sistema Electrónico de
Negociación de Transacciones, Registro y Asignación
 Institución para el Depósito de
Valores
 70




---



##### 



New York Stock Exchange/Mexican Stock Exchange
    
    Pink Sheets (1)Pesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low2001
    
    Ps
    24.00
    
    
    Ps
    24.00
    
    
    US$
    5.55
    
    US$
    5.152002
    
    
    14.00
    
    
    
    14.00
    
    
    
    5.55
    
    
    
    1.012003
    
    
    16.30
    
    
    
    3.00
    
    
    
    1.70
    
    
    
    0.402004
    
    
    19.98
    
    
    
    2.90
    
    
    
    3.85
    
    
    
    0.202005
    
    
    13.00
    
    
    
    4.11
    
    
    
    1.30
    
    
    
    0.15
 
 (1)
    
    Prices through May 25, 2004 are prices quoted on the New York Stock Exchange. Prices after
May 25, 2004 are prices quoted on the Pink Sheets.(2)
    
    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
 New York Stock Exchange/Mexican Stock Exchange
    
    Pink Sheets (1)Pesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    Low2004First Quarter
    
    Ps
    19.98
    
    
    Ps
    11.80
    
    
    US$
    3.85
    
    
    US$
    1.55Second Quarter
    
    
    14.50
    
    
    
    10.98
    
    
    
    2.40
    
    
    
    0.95Third 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
    
    
    9.00
    
    
    
    6.01
    
    
    
    0.85
    
    
    
    0.15Fourth Quarter
    
    
    9.00
    
    
    
    4.11
    
    
    
    1.25
    
    
    
    0.252006First Quarter
    
    
    12.97
    
    
    
    4.10
    
    
    
    1.25
    
    
    
    0.25Second Quarter
(through June 27)
    
    
    7.71
    
    
    
    4.10
    
    
    
    1.30
    
    
    
    0.37
 71




---



##### 



(1)
    
    Prices through May 25, 2004 are prices quoted on the New York Stock Exchange. Prices after
May 25, 2004 are prices quoted on the Pink Sheets. Source
 Mexican Stock Exchange
    
    Pink SheetsPesos per Series A Share
    
    Dollars per ADSHigh
    
    Low
    
    High
    
    LowDecember 2005
    
    Ps
    9.00
    
    
    Ps
    4.11
    
    
    US$
    1.25
    
    
    US$
    0.25January 2006
    
    
    12.97
    
    
    
    6.00
    
    
    
    0.25
    
    
    
    0.35February 2006
    
    
    11.23
    
    
    
    9.99
    
    
    
    0.35
    
    
    
    0.35March 2006
    
    
    9.99
    
    
    
    4.10
    
    
    
    1.12
    
    
    
    0.35April 2006
    
    
    7.20
    
    
    
    4.10
    
    
    
    0.37
    
    
    
    0.37May 2006
    
    
    7.20
    
    
    
    4.90
    
    
    
    1.30
    
    
    
    0.50June 2006 (through June 27)
    
    
    7.15
    
    
    
    7.71
    
    
    
    0.65
    
    
    
    0.50
 
 Source: Mexican Stock Exchange; Pink Sheets LLC.  Item 10. Additional Information.
 Organizational Documents
 estatutos sociales
 Ley del Mercado de Valores sociedad anónima bursátil
 Registration and Transfer
  Voting Rights
  72




---



##### 



Ley General de Sociedades Mercantiles
 
    
    amendments to our bylaws;
    
    anticipated dissolution of our company;
    
    merger and transformation of our company from one type of company to another; and
    
    increases or decreases affecting the fixed portion of our capital stock.
     
    
    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.
  73




---



##### 



Dividends
   Liquidation Rights
  Changes in Capital Stock
  Pre-Emptive Rights
 Periódico Oficial del Estado de Durango
 Repurchase Obligation
  74




---



##### 




    
    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.
  Other Provisions
 Variable Capital and Withdrawal Rights pro rata
  
    
    95% of the average share price quoted on the Mexican Stock Exchange during the 30
business days prior to the date on which the withdrawal becomes effective; and
    
    the book value per share as calculated from our financial statements (as approved at the
annual ordinary stockholders meeting) for the fiscal year at the end of which the
withdrawal becomes effective.
  Right of Dissenting Stockholders to Tender Their Shares
 Restrictions on Foreign Investment
 Forfeiture of Shares
 75




---



##### 



Duration
 Conflict of Interest
 Purchase by our company of its Shares Bis Ley del Mercado de Valores
 Shares Without Voting Rights
 Prohibition on Purchase of Shares by Subsidiaries of our Company
 Material Contracts
   Exchange Controls
  76




---



##### 



Mexican Income Taxation
  establecimiento
permanente
 Secretaría de Hacienda y Crédito Público
   Series A Shares, ADSs, CPOs
 Taxation of Dividends
 Ley del Impuesto Sobre la Renta
  77




---



##### 



cuenta de utilidad fiscal
neta
 cuenta de utilidad fiscal neta reinvertida
  Disposition of Series A Shares, ADSs and CPOs
    
    
    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.
  Estate and Gift Taxes
 78




---



##### 



United States Federal Income Taxation
    
    
    holders that may be subject to special tax treatment, such as financial institutions,
insurance companies, real estate investment trusts, regulated investment companies,
tax-exempt organizations, grantor trusts or dealers or traders in securities or currencies;
    
    certain former citizens or long-term residents of the United States;
    
    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.
   
    
    a citizen or resident 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.
 79




---



##### 



ADSs
  Ownership of CPOs or ADSs in General
  Distributions
 i.e.
   80




---



##### 



Sale or Exchange of Series A Shares or ADSs
     Passive Foreign Investment Company Considerations
   81




---



##### 



U.S. Backup Withholding Tax and Information Reporting
  THE ABOVE DESCRIPTION OF MEXICAN INCOME TAXATION AND U.S. FEDERAL INCOME TAXATION IS NOT INTENDED
TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE 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
  Item 11. Quantitative and Qualitative Disclosure about Market Risk.
  Interest Rate Risk
  82




---



##### 



Liabilities
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010
    
    Thereafter(in millions of constant pesos)Fixed Rate DebtMillions of Pesos
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,613.0Weighted Average rate
    
    
    8.94
    %
    
    
    9.99
    %
    
    
    9.99
    %
    
    
    9.99
    %
    
    
    9.99
    %
    
    
    9.99
    %Variable Rate DebtMillions of Pesos
    
    
    257.6
    
    
    
    335.7
    
    
    
    278.6
    
    
    
    248.5
    
    
    
    256.5
    
    
    
    772.8Weighted Average rate
    
    
    8.37
    %
    
    
    8.42
    %
    
    
    8.51
    %
    
    
    8.54
    %
    
    
    8.61
    %
    
    
    8.69
    %Total DebtMillions of Pesos
    
    
    257.6
    
    
    
    335.7
    
    
    
    278.6
    
    
    
    248.5
    
    
    
    256.5
    
    
    
    5,385.8Weighted Average rate
    
    
    8.76
    %
    
    
    9.54
    %
    
    
    9.61
    %
    
    
    9.68
    %
    
    
    9.74
    %
    
    
    9.80
    %
  Foreign Currency Exchange Rate Risk
    Item 12. Description of Securities Other than Equity Securities.
  PART II
 Item 13. Defaults, Dividend Arrearages and Delinquencies.
  Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds.
  83




---



##### 



Item 15. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
     Item 16. [Reserved].
  Item 16A. Audit Committee Financial Expert.
  84




---



##### 



Item 16B. Code of Ethics.
  Item 16C. Principal Accountant Fees and Services.
 Audit Fees
  For the year ended December 31,2005
    
    
    2004(in thousands of constant pesos)Audit Fees
    
    Ps
    13,270
    
    
    Ps
    10,178Tax Fees
    
    
    130
    
    
    
    884Other Fees
    
    
    597
    
    
    
    5,423Total Fees
    
    Ps
    13,997
    
    
    Ps
    16,485
 Audit fees and audit-related fees.
 Tax Fees.
 Other Fees.
 Audit Committees Pre-Approval Policy 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 SEC, 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.
 85




---



##### 



de minimus
 Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees.
  Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  86




---



##### 



PART III
 Item 17. Financial Statements.
  Item 18. Financial Statements.
  Item 19. Exhibits.
 Documents filed as exhibits to this annual report:
 1.1
    
    
    Bylaws of our company, as amended (English translation)2.1
    
    
    Indenture, dated as of February 23, 2005, between Corporación Durango S.A. de C.V. and Law
Debenture Trust Company of New York, as Trustee (incorporated by reference to Exhibit 2.1 to our
annual report on Form 20-F filed on October 28, 2005)2.2
    
    
    Restructured Credit Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de
C.V., the Guarantors named therein, the Tranche A Holders named therein, and The Bank of New
York, as Administrative Agent (incorporated by reference to Exhibit 2.2 to our annual report on
Form 20-F filed on October 28, 2005)2.3
    
    
    Common Agreement, dated as of February 23, 2005, among Corporación Durango, S.A. de C.V., the
Guarantors and Additional Guarantors named therein, the A Lenders named therein, The Bank of New
York, as Administrative Agent, Law Debenture Trust Company of New York, as Trustee, Deutsche Bank
Trust Company Americas, as Collateral Agent, Deutsche Bank Mexico, S.A., Institución De Banca
Multiple, Trust Division, as Collateral Agent, Deutsche Bank Trust Company Americas, as
Guarantor Paying Agent, and the Subordinating Creditors named therein (incorporated by reference
to Exhibit 2.3 to our annual report on Form 20-F filed on October 28, 2005)2.4
    
    
    The total amount of long-term debt securities of our company and its subsidiaries under any one
instrument, other than the Indenture and the Restructured Credit Agreement, does not exceed 10%
of the total assets of our company and its subsidiaries on a consolidated basis. We agree to
furnish copies of any or all such instruments to the United States Securities and Exchange
Commission upon request.2.5
    
    
    Form of Deposit Agreement among our company, The Bank of New York and owners and beneficial
owners of American Depositary Receipts issued thereunder, including the form of American
Depositary Receipts (incorporated by reference to Exhibit 4.3 to our companys registration
statement No. 33-80148 on Form F-1 filed on June 10, 1994)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)8
    
    
    List of Subsidiaries
 87




---



##### 



12.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 88




---



##### 



SIGNATURES
  CORPORACIÓN DURANGO, S.A. DE C.V.By:
    /s/ Mayela Rincón Arredondo de VelascoName:
    Mayela Rincón Arredondo de VelascoTitle:
    Chief Financial Officer  89




---



##### 



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-2Report
of Independent Certified Public Accountants
    
    F-3Report
of Independent Registered Public Accounting Firm
    
    F-4Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    F-5Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    F-6Statements of Changes in Shareholders Equity for the years ended December 31, 2005, 2004 and 2003
    
    F-7Consolidated Statement of Changes in Financial Position for the years ended December 31, 2005,
2004 and 2003
    
    F-8Notes to the Consolidated Financial Statements
    
    F-9
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 F-2




---



##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
 22,
   
 KBA GROUP LLP
 14241 Dallas Parkway, Suite 200Dallas,Texas 75254Phone 972.702.8262Fax 972.702.0673www.kbagroupllp.com
 F-3




---



##### 



Report of Independent Registered Public
Accounting Firm to the Board of Directors
and Stockholders of
Corporación Durango, S. A. de C. V.
        
  
 F-4




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  AS OF DECEMBER 31, 2005 AND 2004   (In thousands of constant Mexican pesos as of December 31, 2005)
 2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents (Note 4)
    
    $
    700,408
    
    
    $
    859,886Accounts receivable  Net (Note 5)
    
    
    1,733,285
    
    
    
    1,852,745Short-term related parties (Note 14)
    
    
    11,803
    
    
    
    13,505Inventories  Net (Note 6)
    
    
    1,195,809
    
    
    
    1,105,815Prepaid expenses
    
    
    15,655
    
    
    
    6,711Current assets of discontinued operations (Note 17)
    
    
    
    
    
    
    107,973Total current assets
    
    
    3,656,960
    
    
    
    3,946,635PROPERTY, MACHINERY PLANT AND
EQUIPMENT  NET (Note 7)
    
    
    10,913,101
    
    
    
    11,433,228OTHER ASSETS  NET (Note 8)
    
    
    260,386
    
    
    
    350,785NON-CURRENT ASSETS OF DISCONTINUED
OPERATIONS (Note 17)
    
    
    
    
    
    
    257,598Total assets
    
    $
    14,830,447
    
    
    $
    15,988,246LIABILITIESCURRENT LIABILITIES:Short-term debt (Note 9)
    
    $
    
    
    
    $
    43,554Current portion of long-term debt (Note 9)
    
    
    257,572
    
    
    
    138,429Notes payable
    
    
    48,274
    
    
    
    49,887Accrued interest
    
    
    13,564
    
    
    
    15,920Trade accounts payable
    
    
    843,891
    
    
    
    753,464Accrued expenses and taxes
    
    
    474,599
    
    
    
    708,875Employee statutory profit sharing
    
    
    1,000
    
    
    
    876Current liabilities of discontinued operations (Note 17)
    
    
    
    
    
    
    131,138Total current liabilities
    
    
    1,638,900
    
    
    
    1,842,143LONG-TERM LIABILITIES:Long-term debt (Note 9)
    
    
    6,505,139
    
    
    
    7,178,232Long-term notes payable
    
    
    63,773
    
    
    
    89,927Deferred income taxes (Note 16)
    
    
    1,601,824
    
    
    
    1,483,957Pension plans and seniority premiums (Note 11)
    
    
    307,899
    
    
    
    315,706Long-term liabilities of discontinued operations (Note 17)
    
    
    
    
    
    
    150,181Liabilities to be capitalized to equity (Note 9)
    
    
    
    
    
    
    3,264,164Total long-term liabilities
    
    
    8,478,635
    
    
    
    12,482,167Total liabilities
    
    
    10,117,535
    
    
    
    14,324,310STOCKHOLDERS EQUITY:Common stock (Note 12)
    
    
    5,445,303
    
    
    
    5,154,576Additional paid-in capital
    
    
    4,481,354
    
    
    
    1,507,630Retained earnings
    
    
    2,750,209
    
    
    
    2,686,117Net gain for the year
    
    
    179,176
    
    
    
    64,092Loss from holding non monetary assets
    
    
    (5,462,129
    )
    
    
    (4,745,267
    )Cumulative initial effect of deferred income taxes
    
    
    (3,348,713
    )
    
    
    (3,348,713
    )Cumulative translation adjustment of foreign subsidiaries
    
    
    609,425
    
    
    
    265,449Majority stockholders equity
    
    
    4,654,625
    
    
    
    1,583,884Minority stockholders equity in consolidated subsidiaries
    
    
    58,287
    
    
    
    80,052Total stockholders equity
    
    
    4,712,912
    
    
    
    1,663,936Commitments and contingencies (Notes 18 and 19)
    
    
    
    
    
    
    Total liabilities and stockholders equity
    
    $
    14,830,447
    
    
    $
    15,988,246
  F-5




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003   (In thousands of constant Mexican pesos as of December 31, 2005, except per share amounts)
 2005
    
    
    2004
    
    
    2003Net sales
    
    $
    8,143,300
    
    
    $
    8,039,294
    
    
    $
    7,327,253Cost of sales
    
    
    7,096,308
    
    
    
    6,889,515
    
    
    
    6,299,962Gross profit
    
    
    1,046,992
    
    
    
    1,149,779
    
    
    
    1,027,291Selling, general and administrative expenses
    
    
    677,735
    
    
    
    694,128
    
    
    
    698,168Operating income
    
    
    369,257
    
    
    
    455,651
    
    
    
    329,123Other income (expenses)  net (Note 15)
    
    
    5,235
    
    
    
    (417,906
    )
    
    
    (1,638,756
    )Net comprehensive financing cost:Interest expense
    
    
    (592,425
    )
    
    
    (1,158,265
    )
    
    
    (1,288,087
    )Interest income
    
    
    42,555
    
    
    
    41,503
    
    
    
    44,727Exchange gain (loss)
    
    
    334,613
    
    
    
    62,561
    
    
    
    (892,766
    )Gain on monetary position
    
    
    198,708
    
    
    
    469,359
    
    
    
    399,457(16,549
    )
    
    
    (584,842
    )
    
    
    (1,736,669
    )Income (loss) from continuing operations before income
taxes, employee statutory profit sharing and
equity in income of associated companies
    
    
    357,943
    
    
    
    (547,097
    )
    
    
    (3,046,302
    )Income tax benefit (Note 16)
    
    
    (304,016
    )
    
    
    502,740
    
    
    
    2,297Employee statutory profit sharing
    
    
    (719
    )
    
    
    
    
    
    
    (1,884
    )(304,735
    )
    
    
    502,740
    
    
    
    413Income (loss) from continuing operations before equity
in income of associated companies
    
    
    53,208
    
    
    
    (44,357
    )
    
    
    (3,045,889
    )Equity in the income of associated companies
    
    
    1,901
    
    
    
    2,736
    
    
    
    2,061Income (loss) from continuing operations
    
    
    55,109
    
    
    
    (41,621
    )
    
    
    (3,043,828
    )Discontinued operations  Net (Note 17)
    
    
    108,802
    
    
    
    105,536
    
    
    
    (596,964
    )Consolidated net income (loss)
    
    $
    163,911
    
    
    $
    63,915
    
    
    ($
    3,640,792
    )Net income (loss):Majority interest
    
    $
    179,176
    
    
    $
    64,092
    
    
    ($
    3,634,451
    )Minority interest
    
    
    (15,265
    )
    
    
    (177
    )
    
    
    (6,341
    )Consolidated net income (loss)
    
    $
    163,911
    
    
    $
    63,915
    
    
    ($
    3,640,792
    )Basic and diluted net income (loss) per share of
Continuing operations
    
    
    0.51
    
    
    
    (0.45
    )
    
    
    (32.75
    )Discontinued operations
    
    
    1.00
    
    
    
    1.15
    
    
    
    (6.42
    )Basic and diluted net income (loss) per share
    
    
    1.51
    
    
    
    0.70
    
    
    
    (39.17
    )Weighted average number of shares outstanding
    
    
    108,528,665
    
    
    
    91,834,192
    
    
    
    92,942,916
  F-6




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003   (In thousands of constant Mexican pesos as of December 31, 2005)
 Cumulative
    
    
    Cumulative
    
    
    MinorityLoss fron
    
    
    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 12)
    
    
    stock
    
    
    capital
    
    
    earnings
    
    
    assets
    
    
    premiums
    
    
    taxes
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    equityBalances as of January 1, 2003
    
    $
    5,280,258
    
    
    ($
    125,731
    )
    
    $
    1,507,630
    
    
    $
    6,670,306
    
    
    ($
    5,002,821
    )
    
    ($
    159,181
    )
    
    ($
    3,348,713
    )
    
    $
    94,870
    
    
    $
    77,319
    
    
    $
    4,993,937Reduction of common stock
(Note 12.b)
    
    
    (125,731
    )
    
    
    125,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer of the additional liability
for seniority premium (Note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (159,181
    )
    
    
    
    
    
    
    159,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for doubtful accounts for
receivable due from shareholders
(Note 14.b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190,557
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190,557
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,634,451
    )
    
    
    422,477
    
    
    
    
    
    
    
    
    
    
    
    98,625
    
    
    
    (3,653
    )
    
    
    (3,117,002
    )Balances as of December 31, 2003
    
    
    5,154,527
    
    
    
    
    
    
    
    1,507,630
    
    
    
    2,686,117
    
    
    
    (4,580,344
    )
    
    
    
    
    
    
    (3,348,713
    )
    
    
    193,495
    
    
    
    73,666
    
    
    
    1,686,378Increase in common stock (Note 12.c)
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,092
    
    
    
    (164,923
    )
    
    
    
    
    
    
    
    
    
    
    71,954
    
    
    
    6,386
    
    
    
    (22,491
    )Balances as of December 31, 2004
    
    
    5,154,576
    
    
    
    
    
    
    
    1,507,630
    
    
    
    2,750,209
    
    
    
    (4,745,267
    )
    
    
    
    
    
    
    (3,348,713
    )
    
    
    265,449
    
    
    
    80,052
    
    
    
    1,663,936Increase in common stock
    
    
    290,727
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,727Premium in Issuance of Shares
    
    
    
    
    
    
    
    
    
    
    2,973,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,973,724Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,176
    
    
    
    (716,862
    )
    
    
    
    
    
    
    
    
    
    
    343,976
    
    
    
    (21,765
    )
    
    
    (215,475
    )Balances as of December 31, 2005
    
    $
    5,445,303
    
    
    $
    
    
    
    $
    4,481,354
    
    
    $
    2,929,385
    
    
    ($
    5,462,129
    )
    
    $
    
    
    
    ($
    3,348,713
    )
    
    $
    609,425
    
    
    $
    58,287
    
    
    $
    4,712,912
  F-7




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (In thousands of constant Mexican pesos as of December 31, 2005)
 2005
    
    
    2004
    
    
    2003Operating activities:Consolidated income (loss) from continuing operations
    
    $
    55,109
    
    
    ($
    41,621
    )
    
    ($
    3,043,828
    )Items applied to income that did not require (provide) resources:Depreciation and amortization
    
    
    421,617
    
    
    
    438,236
    
    
    
    426,407(Income) expense from deferred income tax
    
    
    241,143
    
    
    
    (531,254
    )
    
    
    (79,473
    )(Revaluation) impairment of long-lived assets
    
    
    (113,803
    )
    
    
    479,130
    
    
    
    656,144(Loss) income on sale of property, plant and equipment
    
    
    (1,696
    )
    
    
    22,844
    
    
    
    217,015Other (expenses) income
    
    
    (26,107
    )
    
    
    17,020
    
    
    
    24,813Amortization of debt issuance costs and other financing costs
    
    
    
    
    
    
    338,148
    
    
    
    99,999Loss on operations of Durango Paper Company
    
    
    
    
    
    
    
    
    
    
    342,472576,263
    
    
    
    722,503
    
    
    
    (1,356,451
    )Trade accounts receivable  Net
    
    
    20,036
    
    
    
    135,582
    
    
    
    (98,261
    )Inventories
    
    
    (89,994
    )
    
    
    73,190
    
    
    
    52,466Other current assets
    
    
    92,182
    
    
    
    (29,316
    )
    
    
    7,922Trade accounts payable
    
    
    90,427
    
    
    
    (222,726
    )
    
    
    93,638Accrued interest
    
    
    (2,356
    )
    
    
    
    
    
    
    998,272Accrued expenses and taxes other than income taxes
    
    
    (135,602
    )
    
    
    44,958
    
    
    
    14,085Other  Net
    
    
    (100,163
    )
    
    
    (3,324
    )
    
    
    (88,319
    )Net resources (used in) provided by operating activities before
discontinued operations
    
    
    450,793
    
    
    
    720,867
    
    
    
    (376,648
    )Assets of discontinued operations
    
    
    107,973
    
    
    
    (16,465
    )
    
    
    6,452Liabilities of discontinued operations
    
    
    (131,138
    )
    
    
    39,102
    
    
    
    81,852Discontinued operations  net of items that did not require resources
    
    
    (284,509
    )
    
    
    105,536
    
    
    
    (194,264
    )(Loss) income from discontinued operations
    
    
    (307,674
    )
    
    
    128,173
    
    
    
    (105,960
    )Net resources provided by (used in) operating activities
    
    
    143,119
    
    
    
    849,040
    
    
    
    (482,608
    )Financing activities:(Decrease) increase of short-term and long-term debt
    
    
    (3,988,996
    )
    
    
    101,148
    
    
    
    281,951Payments of long-term debt
    
    
    (170,546
    )
    
    
    (798,869
    )
    
    
    (441,257
    )Common stock increase
    
    
    290,727
    
    
    
    49
    
    
    
    Additional paid-in capital
    
    
    2,973,724
    
    
    
    
    
    
    
    Translation adjustment of foreign subsidiaries
    
    
    343,976
    
    
    
    71,954
    
    
    
    98,622Net resources used in financing activities
    
    
    (551,115
    )
    
    
    (625,718
    )
    
    
    (60,684
    )Investing activities:Revenue from the sale of discontinued operations
    
    
    334,393
    
    
    
    
    
    
    
    1,004,969Acquisition of machinery and equipment
    
    
    (134,849
    )
    
    
    (214,181
    )
    
    
    (114,733
    )Restricted cash
    
    
    
    
    
    
    171,195
    
    
    
    (171,195
    )Divestment of subsidiaries
    
    
    (54,002
    )
    
    
    
    
    
    
    Investment in (divestment of) other assets
    
    
    28,205
    
    
    
    (34,856
    )
    
    
    20,222Sale of property, plant and equipment
    
    
    74,771
    
    
    
    16,483
    
    
    
    251,150Net resources (used in) generated by investing activities
    
    
    248,518
    
    
    
    (61,359
    )
    
    
    990,413(Decrease) increase in cash and cash equivalents
    
    
    (159,478
    )
    
    
    161,963
    
    
    
    447,121Balance of cash and cash equivalents at beginning of year
    
    
    859,886
    
    
    
    697,923
    
    
    
    250,802Balance of cash and cash equivalents at end of year
    
    $
    700,408
    
    
    $
    859,886
    
    
    $
    697,923
  F-8




---



##### 



CORPORACIÓN DURANGO, S. A. DE C. V. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 (In thousands of constant Mexican pesos as of December 31, 2005)
 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 sacks ), paper (containerboard, newsprint and bond) and other wood
products (plywood) 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. Prior to this sale, the Company provided certain guarantees
for a bank loan and certain letters of credit issued by DPC, amounting to $290,323 (US$25.2
million). DPCs creditors called these guarantees and consequently, the 2003 statement of
operations reflects a charge of $284,976 (US$23.6 million) which was recorded in other
expenses. These liabilities were included in the restructured debt.
 NOTE 2  BASIS OF PRESENTATION
 a.
    
    Going concern  The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, with realization of its assets and
liability payments in the ordinary course of business. As a consequence of the inability of
the Company to pay principal and interest of certain obligations, the Company reclassified
most of its debt as a short-term during 2002 and 2003, as mentioned in Note 9.b. As a result
of the financial restructuring agreement executed by the Company and its creditors in February
2005, the balances of the restructured debt have been reclassified, as of December 31, 2004
and 2005, to short-term and long-term debt in accordance with the maturity of those balances.
(See Note 9).b.
    
    Basis of presentation  The 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).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.
 F-9




---



##### 



Group
    
    Ownership(or Company)
    
    percentage
    
    ActivityAdministración Corporativa de Durango, S. A. de C.
V. and subsidiaries
    
    
    100
    %
    
    Administrative servicesCompañía Forestal de Durango, S. A. de C. V.
    
    
    100
    %
    
    Administrative servicesCompañía Papelera de Atenquique, S. A. de C. V.
    
    
    98
    %
    
    Manufacturing of paper
for corrugated boxesDurango International, Inc. and subsidiaries
    
    
    100
    %
    
    Manufacturing of paper
for corrugated boxes
and corrugated boxes.Durango Internacional, S. A. de C. V. and subsidiary
    
    
    100
    %
    
    Advisory,
administrative and
organization servicesEmpaques de Cartón Titán, S. A. de C. V. and
subsidiaries
    
    
    100
    %
    
    Manufacturing of
corrugated boxes and
multi-wall sacksGrupo Pipsamex, S. A. de C. V. and subsidiaries
    
    
    100
    %
    
    Manufacturing of
newsprint and bond
paperIndustrias Centauro, S. A. de C. V.
    
    
    99
    %
    
    Manufacturing of paper
for corrugated boxesPonderosa Industrial de México, S. A. de C. V.
    
    
    100
    %
    
    Manufacturing of plywoodPorteadores de Durango S.A. de C.V. and subsidiaries
    
    
    100
    %
    
    Hauling freight
 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 reflect constant purchasing power of the currency of the country in which the
subsidiaries operate by using the change in the consumer price index of the country.
Subsequently, all assets and liabilities are translated at the exchange rate in effect at year
end closing. The capital stock is translated at the historical exchange rates, and retained
earnings at the exchange rate in effect at the balance sheet date on which they arise. Income,
costs and expenses are translated at the exchange rate in effect on the date they are
recognized. The resulting translation effects are presented in stockholders equity.The financial statements of foreign subsidiaries included in the 2005, 2004 and 2003 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.
 NOTE 3  SIGNIFICANT ACCOUNTING POLICIES
  F-10




---



##### 



a.
    
    All significant intercompany balances and transactions have been eliminated for consolidation
purposes. The consolidation process was done based on subsidiaries audited financial
statements. See Note 14.b.
    
    Investments in cash equivalents include debt and stock investments and are classified based
on managements anticipated use of the investments at the time of sale either as debt to be
held to maturity, financial investments or available-for sale instruments. They are recorded
at acquisition cost and are subsequently valued as discussed in the following paragraphs.
 i.
    
    Debt investments to be held to maturity are valued at acquisition cost less prime
amortizations, plus discount amortizations, based on the outstanding balance during the life
of the investment. If necessary, a reduction in value is registered.ii.
    
    Financial instruments held for trading or available for sale 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.
 c.
    
    Accumulated preferred dividends of the limited voting rights shares, declared only if
earnings are obtained, are not recognized as liability until they are declared.d.
    
    Investments in affiliated and associated companies stocks are valued by the participation
method. The acquisition cost of the stocks is modified by the proportional part of the changes
in the capital stock of affiliated and associated companies after the acquisition date.
Participation of the Company in the affiliated and associated companies income is presented
separately in the statements of operations.e.
    
    Inventories and cost of sales are stated at average cost and
are later restated using factors derived from changes in the NCPI at its reposition costbased
on the most recent purchase price or production cost. The value should not exceed its market
value. See Note 6.f.
    
    Property, machinery and equipment of Mexican origin are recorded at acquisition cost and are
restated to reflect Mexican pesos of constant purchasing power using factors derived from
changes in the NCPI.Machinery and equipment of non-Mexican origin are recorded at acquisition cost and the
acquisition cost is restated to constant currency using the inflation of the country of origin,
then converted into Mexican pesos at the exchange rate in effect at the balance sheet date.
 F-11




---



##### 



Depreciation is calculated based on units produced in the period in relation to the total
estimated production of the assets over their useful lives, as follows:
 YearsBuildings
    
    25-50Machinery and industrial equipment
    
    23-40Transportation equipment
    
    1-5Computer equipment
    
    1-3Office furniture and equipment
    
    5-10
 These assets are evaluated annually for potential impairment.Recurring maintenance and repair expenditures are charged to operating expense as incurred. Major
overhauls to fixed assets are capitalized and amortized over the period in which benefits are
expected to be received.Net comprehensive financing cost incurred during the period of construction and installation of
property, machinery and equipment is capitalized and restated applying factors derived from
changes in the NCPI.g.
    
    Intangible assets are recognized in the balance sheet provided they are identifiable, provide
future economic benefits and there is control over those benefits. Intangible assets with
indefinite useful lives are not amortized. Intangible assets with definite useful lives are
amortized systematically based on the best estimate of their useful lives determined on the
basis of expectations for future economic benefits. The carrying value of intangible assets is
subject to an annual impairment evaluation.h.
    
    Effective January 1, 2004, the Company adopted Statement C-15, Impairment in the Value of
Long-Lived Assets and their Disposal, issued by MIPA, which establishes general criteria for
the identification and, if applicable, recording of impairment losses or the decrease in value
of long-lived tangible and intangible assets, including goodwill. The Company performed its
annual impairment evaluation of long-lived assets at December 31, 2005 and 2004, and, as a
result, recorded a favorable adjustment of $113,803 and a charge of $479,130, respectively, in
other income (expenses).i.
    
    Financial instruments held for trading or available for sale are valued at fair value (which
is similar to market value) with gains or losses recognized in the statement of operations.
Fair value is the amount for which a financial asset can be exchanged or a financial liability
can be paid in an arms-length transaction between interested and willing parties.
 F-12




---



##### 



j.
    
    Investments in derivative financial instruments for trading or 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. As of January 1, 2005, the Company
adopted amendments to Statement C-2, Financial Instruments. Statement C-2, as amended,
requires effects for valuation of derivative financial instruments for trading to be recorded
in capital stock and impairment effects losses to be calculated. The adoption of the
amendments to this Statement by the Company did not have any impact on the accompanying
financial statements because the Company did not have derivative financial instruments.k.
    
    Long-lived tangible and intangible assets (including goodwill) are subject to an annual
impairment evaluation to calculate their useful value and determine if impairment is
applicable.l.
    
    Liabilities and provisions for liabilities represent present obligations of the Company with
a probable requirement to pay those obligations in cash. The provisions have been recorded
based on the best reasonable estimation by management of the present payment obligation;
however, actual results could differ from recorded provisions.m.
    
    Income tax (IT) is recorded by the comprehensive method of assets and liabilities, which
consists of recording deferred tax for all temporary differences between the book and tax
values of assets and liabilities. Asset tax (AT) paid is charged in
the statement of operations due to uncertainty of its recoverability. See Note 16.Deferred employee statutory profit sharing (EPS) is recorded only when there are temporary
differences in accounting and tax net income that could cause a future benefit or liability and
the amount can be reasonably estimated.n.
    
    Pension plans and seniority premiums to which employees are entitled upon termination of
employment after 15 years of service are non- contributory and are recorded as costs of the
year in which the respective services are rendered, based on actuarial calculations using the
projected unit credit method.As of January 1, 2005, the Company adopted amendments to Statement D-3, Labor Obligations,
issued by MIPA. Statement D-3, as amended, establishes rules for estimating and recording the
liabilities related to severance payments due to employees upon dismissal for causes other than
financial restructuring. These effects are recognized through actuarial calculations using the
projected credit unit method. The net cost for the year ended December 31, 2005 for this item was
$5,139, which was recorded in the results for the year. The initial adoption of the amendments to
this Statement did not have a material impact on the financial statements.Other compensation based on seniority to which employees are entitled in the event of dismissal
or death, in accordance with the Mexican Federal Labor Law, are charged to income in the year in
which they become payable.
 F-13




---



##### 



o.
    
    Debt issuance costs  Debt issuance costs, which are included in other assets, are
capitalized and restated by applying changes in the NCPI. Amortization is calculated based on
the proportion of the initial tenor of the debt during which the debt has been outstanding. In
2004, the unamortized balance was charged to income for the period, as a result of the
exchange of outstanding debt for restructured debt.p.
    
    Common stock, legal reserve and retained earnings represent the value of those items in
terms of purchasing power of the Mexican peso as of the most recent balance sheet date, and
are determined by applying factors derived from the NCPI to the historical values.q.
    
    Additional paid-in capital represents the excess of payments for shares subscribed over their
par value, and is restated applying NCPI factors.r.
    
    Insufficiency in capital stock restatement represents the initial accrued result on monetary
position and the result of holding non-monetary assets (inventories and/or fixed assets)
stated in Mexican pesos of purchasing power as of the most recent balance sheet date.s.
    
    Comprehensive income (loss) represents the net income (loss) for the period presented in the
consolidated statements of operations, plus the effects of holding non-monetary assets, the
profit from translation of foreign currency, and other items required by specific accounting
standards to be reflected in stockholders equity, but which do not represent capital
contributions, reductions or distributions, and is restated by applying NCPI factors.t.
    
    The result on monetary position represents income due to inflation changes, measured by NCPI
factors, on the years net monthly monetary assets and liabilities, stated in Mexican pesos of
purchasing power as of the most recent balance sheet date. Inflation rates were 3.33% in 2005,
5.19% in 2004 and 3.97% in 2003.u.
    
    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. There are no effects from potential dilutive shares.v.
    
    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.w.
    
    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. Differences due to exchange rate fluctuations from transactions and payment dates or
valuations as of the most recent balance sheet date are recognized in income. See Note 13.
 F-14




---



##### 



Financial statements of foreign subsidiaries included in the consolidation process are restated
to reflect constant purchasing power of the currency of the country in which the subsidiaries
operate by using the change in the consumer price index of the country. Subsequently, all assets
and liabilities are translated at the exchange rate in effect at year-end closing. The effect of
exchange rate fluctuations is presented in stockholders equity in Cumulative translation
adjustment of foreign subsidiaries.Financial statements of foreign subsidiaries are translated as follows: a) cash and cash
equivalents at the exchange rate in effect at the closing date; b) non-cash items at historical
exchange rates; c) statements of operations items at monthly average exchange rates for the
period; and d) the translated effect is recorded in net comprehensive financing cost. Financial
statements in Mexican pesos are restated at year-end closing as specified by Statement B-10 .x.
    
    Sales are recognized upon delivery of products and receipt of customer acceptance. Revenue is
recognized only when the Company has transferred to the buyer the significant risks and
rewards of ownership of the goods, which generally occurs when those goods are delivered in
compliance with the customers orders and when the amount of revenue and the cost incurred or
to be incurred in the transaction can be reliably measured.y.
    
    Information by Segment  The provisions contained in Statement B-5, Financial Information by
Segment, issued by MIPA are mandatory for public entities listed on the Mexican Stock
Exchange. Statement B-5 requires that companies look to their internal organizational
structure and internal reporting system for purposes of identifying segments. For all years
presented the Company operates in three reporting segments. See Note 21.z.
    
    B-7 Business Acquisitions  Effective 2005 Statement B-7, Business Acquisitions, establishes,
among other things, that the purchase method to account for business acquisition. In addition, it
modifies the accounting treatment of goodwill, ceasing its amortization but subject to annual
impairment test. Statement B-7 also provides specific guidance for the acquisition of minority
interest and transfer of assets of stock amongst entities common control.aa.
    
    Leasing  Leasing operations are registered under Statement D-5 Leasing. The Company
capitalizes leased asset related to industrial machinery and equipment. These assets are
depreciated under the depreciations rates of the common acquired assets.
 NOTE 4  CASH AND CASH EQUIVALENTS
 2005
    
    
    2004Cash
    
    $
    410,996
    
    
    $
    310,107Cash equivalents
    
    
    289,412
    
    
    
    549,779$
    700,408
    
    
    $
    859,886
 F-15




---



##### 



NOTE 5  ACCOUNTS RECEIVABLE:
 2005
    
    
    2004Trade accounts receivable
    
    $
    1,731,075
    
    
    $
    1,800,888Recoverable taxes
    
    
    44,862
    
    
    
    145,988Other
    
    
    112,053
    
    
    
    81,5671,887,990
    
    
    
    2,028,443Allowance for doubtful accounts
    
    
    (154,705
    )
    
    
    (175,698
    )$
    1,733,285
    
    
    $
    1,852,745
 NOTE 6  INVENTORIES:
 2005
    
    
    2004Finished goods
    
    $
    278,389
    
    
    $
    189,472Production-in-process
    
    
    7,281
    
    
    
    8,911Raw materials
    
    
    371,014
    
    
    
    342,107Spare parts and materials
    
    
    283,434
    
    
    
    274,278Molds and dies
    
    
    78,606
    
    
    
    96,867Other
    
    
    10,693
    
    
    
    26,7701,029,417
    
    
    
    938,405Allowance for obsolete inventories
    
    
    (32,778
    )
    
    
    (30,842
    )996,639
    
    
    
    907,563Advances to suppliers
    
    
    38,458
    
    
    
    76,137Merchandise-in-transit
    
    
    160,712
    
    
    
    122,115$
    1,195,809
    
    
    $
    1,105,815
 NOTE 7  PROPERTY, MACHINERY AND EQUIPMENT:
 2005
    
    
    2004Buildings
    
    $
    3,692,976
    
    
    $
    3,641,466Machinery and industrial equipment (*)
    
    
    17,949,942
    
    
    
    18,486,387Transportation equipment, computer equipment and
office furniture and equipment
    
    
    1,416,746
    
    
    
    1,310,73023,059,664
    
    
    
    23,438,583Accumulated depreciation
    
    
    (13,063,873
    )
    
    
    (12,883,117
    )9,995,791
    
    
    
    10,555,466Land
    
    
    863,749
    
    
    
    825,617Construction-in-progress
    
    
    53,561
    
    
    
    52,145$
    10,913,101
    
    
    $
    11,433,228
 F-16




---



##### 



(*)
    
    The value impairment effect was recognized in accordance with Statement C-15 in the fixed
assets items that originated it with the following results: 2005
    
    
    2004Machinery and industrial equipment
    
    $
    17,836,139
    
    
    $
    18,965,517Revaluation impairment
    
    
    113,803
    
    
    
    (479,130
    )Depreciation
    
    
    (10,117,787
    )
    
    
    (10,633,716
    )Machinery and industrial equipment
    
    $
    7,832,155
    
    
    $
    7,852,671
    F-17




---



##### 



2005
    
    
    2004Machinery and industrial equipment
    
    $
    175,802
    
    
    $
    366,085Accumulated depreciation
    
    
    (13,707
    )
    
    
    (59,770
    )$
    162,095
    
    
    $
    306,315
    NOTE 8  OTHER ASSETS
 Intangible asset
    
    
    Debtrelated to seniority
    
    
    issuance2005
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2005
    
    $
    195,936
    
    
    $
    653,625
    
    
    $
    222,581
    
    
    $
    1,072,142Net movement
    
    
    (30,583
    )
    
    
    
    
    
    
    (28,205
    )
    
    
    (58,788
    )Balances as of December 31, 2005
    
    
    165,353
    
    
    
    653,625
    
    
    
    194,376
    
    
    
    1,013,354Accumulated amortization:Balances as of January 1, 2005
    
    
    
    
    
    
    653,625
    
    
    
    67,732
    
    
    
    721,357Amortization for the period
    
    
    
    
    
    
    
    
    
    
    31,611
    
    
    
    31,611Balances as of December 31, 2005
    
    
    
    
    
    
    653,625
    
    
    
    99,343
    
    
    
    752,968Net balances as of December 31, 2005
    
    $
    165,353
    
    
    $
    
    
    
    $
    95,033
    
    
    $
    260,386
 F-18




---



##### 



Intangible asset
    
    
    Debtrelated to seniority
    
    
    issuance2004
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2004
    
    $
    109,839
    
    
    $
    655,119
    
    
    $
    179,191
    
    
    $
    944,194Net movement
    
    
    86,097
    
    
    
    (1,494
    )
    
    
    43,390
    
    
    
    127,993Balances as of December 31, 2004
    
    
    195,936
    
    
    
    653,625
    
    
    
    222,581
    
    
    
    1,072,142Accumulated amortization:Balances as of January 1, 2004
    
    
    
    
    
    
    320,115
    
    
    
    37,829
    
    
    
    357,944Amortization for the period
    
    
    
    
    
    
    333,510
    
    
    
    29,903
    
    
    
    363,413Balances as of December 31, 2004
    
    
    
    
    
    
    653,625
    
    
    
    67,732
    
    
    
    721,357Net balances as of December 31, 2004
    
    $
    195,936
    
    
    $
    
    
    
    $
    154,849
    
    
    $
    350,785
 Intangible asset
    
    
    Debtrelated to seniority
    
    
    issuance2003
    
    premiums
    
    
    costs
    
    
    Other
    
    
    TotalAssets:Balances as of January 1, 2003
    
    $
    73,282
    
    
    $
    670,265
    
    
    $
    184,267
    
    
    $
    927,814Net movement
    
    
    36,557
    
    
    
    (15,146
    )
    
    
    (5,076
    )
    
    
    16,335Balances as of December 31, 2003
    
    
    109,839
    
    
    
    655,119
    
    
    
    179,191
    
    
    
    944,149Accumulated amortization:Balances as of January 1, 2003
    
    
    
    
    
    
    227,292
    
    
    
    6,524
    
    
    
    233,816Amortization for the period
    
    
    
    
    
    
    92,823
    
    
    
    31,305
    
    
    
    124,128Balances as of December 31, 2003
    
    
    
    
    
    
    320,115
    
    
    
    37,829
    
    
    
    357,944Net balances as of December 31, 2003
    
    $
    109,839
    
    
    $
    335,004
    
    
    $
    140,462
    
    
    $
    586,205
  F-19




---



##### 



NOTE 9  SHORT AND LONG-TERM DEBT
 a.
    
    Short-term and long-term debt not capitalized to equity as of December 31, is as follows:
 2005
    
    
    2004Short-term debt
    
    $
    
    
    
    $
    43,554Current portion of long-term debt
    
    
    257,572
    
    
    
    138,429Long-term debt
    
    
    6,505,139
    
    
    
    7,178,232$
    6,762,711
    
    
    $
    7,360,215
 b.
    
    Financial restructuring
     F-20




---



##### 



concurso
  3 4
 F-21




---



##### 




    
    Bank creditors of the Company with claims against it in the
aggregate amount of $1,611,298 (US$136.3 million) received
2,392,957 Series B Shares, representing 2.16% of the Companys
issued and outstanding capital stock, and the principal amount of
the debt outstanding with respect to these claims was amended and
restated under the Restructured Credit Agreement. Under the
Restructured Credit Agreement, notes in an aggregate principal
amount of $1,294,579 (US$116.1 million) were issued to the holders
of these claims. These Senior Notes bear interest at a rate of
LIBOR plus 2.75% per annum, payable quarterly in arrears and the
principal amount of these notes will be amortized quarterly until
the maturity of these notes on December 30, 2012.
 
    
    Unsecured creditors of the Company with claims against it in the
aggregate amount of $5,689,892 (US$510.3 million) related to its
125/8 Senior Notes due 2003 (the 2003
Senior Notes), its 131/8 Senior Notes due
2006 (the 2006 Senior Notes), its 131/2 Senior Notes due 2008 (the
2008 Senior Notes), its 133/4 Senior Notes due 2009 (the 2009
Senior Notes) and the note issued under its Euro Commercial Paper
Program, (the ECP note) received 16,412,961 Series B Shares,
representing 14.84% of the Companys issued and outstanding
capital stock, and an aggregate principal amount of $4,836,492 (US$433.8 million) of its 2012
Senior Notes in respect to these claims. The 2012 Senior Notes bear interest at a rate of 7.5%
per annum until December 31, 2005, 8.5% per annum from January 1, 2006 through December 31, 2006,
and 9.5% per annum thereafter, payable quarterly in arrears, and mature on December 30, 2012.
  F-22




---



##### 




    
    The Company announced on February 27, 2006 a debt reduction program during the year. At
issue date of these financial statements, the Company has pre-paid US$60 million. This program
has been sourced by majority stockholders capital contribution, some non-strategic assets
divestments and cash flow.
 c.
    
    Total short-term and long-term debt by composition as of December 31 is as follows:
 2005
    
    
    2004Senior Notes
    
    $
    4,613,050
    
    
    $
    4,948,584Bank loans
    
    
    1,173,046
    
    
    
    1,288,872Financial lease agreements
    
    
    108,392
    
    
    
    122,613Letters of credit
    
    
    
    
    
    
    48,819Euro Commercial Paper
    
    
    
    
    
    
    48,963Other long-term debt
    
    
    868,223
    
    
    
    902,364$
    6,762,711
    
    
    $
    7,360,215
 RESTRUCTURED DEBT
   2003 Senior Notes
 F-23




---



##### 



2006 Senior Notes
 2008 Senior Notes
 2009 Senior Notes
 Euro Commercial Paper
  F-24




---



##### 



Banamex Loan
 Banamex Note
 California Commerce Bank Loans +
 F-25




---



##### 



JPMorgan Chase Loan
 Bank of America, N.A. Loan
 First JPMorgan Letter of Credit
 F-26




---



##### 



Second JPMorgan Letter of Credit
  Arrendadora Bank of America, N.A. Leases + +
 F-27




---



##### 



GE Capital Leasing Leases +
 GE Capital Corporation Lease.
  Bancomext Loans +
  F-28




---



##### 



+
 Bank of Albuquerque Loan
 Commerzbank Loan
   F-29




---



##### 




    
    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.
 DEBT AT DECEMBER 31, 2005
     F-30




---



##### 



2007
    
    $
    335,6932008
    
    
    278,6192009
    
    
    248,5212010
    
    
    234,1072011
    
    
    225,1882012 and thereafter
    
    
    5,183,011$
    6,505,139
  Total minimum lease obligations
    
    $
    112,496Unearned interest
    
    
    (4,104
    )Present value of lease obligations
    
    
    108,392Current portion of lease obligations
    
    
    22,187Long-term portion of lease obligations
    
    $
    86,205
  2006
    
    $
    22,1872007
    
    
    63,8402008
    
    
    16,8712009
    
    
    5,494$
    108,392
 NOTE 10  FINANCIAL INSTRUMENTS
 a.
    
    Financial instruments  The estimated fair value amounts of the Companys financial
instruments have been determined by the Company using available market information or other
appropriate valuation methodologies that require considerable judgment in developing and
interpreting the estimates of fair value.The carrying amount of the Companys cash equivalents, accounts receivable, accounts payable and
current notes payable approximate fair value because they have relatively short-term maturities
and bear interest at variable rates, as appropriate.The long-term debt consists of debt instruments that bear interest at fixed or variable rates.
 F-31




---



##### 



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 11  PENSION PLANS, SENIORITY PREMIUMS AND POST-RETIREMENT OBLIGATIONS
    2005
    
    
    2004Accumulated benefit obligation
    
    $
    202,581
    
    
    $
    211,267Projected benefit obligation
    
    $
    224,802
    
    
    $
    239,223Unrecognized items:Variances for assumptions and adjustments based on
experience
    
    
    19,008
    
    
    
    6,040Transition amount
    
    
    (116,225
    )
    
    
    (128,928
    )Net projected liability
    
    
    127,585
    
    
    
    116,335Additional minimum liability
    
    
    74,996
    
    
    
    94,932$
    202,581
    
    
    $
    211,267Intangible asset
    
    $
    74,281
    
    
    $
    94,932
 F-32




---



##### 



2005
    
    2004Discount rate
    
    
    5
    %
    
    
    5
    %Salary increases
    
    
    2
    %
    
    
    2
    %
  Remaining Years2005
    
    2004Transition asset
    
    
    17
    
    
    
    18Variances in assumptions and adjustments based on experience
    
    
    17
    
    
    
    18
  
  Post-retirement obligations
  F-33




---



##### 



2005
    
    
    2004Accumulated post-retirement benefit obligation
    
    $
    97,887
    
    
    $
    104,439Post-retirement other benefit obligation
    
    $
    101,260
    
    
    $
    104,024Variances for assumptions and adjustments based on
experience
    
    
    (12,229
    )
    
    
    Unrecognized prior service cost to be amortized over 17 years
    
    
    (89,509
    )
    
    
    (106,256
    )Net projected liability
    
    
    (478
    )
    
    
    (2,232
    )Additional minimum liability
    
    
    98,365
    
    
    
    106,256$
    97,887
    
    
    $
    104,439Intangible asset
    
    $
    86,625
    
    
    $
    101,004
 Retirement compensation
  Accumulated post-retirement benefit obligation
    
    $
    7,431Post-retirement other benefit obligation
    
    $
    16,731Unrecognized prior service cost to be amortized over 17 years
    
    
    (13,747
    )Net projected liability
    
    
    2,984Additional minimum liability
    
    
    4,447$
    7,431Intangible asset
    
    $
    4,447
 F-34




---



##### 



2005
    
    
    2004Seniority premiums and pensions
    
    $
    202,581
    
    
    $
    211,267Post-retirement obligations
    
    
    97,887
    
    
    
    104,439Retirement compensation
    
    
    7,431
    
    
    
    $
    307,899
    
    
    $
    315,706
  2005
    
    
    2004Seniority premiums and pensions
    
    $
    74,281
    
    
    $
    94,932Post-retirement obligations
    
    
    86,625
    
    
    
    101,004Retirement compensation
    
    
    4,447
    
    
    
    $
    165,353
    
    
    $
    195,936
  2005
    
    
    2004Service cost
    
    $
    10,380
    
    
    $
    7,411Amortization of transition asset, variances for
assumptions and adjustments based on experience
    
    
    16,731
    
    
    
    17,065Financial cost
    
    
    14,548
    
    
    
    14,724Net period cost
    
    $
    41,659
    
    
    $
    39,200
 NOTE 12  STOCKHOLDERS EQUITY
 a.
    
    Shares of common stock at par value as of December 31 are comprised as follows:
 2005InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Series A
    
    
    46,613,171
    
    
    $
    699,760
    
    
    $
    1,916,502
    
    
    $
    2,616,262Series B
    
    
    18,805,918
    
    
    
    282,314
    
    
    
    8,413
    
    
    
    290,727Variable capital:Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,859,441
    
    
    
    2,538,314110,641,111
    
    
    $
    1,660,947
    
    
    $
    3,784,356
    
    
    $
    5,445,303
 F-35




---



##### 



2004InflationNumber of
    
    
    Par
    
    
    restatementshares
    
    
    value
    
    
    effect
    
    
    TotalFixed capital:Series A
    
    
    46,613,171
    
    
    $
    699,760
    
    
    $
    1,916,502
    
    
    $
    2,616,262Variable capital:Series A
    
    
    45,222,022
    
    
    
    678,873
    
    
    
    1,859,441
    
    
    
    2,538,31491,835,193
    
    
    $
    1,378,633
    
    
    $
    3,775,943
    
    
    $
    5,154,576
 Common stock consists of common nominative shares without par value. The variable portion of
capital stock cannot exceed ten times the aggregate amount of the fixed minimum portion without
right to withdraw.
 b.
    
    On June 30, 2003, Board of Directors approved the conversion of 2,240,000 treasury shares;
consequently, variable capital was reduced by $125,731 ($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 minimum portion by $291,763 and authorized the issuance of 18,808,989
treasury shares.c.
    
    On May 17, 2004, Board of Directors approved the contribution of $49 to its fixed share
capital and the sale of 3,071 treasury shares.d.
    
    Retained earnings include the statutory legal reserve. The Mexican General Corporate Law
requires that at least 5% of net income of the year be transferred to the legal reserve until
the reserve equals 20% of capital stock at par value. The legal reserve may be capitalized
but may not be distributed unless the entity is dissolved. The legal reserve must be
replenished if it is reduced for any reason. At December 31, 2005, 2004 and 2003 the legal
reserve, in historical nominal pesos, was $259,634.e.
    
    Stockholders equity, except restated paid-in capital and tax retained earnings, will be
subject to a tax at the rate in effect when a dividend is distributed. In 2005, the rate was
30% (33% in 2004 and 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.f.
    
    The balances of the tax account related to stockholders equity as of December are as
follows:
 2005
    
    
    2004Contributed capital account
    
    $
    3,772,365
    
    
    $
    3,481,637After tax profits account
    
    
    1,803,263
    
    
    
    1,956,906Reinvested after tax profits account
    
    
    947,551
    
    
    
    947,551Total
    
    $
    6,523,179
    
    
    $
    6,386,094
 F-36




---



##### 



NOTE 13  FOREIGN CURRENCY TRANSACTIONS AND BALANCES
 a.
    
    At December 31, the foreign currency monetary position is as follows:
 2005
    
    
    2004Thousands of U.S. dollars:Monetary assets
    
    US$
    64,042
    
    
    US$
    55,092Monetary liabilities
    
    
    (665,179
    )
    
    
    (960,713
    )Monetary (liability) position, net
    

    (US$
    601,137
    )
    
    (US$
    905,621
    )Equivalent in Mexican pesos
    
    ($
    6,392,727
    )
    
    ($
    10,097,221
    )Thousands of Euros:Monetary (liability) position, net
    
    
    (8,317
    )
    
    
    (10,251
    )Equivalent in Mexican pesos
    
    ($
    104,287
    )
    
    ($
    155,439
    )
 b.
    
    Non-monetary assets of foreign origin at December 31, 2005 are as follows:
 Balance inforeign
    
    Equivalentcurrency
    
    in MexicanCurrency
    
    (thousands)
    
    pesosInventories
    
    U.S. dollar
    
    
    19,796
    
    
    $
    210,519Machinery and industrial equipment:United States of America
    
    U.S. dollar
    
    
    462,925
    
    
    
    4,922,932Brazil
    
    Real
    
    
    188,436
    
    
    
    862,381Japan
    
    Yen
    
    
    4,109,349
    
    
    
    370,540Germany
    
    Euro
    
    
    25,214
    
    
    
    316,154Canada
    
    Canadian dollar
    
    
    35,610
    
    
    
    324,419Other
    
    Several
    
    
    
    
    
    
    305,462
 c.
    
    The condensed financial information of the principal foreign countries before inter-company
eliminations, is as follows:
 (In thousands ofU.S. dollars)2005
    
    
    2004
    
    
    2003United States of AmericaNet sales
    
    
    213,216
    
    
    
    212,347
    
    
    
    146,646Income from operations
    
    
    2,337
    
    
    
    3,352
    
    
    
    4,471Net (loss)
    
    
    (15,488
    )
    
    
    (1,867
    )
    
    
    (54,559
    )Current assets
    
    
    132,768
    
    
    
    206,049
    
    
    
    30,216Total assets
    
    
    317,285
    
    
    
    278,272
    
    
    
    115,022Current liabilities
    
    
    65,869
    
    
    
    71,118
    
    
    
    18,960Total liabilities
    
    
    87,207
    
    
    
    92,265
    
    
    
    48,204
 F-37




---



##### 



d.
    
    Transactions denominated in foreign currency were as follows:
 (In thousands ofU.S. dollars)2005
    
    
    2004
    
    
    2003Export sales
    
    
    189,563
    
    
    
    205,617
    
    
    
    166,230Interest expense
    
    
    (50,544
    )
    
    
    (90,306
    )
    
    
    (96,455
    )Interest income
    
    
    534
    
    
    
    68
    
    
    
    31Import purchases
    
    
    (219,570
    )
    
    
    (238,801
    )
    
    
    (167,303
    )Acquisition (sales) of machinery and equipment
    
    
    14,829
    
    
    
    (555
    )
    
    
    (35,486
    )
 e.
    
    The exchange rates in effect at the dates of the consolidated balance sheets and issuance of
the consolidated financial statements were as follows:
 December 31,
    
    April 24,2005
    
    2004
    
    2006U.S. dollar
    
    $
    10.6344
    
    
    $
    11.1495
    
    
    $
    11.0656Euros
    
    
    12.5390
    
    
    
    15.1633
    
    
    
    13.7545
 NOTE 14  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:
 2005
    
    2004
    
    2003Interest income
    
    $
    
    
    
    $
    13,959
    
    
    $
    27,256Sale of paper
    
    
    
    
    
    
    5,058
    
    
    
    13,186Sale of machinery and industrial equipment
and other equipment
    
    
    
    
    
    
    
    
    
    
    17,601Freight expenses
    
    
    
    
    
    
    
    
    
    
    45,999Air transportation services
    
    
    
    
    
    
    36,220
    
    
    
    Other (expenses) income
    
    
    
    
    
    
    (1,012
    )
    
    
    3,471
 b.
    
    Accounts receivable from related parties as of December 31, are as follows:
 2005
    
    
    2004Administradora Corporativa y Mercantil, S.A. de C.V. (1 and 4)
    
    $
    11,803
    
    
    $
    202,931Durango Georgia Receivables Company (DGC) (2 and 4)
    
    
    
    
    
    
    211,791Durango Paper Company (DPC) (2 and 4)
    
    
    
    
    
    
    63,661Líneas Aéreas Ejecutivas de Durango, S. A. de C. V.(3)
    
    
    
    
    
    
    1,131Other
    
    
    
    
    
    
    11,803
    
    
    
    479,514Allowance for doubtful accounts
    
    
    
    
    
    
    (466,009
    )$
    11,803
    
    
    $
    13,505
 F-38




---



##### 



(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, borrows funds from our company to fund principal
and interest payments on its indebtedness. The outstanding balance on these loans was Ps 202.4
million at December 31, 2005. We recorded an allowance for doubtful accounts in the full amount of
these loans during 2003. These loans bear interest at a rate of 5% per annum and mature on December
31, 2012.(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.
The sale was made for an aggregate amount of US$100 thousand. 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 and the J.P. Morgan letters of
credit, which in the aggregate, totaled a principal amount of US$25.2 million ($290.4
million). In 2003, these creditors called these guarantees. As a result, the Company
recorded $285.0 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 service flights
from Líneas Aéreas, a company that was owned and controlled by the Rincón family until April
18, 2005. Líneas Aéreas owns two business jets and provides transportation services to the
Companys subsidiaries and third parties. For the year ended December 31, 2003, the Company
purchased services from Líneas Aéreas for an aggregate amount of $1,131.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. As of December 31, 2005, the aggregate
principal amount outstanding under this financial lease was US$4.9 million (Ps 52.3 million).In 2003, Líneas Aéreas borrowed $15.2 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 $4.2 million.(4)
    
    During 2003, the Company recorded an allowance for doubtful accounts in connection with
the account receivable from ACM. Since the Companys controlling shareholders own ACM, the
$190,557 charge was recorded in retained earnings.
 F-39




---



##### 



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, 2005, we recorded net sales to El Universal of
approximately US$15.0 million(Ps 159.7 million).On June 28, 2005, our company acquired 99.99% of the capital stock of Inmobiliaria Industrial
de Durango, S.A. de C.V. for Ps 735.0 thousand. This company was owned by some of the members of
the Rincón family.On March 6, 2006, Pipsamex issued and sold 2,177,042,255 shares of its series B capital stock,
representing 13.3% of Pipsamex outstanding capital stock to NKM Corporativo, S.A. de C.V., a
company owned and controlled by the Rincón family, for Ps 314.6 million. The proceeds of this sale
were used to fund our debt reduction program.
 c.
    
    Acquisition of new subsidiaries:In April 11, 2005, the Company acquired 99.99% of the capital stock of Empaques del Norte, S.A.
de C.V. for $64,928 (US$5.8 million). The liability at December 31, 2005 was $8,517. See Note 7.On April 18, 2005 the Company acquired 99.99% of the capital stock of Líneas Aéreas Ejecutivas de
Durango, S. A. de C. V. (Líneas Aéreas) for $15. This company was owned by some of the Rincón
family members. Líneas Aéreas owns two business jets and provides transportation services to the
Companys subsidiaries and third parties. See Note 7.On June 28, 2005, the Company acquired 99.99% of the capital stock of Inmobiliaria Industrial de
Durango, S.A. de C.V. for $735. This company was owned by some of the Rincón family members (See
Note 7).d.
    
    Creation of new subsidiary:Corporación Durango, S.A. de C.V., Empaques de Cartón Titán, S.A. de C.V., Industrias Centauro,
S.A. de C.V. and Inmobiliaria Industrial Tizayuca, S.A. de C.V., entered into an operating lease
agreement with GE Capital CEF México, S. de R.L. de C.V., effective as of March 31, 2006. This
agreement has a term of 7.5 years by US$50 million. Under this lease agreement, the Companys
newly formed subsidiary, Papel y Empaques de Tizayuca, S.A. de C.V., leases machinery and
equipment with installed capacity of 200,000 short tons of
 F-40




---



##### 



linerboard and 100,000 short tons of corrugated boxes located at an industrial facility purchased
by the Company.
 NOTE 15  OTHER INCOME (EXPENSES), NET
 2005
    
    
    2004
    
    
    2003Loss on sale of property, plant and equipment (1)
    
    ($
    1,696
    )
    
    ($
    22,844
    )
    
    ($
    217,015
    )Severance payments due to reorganization
    
    
    
    
    
    
    
    
    
    
    (64,414
    )Restructuring expenses
    
    
    (65,717
    )
    
    
    (149,440
    )
    
    
    (296,607
    )Write-off of debt issuance costs
    
    
    
    
    
    
    (333,510
    )
    
    
    Reserve for fixed assets value
    
    
    
    
    
    
    
    
    
    
    (656,144
    )Revaluation (impairment) of long-lived assets in use
    
    
    113,803
    
    
    
    (479,130
    )
    
    
    Loss on operations of DPC (2)
    
    
    
    
    
    
    
    
    
    
    (342,472
    )Debt repurchase at market price (3)
    
    
    
    
    
    
    641,451
    
    
    
    Other expenses, net
    
    
    (41,155
    )
    
    
    (74,433
    )
    
    
    (62,104
    )$
    5,235
    
    
    ($
    417,906
    )
    
    ($
    1,638,756
    )
 
 (1)
    
    On November 25, 2003, the Company sold property for $140,425 (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 $210,746.(2)
    
    In 2003, this amount included $284,976 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.).(3)
    
    On August 5, 2004, HG Estate LLC and St. Marys Railroad Corporation sold certain notes in an
aggregate principal amount of US$48.1 million ($554.2 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 ($88.9 million) which the parties agreed was the fair market value of these notes. The
Company recorded a debt reduction of $641,451 in other income (expenses), as a consequence of
the market value purchase of these notes. NOTE 16  INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEES STATUTORY PROFIT SHARING (EPS)
 F-41




---



##### 



a.
    
    IT (provision) benefit consists of the following:
 2005
    
    
    2004
    
    
    2003Current
    
    ($
    122,223
    )
    
    ($
    37,448
    )
    
    ($
    165,952
    )Deferred
    
    
    (241,143
    )
    
    
    531,254
    
    
    
    79,473Benefit from tax consolidation
    
    
    59,350
    
    
    
    8,934
    
    
    
    88,776($
    304,016
    )
    
    $
    502,740
    
    
    $
    2,297
 b.
    
    The reconciliation of the statutory and effective IT rates expressed as a percentage of
income (loss) from continuing operations before IT and EPS for the years ended December 31,
2005, 2004 and 2003 is:
 F-42




---



##### 



2005
    
    
    2004
    
    
    2003Statutory income tax rate
    
    
    30
    %
    
    
    33
    %
    
    
    34
    %Plus (less) the effect of permanent differences:Non-deductible expenses
    
    
    16.72
    %
    
    
    (5.43
    %)
    
    
    (1.30
    %)Other
    
    
    13.17
    %
    
    
    10.23
    %
    
    
    (14.59
    %)Effects of inflation
    
    
    (7.24
    %)
    
    
    7.05
    %
    
    
    0.93
    %Effect of the rate reduction on deferred IT
    
    
    (18.89
    %)
    
    
    16.59
    %
    
    
    0.49
    %Change in valuation allowance of recoverable
deferred IT asset and AT
    
    
    51.17
    %
    
    
    33.01
    %
    
    
    (19.51
    %)Effective IT rate
    
    
    84.93
    %
    
    
    94.45
    %
    
    
    0.02
    %
 c.
    
    At December 31, 2005 and 2004 the main components of the net deferred IT liability balance
are:
 2005
    
    
    2004Deferred IT liability (asset):Property, machinery and equipment
    
    $
    2,434,657
    
    
    $
    2,628,007Inventories
    
    
    (121,026
    )
    
    
    35,833Allowance for doubtful accounts
    
    
    (49,767
    )
    
    
    (65,600
    )Accrued expenses
    
    
    (40,965
    )
    
    
    (94,712
    )Other assets
    
    
    (26,829
    )
    
    
    44,521Other, net
    
    
    (65,307
    )
    
    
    (45,851
    )Deferred IT from temporary differences
    
    
    2,130,763
    
    
    
    2,502,198Tax loss carryforwards
    
    
    (1,005,278
    )
    
    
    (1,300,654
    )Recoverable AT carryforwards
    
    
    (329,849
    )
    
    
    (340,624
    )795,636
    
    
    
    860,920Valuation allowance
    
    
    806,188
    
    
    
    623,037Net long-term deferred IT liability
    
    $
    1,601,824
    
    
    $
    1,483,957
 Certain reclassifications among line items have been made that 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 the amounts that it does not
expect to recover.e.
    
    At December 31, 2005 and 2004, the Company has taxable temporary differences related to
deferred EPS, mainly inventories and property, machinery and equipment, for which the deferred
EPS liabilities were not recognized since the Company believes that they will not materialize
due to the continuity of its operations (i.e. will be replaced in the future with similar
temporary differences).
 F-43




---



##### 



f.
    
    Consolidated unamortized tax loss carryforwards and recoverable AT of the Mexican companies
for which the deferred IT assets and prepaid IT, respectively, have been recognized may be
recoverable subject to certain conditions. The restated amounts of tax loss carryforwards and
recoverable AT and their respective expiration dates at December 31, 2005 are as follows:
 Year of
    
    Tax loss
    
    
    RecoverableExpiration
    
    carryforwards
    
    
    AT2006
    
    $
    158,265
    
    
    $
    28,5582007
    
    
    107,569
    
    
    
    28,3612008
    
    
    149,179
    
    
    
    27,5102009
    
    
    70,629
    
    
    
    21,4872010
    
    
    63,618
    
    
    
    25,9312011
    
    
    87,156
    
    
    
    24,1422012
    
    
    361,183
    
    
    
    64,1042013
    
    
    1,128,248
    
    
    
    59,7112014
    
    
    384,274
    
    
    
    6,3972015
    
    
    1,038,042
    
    
    
    961$
    3,548,163
    
    
    $
    287,162
 g.
    
    For the years ended December 31, 2005, 2004 and 2003, the change in gain (loss) from holding
non-monetary assets includes the effect of the deferred income tax of $148,636, $266,804 and
$220,789, respectively.
 NOTE 17  DISCONTINUED OPERATIONS
  a.
    
    On February 27, 2003, the Company sold the assets of its molded pulp division for
approximately $650,772 (US$53.7 million), resulting in a gain of $364,087, 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-44




---



##### 



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 $354,224 (US$28.0 million), which gave rise to a $486,362 loss; this amount is
included in gain (loss) from discontinued operations-net 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 $381,828,
which is included in the net loss of discontinued operations in the accompanying consolidated
statement of operations for the year ended December 31, 2003.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
$334,393 (US$30 million). As a result of this sale, the capacity of the Companys other segment
was reduced by 200 thousands short tons, the Company ceased producing particleboard and the
Company no longer has any discontinued operations.The balance sheet of the Companys discontinued operations for the year ended December 31, 2004
is as follows:
 2004Cash and cash equivalents
    
    $
    7,573Trade accounts receivable  Net
    
    
    64,860Inventories  Net
    
    
    34,714Prepaid expenses
    
    
    826Total current assets
    
    
    107,973Property, plant and equipment  Net
    
    
    257,587Other assets  Net
    
    
    11Total long-term assets
    
    
    257,598Total assets
    
    $
    365,571
 2004Current portion of long-term debt
    
    $
    22,036Trade accounts payable
    
    
    32,698Accrued expenses and taxes
    
    
    76,404Total current liabilities
    
    
    131,138Long-term debt
    
    
    99,164Deferred income taxes
    
    
    49,856Pension plans and seniority premiums
    
    
    1,161
 F-45




---



##### 



2004Total long-term liabilities
    
    
    150,181Total liabilities
    
    $
    281,319Net assets of discontinued operations
    
    $
    84,252
 d.
    
    The statements of operations reflect the effects of discontinued operations, which are
comprised as follows:
 2005
    
    
    2004
    
    
    2003Net sales
    
    $
    166,046
    
    
    $
    346,247
    
    
    $
    752,938Cost of sales
    
    
    141,112
    
    
    
    289,986
    
    
    
    764,277Gross profit (loss)
    
    
    24,934
    
    
    
    56,261
    
    
    
    (11,339
    )Operating expenses  Net
    
    
    21,953
    
    
    
    31,806
    
    
    
    45,439Income (loss) from operations
    
    
    2,981
    
    
    
    24,455
    
    
    
    (56,778
    )Net comprehensive financing income (cost)
    
    
    76,253
    
    
    
    45,585
    
    
    
    (147,042
    )Other income (expenses)  Net
    
    
    (19,886
    )
    
    
    318
    
    
    
    (27,285
    )Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    (381,828
    )Income (loss) from discontinued operations
    
    
    59,348
    
    
    
    70,358
    
    
    
    (612,933
    )Revenue from sales of discontinued operations
    
    
    334,393
    
    
    
    
    
    
    
    1,004,996Cost of sales of assets of discontinued operations
    
    
    350,171
    
    
    
    
    
    
    
    1,127,271Loss on sales of discontinued operations
    
    
    (15,778
    )
    
    
    
    
    
    
    (122,275
    )IT and EPS
    
    
    65,232
    
    
    
    35,178
    
    
    
    138,244Net income (loss) from discontinued operations
    
    $
    108,802
    
    
    $
    105,536
    
    
    ($
    596,964
    )Depreciation and amortization
    
    $
    6,947
    
    
    $
    15,734
    
    
    $
    40,950
 NOTE 18  COMMITMENTS
 a.
    
    Some of the Mexican subsidiaries lease certain equipment under non-cancelable operating
leases. Rental expenses totaled $51,214, $51,627 and $54,938 for the years ended December 31,
2005, 2004 and 2003, respectively. As of December 31, 2005, estimated future minimum lease
payments were as follows:
 F-46




---



##### 



Year
    
    Amount2006
    
    $
    25,0222007
    
    
    19,4612008
    
    
    17,3992009
    
    
    17,3992010 and thereafter
    
    
    42,280$
    121,561
 b.
    
    McKinley Paper Company leases certain equipment under non-cancelable operating leases. Rental
expenses under these leases were $9,248, $3,656 and $4,672 for the years ended December 31,
2005, 2004 and 2003 respectively. As of December 31, 2005, estimated future minimum lease
payments were as follows:
 Year
    
    Amount2006
    
    $
    7,7102007
    
    
    6,7002008
    
    
    5,0732009
    
    
    6,103$
    25,586
 NOTE 19  CONTINGENCIES
 a.
    
    Subsequent to the sale of Productora Nacional de Papel, S.A. de C.V., as described in Note
17, the Mexican National Water Commission billed the Company $170,800 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 $1,996 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.
    
    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
 F-47




---



##### 



d.
    
    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.
 e.
    
    The Company would be obligated to pay severance payments to its employees in case of
dismissal under certain circumstances under the Federal Labor Law. As of December 31, 2005,
there are no obligations for such severance payments. Beginning in 2005, in accordance with
Statement D-3, as amended, this liability is recorded in the results for the year.
 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 and the rules and regulations published under this law. Companies engaged in
industrial activities are subject to the regulatory jurisdiction of the Mexican Ministry of
the Environment and Natural Resources.In 1988, the Company agreed with Mexican environmental regulatory authorities on a compliance
plan that the Company proceeded to implement. The Companys paper mills are in compliance with
general standards promulgated by the Mexican regulatory authorities. In 1995, the Company
purchased approximately 26% of Planta Ecológica Industrial, S.A. de C.V., a joint venture of
industrial water users in Monterrey, Nuevo León. The venture paper mills in Mexico are subject
to periodic environmental audits by the Mexican Ministry of the Environmental and Natural
Resources. The Company has frequently been recognized for its environmental record and its role
in implementing modern forest management techniques. However, there can be no assurance that
relevant Mexican authorities will continue to find the Companys environmental procedures
adequate, or that more stringent environmental laws will not be enacted by Mexico in the future.
Were 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 strives to maintain compliance with all state and
federal environmental regulations in a manner that is also cost effective. In any construction
of new facilities and the modernization of existing facilities, the Company intends to use modern
technology for air and water emissions. These forward-looking
 F-48




---



##### 



programs will minimize the impact that changing regulations have on capital expenditures for
environmental compliance.g.
    
    Tax authority may have a different criteria from the
Companys as a result of tax
documentation review.h.
    
    On December 31, 2005 a facility from Empaques de Cartón Titán, S.A. de C.V., Silvamex, had
an accidental fire. Plant, equipment, finished product inventory and raw material inventory
were lost. During March of 2006 a pre-payment of $32,807 was recovered from the insurance
company.
 NOTE 20  SUBSEQUENT EVENTS:
 a.
    
    CODUSA announced on February 27, 2006 a debt reduction program during the year. At April 24,
2006, the Company has pre-paid US$60 million. This program has been sourced by majority
stockholders capital contribution, proceeds from divestiture of some minor non-strategic
assets and operating cash flow.b.
    
    Corporación Durango, S.A. de C.V. and some subsidiaries, entered into an operating
lease agreement with GE Capital CEF México, S. de R.L. de C.V., effective as of April 1, 2006.
Under this lease agreement, the Companys newly formed subsidiary, Papel y Empaques de
Tizayuca, S.A. de C.V., leases machinery and equipment with installed
capacity of 200,000 short tons of linerboard and 100,000 short tons
of corrugated boxes located at an industrial facility purchased by
the Company. (See Note 14d.).
 NOTE 21  SEGMENT INFORMATION
     F-49




---



##### 



2005Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    3,490,053
    
    
    $
    4,552,832
    
    
    $
    100,415
    
    
    $
    8,143,300
    
    
    $
    
    
    
    $
    8,143,300Intersegment sales
    
    
    4,199,757
    
    
    
    413,345
    
    
    
    90,379
    
    
    
    4,703,481
    
    
    
    (4,703,481
    )
    
    
    Total sales
    
    
    7,689,810
    
    
    
    4,966,177
    
    
    
    190,794
    
    
    
    12,846,781
    
    
    
    (4,703,481
    )
    
    
    8,143,300Depreciation and amortization
    
    
    276,630
    
    
    
    133,404
    
    
    
    11,583
    
    
    
    421,617
    
    
    
    
    
    
    
    421,617Income (loss) from operations
    
    
    122,481
    
    
    
    236,691
    
    
    
    10,085
    
    
    
    369,257
    
    
    
    
    
    
    
    369,257Total assets
    
    
    18,950,232
    
    
    
    27,704,559
    
    
    
    1,247,590
    
    
    
    47,902,381
    
    
    
    (33,071,934
    )
    
    
    14,830,447Capital expenditures
    
    
    83,368
    
    
    
    42,183
    
    
    
    9,298
    
    
    
    134,849
    
    
    
    
    
    
    
    134,849Impairment
    
    
    (113,803
    )
    
    
    
    
    
    
    
    
    
    
    (113,803
    )
    
    
    
    
    
    
    (113,803
    )Interest income
    
    
    663,036
    
    
    
    3,063,836
    
    
    
    10,630
    
    
    
    3,737,502
    
    
    
    (3,694,947
    )
    
    
    42,555Interest expense
    
    
    (1,109,666
    )
    
    
    (2,873,822
    )
    
    
    (39,061
    )
    
    
    (4,022,549
    )
    
    
    3,430,124
    
    
    
    (592,425
    )Income tax
    
    $
    437,451
    
    
    ($
    631,932
    )
    
    ($
    109,535
    )
    
    ($
    304,016
    )
    
    $
    
    
    
    ($
    304,016
    )
 2004Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    3,554,513
    
    
    $
    4,374,244
    
    
    $
    110,537
    
    
    $
    8,039,294
    
    
    $
    
    
    
    $
    8,039,294Intersegment sales
    
    
    4,029,699
    
    
    
    305,953
    
    
    
    107
    
    
    
    4,335,759
    
    
    
    (4,335,759
    )
    
    
    Total sales
    
    
    7,584,212
    
    
    
    4,680,197
    
    
    
    110,644
    
    
    
    12,375,053
    
    
    
    (4,335,759
    )
    
    
    8,039,294Depreciation and amortization
    
    
    293,051
    
    
    
    137,441
    
    
    
    7,744
    
    
    
    438,236
    
    
    
    
    
    
    
    438,236Income (loss) from operations
    
    
    55,521
    
    
    
    398,928
    
    
    
    1,202
    
    
    
    455,651
    
    
    
    
    
    
    
    455,651Total assets
    
    
    21,776,482
    
    
    
    31,363,373
    
    
    
    1,245,722
    
    
    
    54,385,577
    
    
    
    (38,762,902
    )
    
    
    15,622,675Capital expenditures
    
    
    121,203
    
    
    
    66,835
    
    
    
    26,143
    
    
    
    214,181
    
    
    
    
    
    
    
    214,181Impairment
    
    
    479,130
    
    
    
    
    
    
    
    
    
    
    
    479,130
    
    
    
    
    
    
    
    479,130Interest income
    
    
    640,604
    
    
    
    1,931,947
    
    
    
    1,240
    
    
    
    2,573,791
    
    
    
    (2,532,288
    )
    
    
    41,503Interest expense
    
    
    (923,258
    )
    
    
    (2,695,201
    )
    
    
    (4,316
    )
    
    
    (3,652,775
    )
    
    
    2,494,510
    
    
    
    (1,158,265
    )Income tax
    
    $
    1,090,359
    
    
    ($
    718,146
    )
    
    $
    130,527
    
    
    $
    502,740
    
    
    
    
    
    
    $
    502,740
 F-50




---



##### 



2003Other
    
    
    Total
    
    
    
    
    
    
    TotalPaper
    
    
    Packaging
    
    
    segments
    
    
    segments
    
    
    Eliminations
    
    
    consolidatedSales to external customers
    
    $
    2,987,613
    
    
    $
    4,250,984
    
    
    $
    88,656
    
    
    $
    7,327,253
    
    
    $
    
    
    
    $
    7,327,253Intersegment sales
    
    
    2,654,968
    
    
    
    144,920
    
    
    
    17,519
    
    
    
    2,817,407
    
    
    
    (2,817,407
    )
    
    
    Total sales
    
    
    5,642,581
    
    
    
    4,395,904
    
    
    
    106,175
    
    
    
    10,144,660
    
    
    
    (2,817,407
    )
    
    
    7,327,253Depreciation and amortization
    
    
    285,676
    
    
    
    128,751
    
    
    
    11,980
    
    
    
    426,407
    
    
    
    
    
    
    
    426,407Income (loss) from operations
    
    
    (122,562
    )
    
    
    467,452
    
    
    
    (15,767
    )
    
    
    329,123
    
    
    
    
    
    
    
    329,123Total assets
    
    
    19,982,164
    
    
    
    28,100,949
    
    
    
    1,042,289
    
    
    
    49,125,402
    
    
    
    (32,247,600
    )
    
    
    16,877,802Capital expenditures
    
    
    80,548
    
    
    
    33,604
    
    
    
    581
    
    
    
    114,733
    
    
    
    
    
    
    
    114,733Interest income
    
    
    440,946
    
    
    
    1,501,096
    
    
    
    8,773
    
    
    
    1,950,815
    
    
    
    (1,906,088
    )
    
    
    44,727Interest expense
    
    
    (724,671
    )
    
    
    (2,434,418
    )
    
    
    (580
    )
    
    
    (3,159,669
    )
    
    
    1,871,582
    
    
    
    (1,288,087
    )Income tax
    
    $
    (386,083
    )
    
    $
    334,735
    
    
    $
    53,645
    
    
    
    2,297
    
    
    
    
    
    
    $
    2,297
  Net revenues
    
    2005
    
    
    2004
    
    
    2003Packaging- Corrugated container
    
    $
    4,152,975
    
    
    $
    4,027,026
    
    
    $
    3,928,260- Paper sacks
    
    
    388,909
    
    
    
    347,218
    
    
    
    319,574- Tubes
    
    
    10,948
    
    
    
    
    
    
    
    3,150Paper- Containerboard
    
    
    1,381,262
    
    
    
    1,575,876
    
    
    
    1,252,557- Newsprint
    
    
    936,693
    
    
    
    955,429
    
    
    
    734,207- Uncoated free sheet
    
    
    1,172,098
    
    
    
    1,023,208
    
    
    
    1,000,849Other segments
    
    
    100,415
    
    
    
    110,537
    
    
    
    88,656Consolidated total
    
    $
    8,143,300
    
    
    $
    8,039,294
    
    
    $
    7,327,253
  2005Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    10,555,422
    
    
    $
    46,853,270
    
    
    $
    111,918United States of America
    
    
    2,291,359
    
    
    
    1,049,217
    
    
    
    22,931Intersegment eliminations
    
    
    (4,703,481
    )
    
    
    (33,071,934
    )
    
    
    Consolidated total
    
    $
    8,143,300
    
    
    $
    14,830,447
    
    
    $
    134,849
 F-51




---



##### 



2004Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    10,016,485
    
    
    $
    53,124,205
    
    
    $
    213,605United States of America
    
    
    2,358,568
    
    
    
    1,261,372
    
    
    
    576Intersegment eliminations
    
    
    (4,335,759
    )
    
    
    (38,762,902
    )
    
    
    Consolidated total
    
    $
    8,039,294
    
    
    $
    15,622,675
    
    
    $
    214,181
 2003Total
    
    
    CapitalNet sales
    
    
    assets
    
    
    expendituresMexico
    
    $
    8,071,959
    
    
    $
    45,978,850
    
    
    $
    98,076United States of America
    
    
    2,072,701
    
    
    
    3,146,552
    
    
    
    16,657Intersegment eliminations
    
    
    (2,817,407
    )
    
    
    (32,247,600
    )
    
    
    Consolidated total
    
    $
    7,327,253
    
    
    $
    16,877,802
    
    
    $
    114,733
   Net income
    
    2005
    
    
    2004
    
    
    2003Packaging -Food and beverage
    
    $
    3,180,846
    
    
    $
    3,080,003
    
    
    $
    2,937,822Agribusiness
    
    
    440,215
    
    
    
    474,053
    
    
    
    538,913Agriculture
    
    
    348,850
    
    
    
    316,036
    
    
    
    265,494Maquila sector
    
    
    249,179
    
    
    
    243,104
    
    
    
    289,269Paper sacks -Cement
    
    
    234,901
    
    
    
    215,622
    
    
    
    164,929Lime and plaster
    
    
    68,448
    
    
    
    70,138
    
    
    
    56,896Paper -Editorial
    
    
    1,886,063
    
    
    
    1,649,225
    
    
    
    1,663,000Scholastic
    
    
    390,536
    
    
    
    495,756
    
    
    
    247,819Forest -Furniture manufacturers
    
    
    100,415
    
    
    
    110,537
    
    
    
    88,656Other
    
    
    1,243,847
    
    
    
    1,384,820
    
    
    
    1,074,455Total
    
    $
    8,143,300
    
    
    $
    8,039,294
    
    
    $
    7,327,253
 F-52




---



##### 



NOTE 22  NEW ACCOUNTING PRINCIPLES
 Normas de Información Financiera
   
    
    New bulletins and interpretations to the bulletins issued by CINIF
    
    Existing bulletins issued by the Accounting Principles Board of the Mexican
Institute of Public Accountants that have not been amended, replaced or repealed by the
new NIFs
    
    IFRSs that are supplementary guidance to be used when Mexican GAAP does not provide
primary guidance
   
    
    NIF A-1 Financial Information Standards Structure
    
    NIF A-2 Basic Principles
    
    NIF A-3 Users Requirements and Financial Statement Objectives
    
    NIF A-4 Financial Statements Qualitative Characteristics
    
    NIF A-5 Financial Statements Basic Elements
    
    NIF A-6 Recognition and Valuation
    
    NIF A-7 Presentation and Disclosure
    
    NIF A-8 Supplementary Standards to Mexican GAAP
    
    NIF B-1 Accounting Changes and Error Corrections
   F-53




---



##### 



NOTE 23  RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP
  Reconciliation of consolidated statements of operations:
 Years ended December 31,2005
    
    
    2004
    
    
    2003Majority interest net gain (loss) as reported under Mexican GAAP
    
    
    
    $
    179,176
    
    
    $
    64,092
    
    
    
    (  $3,634,451
    )Deferred income taxes
    
    i
    
    
    928,816
    
    
    
    ( 155,205
    )
    
    
    ( 278,818
    )Deferred employee profit sharing
    
    i
    
    
    76,159
    
    
    
    119,302
    
    
    
    275,285Purchase accounting adjustment  depreciation
    
    ii
    
    
    132,660
    
    
    
    111,571
    
    
    
    170,567Effect of fifth amendment to Statement B-10
    
    iii
    
    
    (53,177
    )
    
    
    ( 56,554
    )
    
    
    ( 73,213
    )Debt issuance costs and repurchase of bonds
    
    iv
    
    
    (247,117
    )
    
    
    309,603
    
    
    
    48,563Capitalized financing costs
    
    v
    
    
    (29,610
    )
    
    
    37,850
    
    
    
    12,945Effect of Statement B-15 on restatement to constant currency
    
    vi
    
    
    
    
    
    
    (1,278
    )
    
    
    (2,795
    )Adjustment to impairment of long-lived assets
    
    vii
    
    
    (150,948
    )
    
    
    327,168
    
    
    
    278,825Adjustment to loss on sale of subsidiaries
    
    viii
    
    
    
    
    
    
    
    
    
    
    267,798Deferred start-up, research and development costs
    
    ix
    
    
    4,261
    
    
    
    3,824
    
    
    
    101,148Troubled debt restructuring effect, net of inflation and exchange
rate effects
    
    x
    
    
    524,465
    
    
    
    
    
    
    
    Effect of U.S. GAAP adjustments on minority interest
    
    xi
    
    
    3,046
    
    
    
    (3,491
    )
    
    
    (3,514
    )Reversal of (loss) income on sale of discontinued operations
    
    xii
    
    
    (11,195
    )
    
    
    
    
    
    
    77,576Severance payments
    
    xiii
    
    
    (11,592
    )
    
    
    
    
    
    
    U.S. GAAP net income (loss)
    
    
    
    $
    1,344,944
    
    
    $
    756,882
    
    
    
    (  $2,760,084
    )
 F-54




---



##### 



Reconciliation of consolidated stockholders equity:
 Years ended December 31,2005
    
    
    2004Total stockholders equity corresponding to majority interest as
reported under Mexican GAAP
    
    
    
    $
    4,654,625
    
    
    $
    1,583,884Deferred income taxes
    
    i
    
    
    887,947
    
    
    
    50,092Deferred employee profit sharing
    
    i
    
    
    ( 689,665
    )
    
    
    ( 765,824
    )Purchase accounting adjustments:
    
    iiAccumulated negative goodwill
    
    
    
    
    ( 4,083,970
    )
    
    
    ( 4,445,917
    )Accumulated depreciation
    
    
    
    
    1,006,986
    
    
    
    973,635Effect of fifth amendment to Statement B-10:
    
    iiiFixed assets
    
    
    
    
    3,269,220
    
    
    
    3,418,176Accumulated depreciation
    
    
    
    
    ( 1,859,098
    )
    
    
    ( 2,067,387
    )Debt issuance costs and repurchase of bonds
    
    iv
    
    
    
    
    
    
    247,117Capitalized financing costs
    
    v
    
    
    85,725
    
    
    
    115,335Effect of Statement B-15 on restatement to constant currency
    
    vi
    
    
    
    
    
    
    32,885Adjustment to impairment on long-lived assets
    
    vii
    
    
    918,004
    
    
    
    1,342,785Deferred start-up, research and development costs:
    
    ix
    
    
    (4,514
    )
    
    
    (8,775
    )Reversal of premium on issuance of shares related to the troubled
debt restructuring effect
    
    x
    
    
    ( 2,503,593
    )
    
    
    Effect of U.S. GAAP adjustments on minority interest
    
    xi
    
    
    9,436
    
    
    
    6,390Severance payments
    
    xiii
    
    
    (9,300
    )
    
    
    Total U.S.
GAAP stockholders equity
    
    
    
    $
    1,681,803
    
    
    $
    482,396
  Years ended December 31,2005
    
    
    2004Balance at beginning of the year
    
    $
    482,396
    
    
    ($
    254,747
    )Net income under U.S. GAAP
    
    
    1,344,944
    
    
    
    756,882Deficit from restatement
    
    
    ( 693,021
    )
    
    
    ( 72,359
    )Cumulative translation adjustment
    
    
    311,091
    
    
    
    52,571Increase in capital stock and additional paid  in capital, net
    
    
    236,393
    
    
    
    49Balance at end of the year
    
    $
    1,681,803
    
    
    $
    482,396
 F-55




---



##### 



Comprehensive loss
  Years ended December 31,2005
    
    
    2004
    
    
    2003Majority interest net income (loss) under Mexican GAAP
    
    $
    179,176
    
    
    $
    64,092
    
    
    
    ($3,634,451
    )Other comprehensive (loss) income, net:
    
    
    (372,886
    )
    
    
    (92,969
    )
    
    
    680,283Net majority comprehensive loss
    
    ($
    193,710
    )
    
    ($
    28,877
    )
    
    
    ($2,954,168
    )Cumulative other comprehensive loss
    
    ($
    8,201,417
    )
    
    ($
    7,828,531
    )
    
    
    ($7,735,562
    )
  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, 2003
    
    ($
    3,348,713
    )
    
    ($
    159,181
    )
    
    $
    94,870
    
    
    ($
    5,002,821
    )
    
    ($
    8,415,845
    )Current period changes
    
    
    
    
    
    
    159,181
    
    
    
    98,625
    
    
    
    422,477
    
    
    
    680,283Balances at December 31, 2003
    
    
    (3,348,713
    )
    
    
    
    
    
    
    193,495
    
    
    
    (4,580,344
    )
    
    
    (7,735,562
    )Current period changes
    
    
    
    
    
    
    
    
    
    
    71,954
    
    
    
    (164,923
    )
    
    
    (92,969
    )Balance at December 31, 2004
    
    
    (3,348,713
    )
    
    
    
    
    
    
    265,449
    
    
    
    (4,745,267
    )
    
    
    (7,828,531
    )Current period changes
    
    
    
    
    
    
    
    
    
    
    343,976
    
    
    
    (716,862
    )
    
    
    (372,886
    )Balance at December 31, 2005
    
    ($
    3,348,713
    )
    
    $
    
    
    
    $
    609,425
    
    
    ($
    5,462,129
    )
    
    ($
    8,201,417
    )
 
 (1)
    
    For 2005 and 2004, loss from holding non-monetary assets includes deferred tax effect of
($90,961) and ($82,064), respectively, as a result of the application of Statement D-4. F-56




---



##### 



Effects of the U.S. GAAP adjustments on discontinued operations
 Reconciliation of consolidated statements of operations:
 Years ended December 31,2005
    
    
    2004
    
    
    2003Income (loss) as reported under Mexican GAAP
    
    
    
    $
    108,802
    
    
    $
    105,536
    
    
    ($
    596,964
    )Deferred income taxes
    
    i
    
    
    (9,316
    )
    
    
    206
    
    
    
    158,048Deferred employee profit sharing
    
    i
    
    
    21,380
    
    
    
    13,811
    
    
    
    Purchase accounting adjustments  depreciation
    
    ii
    
    
    
    
    
    
    11,655
    
    
    
    (14,494
    )Effect of fifth amendment to Statement B-10
    
    iii
    
    
    
    
    
    
    72
    
    
    
    DPC liability
    
    
    
    
    
    
    
    
    
    
    
    
    274,291Adjustment to impairment of long-lived assets
    
    vii
    
    
    
    
    
    
    (14,954
    )
    
    
    Reversal of (loss) income on sale of discontinued operations
    
    xii
    
    
    (11,195
    )
    
    
    
    
    
    
    77,576U.S. GAAP income (loss)
    
    
    
    $
    109,671
    
    
    $
    116,326
    
    
    ($
    101,543
    )
 Deferred income tax and employee profit sharing
   F-57




---



##### 



Years ended December 31,2005
    
    
    2004
    
    
    2003Income and asset tax expense (benefit):Current:Domestic
    
    $
    62,873
    
    
    $
    29,046
    
    
    $
    78,374Deferred:Domestic
    
    
    (706,361
    )
    
    
    (283,104
    )
    
    
    37,914Foreign
    
    
    (4,636
    )
    
    
    (72,792
    )
    
    
    219,250(710,997
    )
    
    
    (355,896
    )
    
    
    257,164Income and asset tax provision (benefit)  continuing operations
    
    ($
    648,124
    )
    
    ($
    326,850
    )
    
    $
    335,538
 F-58




---



##### 



Years ended December 31,2005
    
    
    2004Deferred income tax liabilities (assets):Inventory
    
    $
    81,759
    
    
    $
    265,158Inventory Rule 106
    
    
    (202,786
    )
    
    
    (229,325
    )Property, plant and equipment
    
    
    2,248,980
    
    
    
    2,442,263Other assets
    
    
    (29,114
    )
    
    
    46,504Allowance for doubtful accounts
    
    
    (49,767
    )
    
    
    (65,599
    )Accrued expenses
    
    
    (101,678
    )
    
    
    (128,267
    )Other reserves
    
    
    (3,573
    )
    
    
    52,458Troubled
debt restructuring
    
    
    (701,006
    )
    
    
    Asset tax credits
    
    
    (329,849
    )
    
    
    (340,627
    )Tax loss carryforwards
    
    
    (1,005,278
    )
    
    
    (1,300,652
    )Total net deferred income tax (asset) liability  continuing
operations
    
    
    (92,312
    )
    
    
    741,913Valuation allowance
    
    
    806,189
    
    
    
    691,953713,877
    
    
    
    1,433,866Discontinued operations, net
    
    
    
    
    
    
    49,855Total net deferred income tax liability
    
    $
    713,877
    
    
    $
    1,483,721
 Years ended December 31,2005
    
    
    2004Deferred employee profit sharing liabilities (assets):Inventory
    
    $
    29,200
    
    
    $
    87,957Inventory Rule 106
    
    
    (72,424
    )
    
    
    (76,442
    )Property, plant and equipment
    
    
    795,482
    
    
    
    765,223Other assets
    
    
    683
    
    
    
    30,276Allowance for doubtful accounts
    
    
    (15,471
    )
    
    
    (17,235
    )Other
    
    
    (47,805
    )
    
    
    (43,969
    )Total net deferred employee profit sharing liability from continuing
operations
    
    
    689,665
    
    
    
    745,810Discontinued operations, net
    
    
    
    
    
    
    20,014Total net deferred employee profit sharing liability
    
    $
    689,665
    
    
    $
    765,824
 F-59




---



##### 



Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceDeferred income tax liability:At December 31, 2003
    
    $
    2,162,003
    
    
    $
    1,874,640
    
    
    $
    287,363At December 31, 2004
    
    
    1,533,813
    
    
    
    1,483,721
    
    
    
    50,092Net change
    
    ($
    628,190
    )
        ($
    390,919
    )
        ($
    237,271
    )Deferred income tax liability:At December 31, 2004
    
    $
    1,533,813
    
    
    $
    1,483,721
    
    
    $
    50,092At December 31, 2005
    
    
    1,601,824
    
    
    
    713,877
    
    
    
    887,947Net change
    
    $
    68,011
    
        ($
    769,844
    )
    
    $
    837,855
  Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax expense line item
    
    $
    175,278
    
        ($
    769,844
    )
    
    $
    945,122Gain on monetary position
    
    
    ( 16,306
    )
    
    
    
    
    
    
    ( 16,306
    )Total income statement effect
    
    
    158,972
    
    
    
    (769,844
    )
    
    
    928,816Gain from holding non-monetary
assets(1)
    
    
    (90,961
    )
    
    
    
    
    
    
    ( 90,961
    )Total change in deferred tax liability
    
    $
    68,011
    
        ($
    769,844
    )
    
    $
    837,855
 F-60




---



##### 



Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax gain line item
        ($
    566,432
    )
    
    ($
    390,919
    )
        ($
    175,513
    )Loss on monetary position
    
    
    20,308
    
    
    
    
    
    
    
    20,308Total income statement effect
    
    
    ( 546,124
    )
    
    
    (390,919
    )
    
    
    ( 155,205
    )Gain from holding non-monetary
assets(1)
    
    
    ( 82,066
    )
    
    
    
    
    
    
    (82,066
    )Total change in deferred tax
liability
        ($
    628,190
    )
        ($
    390,919
    )
        ($
    237,271
    )
  Mexican
    
    
    U.S.GAAP
    
    
    GAAP
    
    
    DifferenceReflected in:Deferred tax gain line item
        ($
    221,817
    )
        ($
    44,562
    )
        ($
    177,255
    )Gain on monetary position
    
    
    ( 101,563
    )
    
    
    
    
    
    
    ( 101,563
    )Total income statement effect
    
    
    ( 323,380
    )
    
    
    ( 44,562
    )
    
    
    ( 278,818
    )Loss from holding non-monetary
assets(1)
    
    
    216,639
    
    
    
    
    
    
    
    216,639Total change in deferred tax
liability
        ($
    106,741
    )
        ($
    44,562
    )
        ($
    62,179
    )
 
 (1)
    
    Represents the deferred income tax effect resulting from the differences in
restating the Companys non-monetary assets of foreign origin using the
Mexican peso against foreign currencies and by applying inflation rates of the countries
from which the non-monetary assets originate versus applying the Mexican NCPI. F-61




---



##### 



Purchase accounting adjustments
   Effect of fifth amendment to Statement B-10
  Debt issuance costs and repurchase of bonds
   F-62




---



##### 



Capitalized financing costs
   Effect of Statement B-15 on restatement to constant currency
   Years ended December 31,2004
    
    
    2003Consolidated statements of operations:As previously reported, indexed for effects of inflation in Mexico
    
    $
    62,814
    
    
    ($
    3,637,246
    )As reported under Statement B-15
    
    
    64,092
    
    
    
    (3,634,451
    )($
    1,278
    )
    
    ($
    2,795
    )Consolidated stockholders equity:As previously reported, indexed for effects of inflation in Mexico
    
    $
    1,616,769
    
    
    $
    1,666,258As reported under Statement B-15
    
    
    1,583,884
    
    
    
    1,612,712$
    32,885
    
    
    $
    53,546
 F-63




---



##### 



Adjustment to impairment on long-lived assets
   Adjustment to loss on sale of subsidiaries
  F-64




---



##### 



Deferred start-up research and development costs
 
  Troubled Debt Restructuring
    F-65




---



##### 



Minority interest
   Reversal of loss on sale of discontinued operations
   Severance payments
   F-66




---



##### 



SUPPLEMENTAL U.S. GAAP DISCLOSURES
 Condensed information
  F-67




---



##### 



CONDENSED CONSOLIDATED BALANCE SHEETS:
 Years ended December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    700,408
    
    
    $
    862,735Accounts receivable, net
    
    
    1,733,285
    
    
    
    1,863,799Inventories, net
    
    
    1,195,809
    
    
    
    1,114,160Deferred income tax and employee profit sharing
    
    
    816,774
    
    
    
    67,660Short-term assets of discontinued operations
    
    
    
    
    
    
    107,973Other
    
    
    27,458
    
    
    
    20,216Total current assets
    
    
    4,473,734
    
    
    
    4,036,543Property, plant and equipment
    
    
    10,249,968
    
    
    
    10,807,220Long-term assets of discontinued operations
    
    
    
    
    
    
    257,598Other assets
    
    
    255,871
    
    
    
    589,589Total assets
    
    $
    14,979,573
    
    
    $
    15,690,950Liabilities and shareholders equity (deficit)Current liabilities:Short-term debt, notes payable and current portion of long-term
debt
    
    $
    257,572
    
    
    $
    234,522Accrued liabilities and other payables
    
    
    1,380,328
    
    
    
    1,490,611Current liabilities of discontinued operations
    
    
    
    
    
    
    131,138Total current liabilities
    
    
    1,637,900
    
    
    
    1,856,271Long-term debt
    
    
    9,008,732
    
    
    
    7,183,469Seniority premiums
    
    
    317,199
    
    
    
    315,706Deferred income tax and employee profit sharing
    
    
    2,221,314
    
    
    
    2,247,336Other long-term debt
    
    
    63,774
    
    
    
    3,361,914Long-term liabilities of discontinued operations
    
    
    
    
    
    
    170,195Total long-term liabilities
    
    
    11,611,019
    
    
    
    13,278,620Total liabilities
    
    
    13,248,919
    
    
    
    15,134,891Minority interest
    
    
    48,851
    
    
    
    73,663Shareholders equity (deficit)
    
    
    1,681,803
    
    
    
    482,396Total liabilities and shareholders equity (deficit)
    
    $
    14,979,573
    
    
    $
    15,690,950
 F-68




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Years ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    $
    8,143,300
    
    
    $
    8,113,900
    
    
    $
    7,424,644Cost of sales
    
    
    7,092,047
    
    
    
    6,953,985
    
    
    
    6,373,850Gross profit
    
    
    1,051,253
    
    
    
    1,159,915
    
    
    
    1,050,794Selling, general and administrative expenses
    
    
    592,929
    
    
    
    686,898
    
    
    
    1,165,617Operating income (loss)
    
    
    458,324
    
    
    
    473,017
    
    
    
    (114,823
    )Financing cost:Interest expense
    
    
    283,984
    
    
    
    1,121,109
    
    
    
    1,227,808Interest income
    
    
    (42,555
    )
    
    
    (41,540
    )
    
    
    (46,115
    )Foreign exchange (gain) loss, net
    
    
    (437,656
    )
    
    
    (62,561
    )
    
    
    892,766Gain from monetary position, net
    
    
    (268,070
    )
    
    
    (487,176
    )
    
    
    (297,345
    )(464,297
    )
    
    
    529,832
    
    
    
    1,777,114Other (expenses) income, net
    
    
    (355,685
    )
    
    
    371,102
    
    
    
    (435,957
    )Income (loss) before income tax provisions, equity in income of
associated companies , minority interest and discontinued
operations
    
    
    566,936
    
    
    
    314,287
    
    
    
    (2,327,894
    )Provision for:Income and asset tax (benefit) expense
    
    
    (648,124
    )
    
    
    (326,850
    )
    
    
    335,538Minority interest
    
    
    (18,311
    )
    
    
    3,316
    
    
    
    (2,829
    )Equity in income of associated companies
    
    
    (1,902
    )
    
    
    (2,735
    )
    
    
    (2,062
    )Net income (loss) from continuing operations
    
    
    1,235,273
    
    
    
    640,556
    
    
    
    (2,658,541
    )Discontinued operations, net
    
    
    109,671
    
    
    
    116,326
    
    
    
    (101,543
    )Net income (loss)
    
    $
    1,344,944
    
    
    $
    756,882
    
    
    ($
    2,760,084
    )
 F-69




---



##### 



Cash flow information
   Years ended December 31,2005
    
    
    2004
    
    
    2003Operating activities:U.S. GAAP net income (loss) from
continuing operations
    
    $
    1,235,273
    
    
    $
    640,556
    
    
    
    ($2,658,541
    )Adjustment to reconcile net income to net
cash flows provided by
operating activities:Depreciation and amortization
    
    
    288,957
    
    
    
    341,327
    
    
    
    386,314Minority interest
    
    
    (18,311
    )
    
    
    3,316
    
    
    
    Deferred income taxes
    
    
    (710,997
    )
    
    
    (355,896
    )
    
    
    251,573Deferred employee profit sharing
    
    
    (56,145
    )
    
    
    (105,491
    )
    
    
    (275,285
    )Allowance for doubtful accounts
    
    
    32,493
    
    
    
    48,800
    
    
    
    72,278Inventory obsolescence allowance
    
    
    4,823
    
    
    
    1,963
    
    
    
    2,223Gain from monetary position
    
    
    (268,070
    )
    
    
    (487,176
    )
    
    
    (384,230
    )Loss (gain) on sale of non-strategic assets
    
    
    (10,662
    )
    
    
    37,745
    
    
    
    217,020Impairment on long-lived assets
    
    
    37,145
    
    
    
    137,008
    
    
    
    638,294Debt assumption
    
    
    
    
    
    
    
    
    
    
    74,684Unrealized foreign exchange loss, net
    
    
    (160,752
    )
    
    
    21,701
    
    
    
    847,883Amortization of debt issuance costs and
other financing costs
    
    
    
    
    
    
    24,941
    
    
    
    Other
    
    
    (14,518
    )
    
    
    17,021
    
    
    
    24,813359,236
    
    
    
    325,815
    
    
    
    (802,974
    )
 F-70




---



##### 



Years ended December 31,2005
    
    
    2004
    
    
    2003Changes in operating assets and liabilities:Accounts receivable, net
    
    ($
    95,307
    )
    
    ($
    93,669
    )
    
    ($
    1,093,503
    )Inventories, net
    
    
    (94,817
    )
    
    
    71,226
    
    
    
    84,665Prepaid expenses
    
    
    (3,212
    )
    
    
    (5,059
    )
    
    
    Other liabilities
    
    
    88,167
    
    
    
    380,705
    
    
    
    1,698,498Cash flow (used in) provided by operating activities before
discontinued operations
    
    
    254,067
    
    
    
    679,018
    
    
    
    (113,314
    )Discontinued operations
    
    
    (307,795
    )
    
    
    117,384
    
    
    
    (230,174
    )Cash flows (used in) provided by operating activities:
    
    
    (53,728
    )
    
    
    796,402
    
    
    
    (343,488
    )Financing activities:Bank loans
    
    
    132,558
    
    
    
    517
    
    
    
    Payments of long-term debt
    
    
    (170,546
    )
    
    
    (482,721
    )
    
    
    (441,269
    )Increase in capital stock
    
    
    
    
    
    
    49
    
    
    
    Cash flows (used in) provided by financing activities
    
    
    (37,988
    )
    
    
    (482,155
    )
    
    
    (441,269
    )Investing activities:Acquisitions of fixed assets
    
    
    (105,238
    )
    
    
    (208,753
    )
    
    
    (115,996
    )Proceeds from sale of non-strategic assets
    
    
    346,204
    
    
    
    16,066
    
    
    
    251,157Investments in subsidiaries
    
    
    (54,002
    )
    
    
    
    
    
    
    Restricted cash
    
    
    
    
    
    
    171,195
    
    
    
    (171,196
    )Other assets
    
    
    271,061
    
    
    
    (34,856
    )
    
    
    20,222Proceeds from sale of discontinued operations
    
    
    97,585
    
    
    
    
    
    
    
    1,004,996Cash flows used in investing activities
    
    
    555,610
    
    
    
    (56,348
    )
    
    
    989,183Effect of inflation and exchange rate changes on cash and cash
equivalents
    
    
    (626,221
    )
    
    
    (93,087
    )
    
    
    204,523Net (decrease) increase in cash and cash equivalents
    
    
    (162,327
    )
    
    
    164,812
    
    
    
    408,949Cash and cash equivalents at beginning of year
    
    
    862,735
    
    
    
    697,923
    
    
    
    288,974Cash and cash equivalents at end of year
    
    $
    700,408
    
    
    $
    862,735
    
    
    $
    697,923
 F-71




---



##### 



Supplemental cash flow disclosures:
 Years ended December 31,2005
    
    
    2004
    
    
    2003Cash paid during the year for:Interest, net of capitalized interest
    
    $
    579,102
    
    
    $
    36,466
    
    
    $
    156,268Income and asset tax
    
    
    25,876
    
    
    
    109,975
    
    
    
    178,011
 Non
 cash transactions:
 2005Exchange debt
    
    ($
    3,542,539
    )Exchange gain
    
    
    278,088Common stock
    
    
    290,727Premium in issuance of shares
    
    $
    2,973,724
 Supplemental balance sheet information
 
    
    Employee benefits
   F-72




---



##### 



December 31,2005
    
    
    2004Actual benefit obligation:
    
    $
    202,581
    
    
    $
    211,267Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    239,223
    
    
    $
    241,296Service cost
    
    
    10,380
    
    
    
    7,381Interest cost
    
    
    14,548
    
    
    
    14,725Actuarial loss
    
    
    16,731
    
    
    
    17,064Benefits paid and variations in assumptions
    
    
    ( 56,080
    )
    
    
    ( 41,243
    )Projected benefit obligations, end of year
    
    $
    224,802
    
    
    $
    239,223
 
    
    Post  retirement benefits
 December 31,2005
    
    
    2004Actual benefit obligation:
    
    $
    97,887
    
    
    $
    104,439Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    104,024
    
    
    $
    114,141Service cost
    
    
    400
    
    
    
    436Interest cost
    
    
    4,942
    
    
    
    5,310Benefits paid
    
    
    ( 8,106
    )
    
    
    ( 15,863
    )Projected benefit obligation, end of year
    
    $
    101,260
    
    
    $
    104,024
  F-73




---



##### 




    
    Postretirement obligations
   December 31,2005
    
    
    2004Actual benefit obligation:
    
    $
    7,431
    
    
    $
    Change in benefit obligation:Projected benefit obligation, beginning of year
    
    $
    14,565
    
    
    $
    Service cost
    
    
    3,115
    
    
    
    Interest cost
    
    
    1,206
    
    
    
    Benefits paid
    
    
    (2,155
    )
    
    
    Projected benefit obligation, end of year
    
    $
    16,731
    
    
    $
    
  Seniority premiums and pensions
    
    $
    202,581
    
    
    $
    211,266Postretirement obligations
    
    
    97,887
    
    
    
    104,440Severance payments
    
    
    16,731
    
    
    
    $
    317,199
    
    
    $
    315,706
 F-74




---



##### 




    
    Valuation and qualifying accounts:
  Years ended December 31,2005
    
    
    2004
    
    
    2003Balance at the beginning of the period
    
    
    ($175,698
    )
    
    
    ($156,470
    )
    
    
    ($148,234
    )Effects of inflation
    
    
    4,691
    
    
    
    7,377
    
    
    
    11,468Increase in the allowance
    
    
    (32,493
    )
    
    
    (48,800
    )
    
    
    (72,278
    )Write-offs
    
    
    48,795
    
    
    
    22,195
    
    
    
    52,574Balance at the end of the period
    
    
    ($154,705
    )
    
    
    ($175,698
    )
    
    
    ($156,470
    )
  Years ended December 31,2005
    
    
    2004
    
    
    2003Balance at the beginning of the period
    
    
    ($30,842
    )
    
    
    ($30,808
    )
    
    
    ($46,213
    )Effects of inflation
    
    
    994
    
    
    
    1,520
    
    
    
    1,796Increase in the allowance
    
    
    (4,823
    )
    
    
    (1,963
    )
    
    
    (2,310
    )Write-offs
    
    
    1,893
    
    
    
    409
    
    
    
    15,919Balance at the end of the period
    
    
    ($32,778
    )
    
    
    ($30,842
    )
    
    
    ($30,808
    )
 U.S.
GAAP  New Accounting pronouncements
  F-75




---



##### 



F-76




---



##### 



F-77




---



##### 





EXHIBIT INDEX




|                                              |  |  |  |  |  |  |  | 
|--------------------------------------------- |  |  |  |  |  |  |  | 
|Ex-1.1  Bylaws                               
|Ex-8  List of Subsidiaries                   
|Ex-12.1  Section 302 Certification of the CEO
|Ex-12.2  Section 302 Certification of the CFO
|Ex-13.1  Section 906 Certification of the CEO
|Ex-13.2  Section 906 Certification of the CFO