As filed with the Securities and Exchange Commission on July 30, 2001
Registration No. 333-64506
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Pre-Effective Amendment No. 1 To
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CORPORACION 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 2653 Not Applicable
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
Corporacion Durango, S.A. de C.V.
Torre Corporativa Durango
Potasio 150, Ciudad Industrial
Durango, Durango
United Mexican States 34220
(52-18) 14-1658
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
----------------
Durango Paper Company
1000 Osborne Street
St. Marys, Georgia 31558
(912) 882-0400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Priscilla Almodovar, Esq. Antonia E. Stolper, Esq.
White & Case LLP Shearman & Sterling
1155 Avenue of the Americas 599 Lexington Avenue
New York, New York 10036-2787 New York, NY 10022
(212) 819-8535 (212) 848-8434
----------------
Approximate date of commencement of proposed sale to the public: As soon
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
------
--------------------------------------------------------------------------------
------
Proposed Proposed
Title of each class of Amount maximum maximum
Amount of
securities to be to be offering price aggregate
registration
registered registered(1) per unit(1) offering price(1)
fee(1)
--------------------------------------------------------------------------------
------
13 1/8% senior notes due
2006.................. US$51,500,000 100% US$51,500,000
US$12,875
--------------------------------------------------------------------------------
------
13 1/2% senior notes due
2008.................. US$212,000,000 100% US$212,000,000
US$53,000
--------------------------------------------------------------------------------
------
--------------------------------------------------------------------------------
------
(1) The Registrant previously registered US$50,000,000 of the 2006 notes and
US$200,000,000 of the 2008 notes and paid a filing fee of US$62,500 in
respect thereof. Concurrently with the filing of this registration
statement, the Registrant has paid an additional US$3,375 in registration
fees in respect of the additional amount being registered.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), may determine.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Prospectus and Consent Solicitation
OFFER TO EXCHANGE
13 1/8% Senior Notes Due 2006 and
13 1/2% Senior Notes Due 2008 of Corporacion Durango, S.A. de C.V.
For Any and All Outstanding
(LOGO OF DURANGO)
12 5/8% Notes Due 2003 of Grupo Industrial Durango, S.A. de C.V.
(CUSIP No. 40050MAA4)
Exchange Offer
We are offering to issue our exchange notes in exchange for your Grupo
Industrial Durango notes, or GID notes. We are offering to issue US$1,030 in
principal amount of exchange notes for US$1,000 in principal amount of GID
notes. In addition, we are offering to make a consent payment equal to US$30
per US$1,000 principal amount of GID notes that you tender, which is payable
as described below. Including the consent payment, the total consideration
being offered is equal to US$1,060 per US$1,000 principal amount of tendered
GID notes.
Exchange Offer Mechanics: You may select the form of consideration that you
will receive for your GID notes from the following two options, subject to the
limitations described below:
.new 13 1/8% senior notes due 2006; and
.new 13 1/2% senior notes due 2008.
We are offering to exchange up to a maximum of US$50 million in aggregate
principal amount of GID notes for 2006 notes and US$200 million in aggregate
principal amount of GID notes for 2008 notes. You do not have to choose the
same option for all the GID notes that you tender. You do not have to tender
all your GID notes to participate in this exchange offer. Either type of the
exchange notes may be oversubscribed. In the event of oversubscription, we
will issue the oversubscribed type of exchange notes on a pro rata basis in
exchange for all GID notes tendered for the oversubscribed type of exchange
notes and will issue the other type of exchange notes in exchange for the
balance of the tendered GID notes. Therefore, you may receive a different type
of exchange note than that for which you tendered for a portion of the GID
notes that you tendered.
This exchange offer is conditioned on the receipt of tenders of at least 80%
of the outstanding principal amount of the GID notes. If we accept any GID
notes, we will accept for exchange all GID notes that are validly tendered and
not withdrawn. The exchange notes will pay interest on February 1 and August 1
of each year, commencing February 1, 2002. Interest on the exchange notes will
accrue from August 1, 2001, irrespective of the settlement date of the
exchange offer. Interest on the GID notes for the period from February 1, 2001
to August 1, 2001 will be paid in cash as scheduled on August 1, 2001.
Exchange Offer Expiration: August 27, 2001 at 5:00 p.m., New York City time,
unless extended by us. You may withdraw your tender of GID notes or change
your selection of exchange notes at any time prior to the expiration date of
this exchange offer.
Consent Solicitation
If you tender your GID notes prior to the consent date, you will receive a
consent payment equal to US$30 per US$1,000 principal amount of GID notes
tendered and accepted. We will make the consent payment in cash to the extent
you receive 2006 notes or in additional 2008 notes to the extent you receive
2008 notes in the exchange offer.
By tendering your GID notes in the exchange offer you will be deemed to have
given your consent to amend the indenture under which the GID notes were
issued to delete substantially all of the restrictive covenants contained in
the GID indenture.
Consent Date: The later of (1) 5:00 p.m., New York City time, on August 14,
2001, or (2) the time the required consent to the proposed amendments is
received. You may withdraw your consent at any time prior to the consent date.
Terms of the Exchange Notes
The terms of the exchange notes will be substantially identical, except for
their interest rate, maturity and optional redemption provisions. For a
description of the terms of the exchange notes, see "Description of Our
Exchange Notes." The 2006 notes will be treated as a single class with our
outstanding US$180 million 13 1/8% senior notes due 2006 (CUSIP 21986MAA3)
that were issued in February 2001 and will be issued under the same indenture.
Intercompany Notes/Collateral
On the settlement date, GID will have issued to us two unsubordinated
promissory notes, one which will be equal to the principal amount of the 2006
notes and will have the same interest rate, interest payment dates and
maturity as the 2006 notes, and one which will be equal to the principal
amount of the 2008 notes and will have the same interest rate, interest
payment dates and maturity as the 2008 notes. The GID unsubordinated
promissory notes will be owned by us and will rank equal in right of payment
to all other existing and future unsecured unsubordinated indebtedness of GID.
Each type of exchange note will be separately secured by a pledge of the
relevant GID unsubordinated promissory note for a period of time.
Participating in this exchange offer involves risks. See "Risk Factors"
beginning on page 20.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus and consent solicitation. Any
representation to the contrary is a criminal offense.
The exclusive dealer manager and solicitation agent for this exchange offer
is:
Banc of America Securities LLC
The date of this prospectus and consent solicitation is July 30, 2001.
TABLE OF CONTENTS
Page
----
Presentation of Financial Information...................................... 4
Summary.................................................................... 6
Risk Factors............................................................... 20
Special Note Regarding Forward-Looking Statements.......................... 28
The Exchange Offer......................................................... 29
The Consent Solicitation................................................... 38
Exchange Rates............................................................. 40
Use of Proceeds............................................................ 41
Capitalization............................................................. 42
Selected Financial Data.................................................... 43
Ratio of Earnings to Fixed Charges......................................... 46
Operating and Financial Review and Prospects............................... 47
Industry Overview.......................................................... 66
Business................................................................... 73
Page
----
Management................................................................ 90
Major Shareholders and Related Party Transactions......................... 95
Description of Our Exchange Notes......................................... 96
Taxation.................................................................. 145
Enforceability of Civil Liabilities....................................... 151
Legal Matters............................................................. 152
Experts................................................................... 152
Where You Can Find More Information About Us.............................. 152
Annex A--Annual Report on Form 20-F/A, for GID for the year ended December
31, 2000 filed July 30, 2001, Form 6-K filed April 27, 2001 and Form 6-K
filed July 27, 2001...................................................... A-1
Index to Consolidated Financial Statements................................ F-1
----------------
You should rely only on the information contained in this prospectus and
consent solicitation. We have not authorized anyone to provide you with
information different from that contained in this prospectus and consent
solicitation. We are offering our exchange notes in exchange for your GID
notes only in jurisdictions where this offer and exchange is permitted. The
information contained in this prospectus and consent solicitation is accurate
only as of the date of this prospectus and consent solicitation, regardless of
the time of delivery of this prospectus and consent solicitation. However, we
will disclose any material changes to the company's business by filing a post-
effective amendment.
Until 25 days after the day succeeding the expiration date, all dealers
effecting transactions in the exchange notes, whether or not participating in
this distribution, may be required to deliver a prospectus and consent
solicitation. This is in addition to the obligations of dealers to deliver a
prospectus and consent solicitation when acting as underwriters and with
respect to their unsold allotments or subscriptions.
In this prospectus and consent solicitation, "Corporacion Durango," "we,"
"our," "us" or the "company" refers to Corporacion Durango, S.A. de C.V. and
its subsidiaries unless the context otherwise requires. "GID" refers to Grupo
Industrial Durango, S.A. de C.V.
The statistical information in this prospectus and consent solicitation
regarding the domestic and inter-national paper and packaging industry
consists of management estimates or has been derived from publicly available
sources, including trade publications, which we have not independently
verified but we believe to be reliable.
The exchange notes have been registered with the special section (seccion
especial) of the National Registry of Securities (Registro Nacional de
Valores), or NSR, maintained by the National Banking and Securities Commission
of Mexico (Comision Nacional Bancaria y de Valores). Registration of the
exchange notes in the special section of the NSR does not imply any
certification as to the investment quality of our exchange notes, the solvency
of the issuer or the accuracy or completeness of the information contained in
this prospectus and consent solicitation. Our exchange notes may not be
offered publicly in Mexico. This prospectus and consent solicitation may not
be publicly distributed in Mexico.
3
PRESENTATION OF FINANCIAL INFORMATION
We report our financial statements in Pesos and prepare our financial
statements in accordance with generally accepted accounting principles in
Mexico, or Mexican GAAP, which differ in significant respects from generally
accepted accounting principles in the United States, or U.S. GAAP. Note 21 to
our audited combined and consolidated financial statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to us, and a reconciliation to U.S. GAAP of our combined net
income and total shareholders' equity as of December 31, 1999 and 2000 and for
the years ended December 31, 1998, 1999 and 2000. We have a fiscal year end of
December 31.
We have controlled GID since March 2000 and we currently own 59% of GID. As
a result, the financial statements for the year ended December 31, 2000 and
for the three-month period ended March 31, 2001 are presented on a
consolidated basis. Prior to March 2000, GID and Corporacion Durango were
under common ownership and control of the Rincon family. Therefore, the
financial statements for the years ended December 31, 1998 and December 31,
1999 and three-month period ended March 31, 2000 are presented on a combined
basis, combining the accounts of Corporacion Durango and its subsidiaries and
GID and its subsidiaries.
All significant inter-company accounts and transactions have been eliminated
in the combination and consolidation of the financial statements. There was a
41% minority interest in GID at December 31, 2000 and March 31, 2001.
We have attached a copy of GID's Annual Report on Form 20-F/A for the year
ended December 31, 2000 and GID's report on Form 6-K filed on March 31, 2001
related to GID's unaudited consolidated financial statements for the three-
month period ended March 31, 2001 in each case filed by GID with the
Securities and Exchange Commission. In compliance with the requirements of
Rule 3-05 of Regulation S-X, we have attached the audited combined financial
statements of Gilman Pulp and Paper Group, which is now known as Durango Paper
Company, which we acquired in December 1999, for each of the two years ended
December 31, 1997 and December 31, 1998, and the period from January 1, 1999
through December 17, 1999.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation in
Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position," issued by the Mexican Institute of Public Accountants, our audited
combined and consolidated financial statements are reported in period-end
Pesos to adjust for the inter-period effects of inflation. The presentation of
financial information in period-end, or constant, currency units is intended
to eliminate the distorting effect of inflation on the financial statements
and to permit comparisons across comparable periods in comparable monetary
units. Consequently, under Mexican GAAP, non-monetary assets, with the
exception of inventories and fixed assets of non-Mexican origin and those of
our foreign subsidiaries, are restated using the National Consumer Price Index
(Indice Nacional de Precios al Consumidor), or the NCPI. Inventories are
restated at current replacement costs while fixed assets of non-Mexican origin
are restated by the inflation of the country of origin prior to translation to
Pesos at the period end exchange rate. The effects of inflation accounting
under Mexican GAAP, other than the restatement of fixed assets of non-Mexican
origin, have not been reversed in the reconciliation to U.S. GAAP.
In 1998, we adopted Bulletin B-15, "Foreign Currency Transactions and
Translation of Financial Statements of Foreign Operations" which prescribes
the methodology for the translation and recognition of inflation of the
financial information of foreign subsidiaries. Therefore, the Peso amounts of
our revenues and expenses of our U.S. based subsidiaries may be impacted by
the foreign exchange rate fluctuations and inflation rates in the U.S.
Bulletin B-15 also prescribes the methodology for the restatement of prior
period information to constant Pesos as of the most recent balance sheet
presented. Instead of using the NCPI to restate prior period combined
financial information, under Bulletin B-15, prior period information is
deconsolidated by subsidiary or country of origin to which the applicable
inflation rate is applied and then retranslated to Pesos at the most recent
reporting period date. For the purposes of U.S. GAAP, we have restated all
combined and consolidated financial information in constant Pesos as of
December 31, 2000 using the NCPI. U.S. Dollar amounts shown in the
4
combined and consolidated financial statements have been included solely for
the convenience of the reader and are translated from Pesos at an exchange
rate of Ps 9.6098 per US$1.00, the interbank free market exchange rate as
reported by the Mexican Central Bank (Banco de Mexico) as of December 31,
2000. For a more detailed discussion of Mexican GAAP inflation methodologies,
see Note 3 to our audited financial statements.
Except for financial data for March 31, 2001 and March 31, 2000 which have
been restated in constant Pesos as of March 31, 2001 and except as otherwise
indicated, financial data for all periods throughout this prospectus and
consent solicitation have been restated in constant Pesos as of December 31,
2000. The Peso/Dollar exchange rate at December 31, 2000 was Ps 9.6098 = U.S.
$1.00 and at March 31, 2001 was Ps 9.4933 = U.S. $1.00. In addition, from
December 31, 2000 to March 31, 2001 inflation increased by 1.12%.
5
SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our exchange notes being offered in
exchange for your GID notes and our combined financial statements and notes
thereto and our unaudited condensed, combined, and consolidated financial
statements appearing elsewhere in this prospectus and consent solicitation. In
this prospectus and consent solicitation, "short ton" means 0.907 metric tons.
Corporacion Durango, S.A. de C.V.
General
We are the largest integrated paper producer based in Latin America and we
are also among the world's top 50 paper companies in terms of sales. We produce
several types of paper products, the majority of which supply paper to our
converting facilities, which in turn manufacture packaging products.
We are one of the industry's lowest cost producers due to our vertical
integration, our extensive distribution network and our easy access to raw
materials. In addition, our diverse product portfolio reduces the impact of
cyclical movements in the paper industry on our business. In Mexico, we are the
sole domestic producer of news-print with a 70% market share and we are the
leading producer of corrugated containers with a 40% market share.
We are one of the leading integrated paper producers in the North American
Free Trade Agreement, or NAFTA, region, which encompasses Mexico, Canada and
the United States. We are also a rapidly growing paper company supplying the
maquiladora sector, as well as the traditional Mexican export sector both of
which have grown at a 19% compounded annual growth rate since NAFTA took effect
on January 1, 1994. The maquiladora sector refers to manufacturing facilities
established to export Mexican products, the majority of which are located near
the Mexico-U.S. border. We believe that we are the leading domestic producer of
corrugated containers used by the traditional Mexican export sector and that we
are the leading supplier of corrugated containers for the maquiladora sector.
Our revenues were Ps 11,603.9 million (US$1,207.5 million) in 2000 and Ps
2,587.7 million (US$272.6 million) for the three months ended March 31, 2001.
For the three months ended March 31, 2001, approximately 44% of our sales were
made in U.S. Dollars, with the balance primarily U.S. Dollar linked. Our
operating income plus depreciation and amortization was Ps 1,832.5 million
(US$190.7 million) in 2000 and Ps 391.3 million (US$41.2 million) for the three
months ended March 31, 2001.
Our Competitive Strengths
We believe our competitive strengths are the following:
. We are a vertically integrated, low cost producer of paper and packaging
products;
. We have dominant market positions in the rapidly growing markets we
serve;
. We have an experienced management team with a proven turnaround track
record;
. Substantially all of our revenues are U.S. Dollar denominated or linked;
. Our strategically located facilities and customers are linked by our
extensive distribution network; and
. We have a diverse product portfolio which mitigates the impact of our
industry's cyclicality.
6
Our Business Strategy
Our business strategy is to strengthen our position as the leading integrated
paper and packaging company in Latin America, as well as to continue our growth
as a leading integrated paper producer in the NAFTA region. To implement our
strategy, we expect to:
. Increase our cash flow through enhanced efficiency and shifts to higher
margin products;
. Strengthen our leadership position in regional markets and increase our
market share in the United States;
. Continue to expand our core businesses through internal and external
growth; and
. Optimize our capital structure and pursue fiscally sound financial
activities.
Grupo Industrial Durango, S.A. de C.V.
GID is one of our three main subsidiaries. Our other two main subsidiaries
are Grupo Pipsamex and Durango Paper Company. We currently own 59% of GID. We
acquired control of GID in March 2000 from our majority and controlling
shareholder, the Rincon family, for a purchase price of Ps 1,954.9 million. In
connection with the purchase, the Rincon family transferred its GID shares to
our company in exchange for shares of our company valued at Ps 1,875.7 million.
The Rincon family, which owns 100% of our company, also indirectly owns an
additional 28% of GID.
GID is the largest producer in Mexico of corrugated containers,
containerboard, industrial paper and molded paper egg cartons in terms of
sales. GID is also a leading producer of multi-wall sacks and bags and forest
products. GID's Class A Shares trade on the Mexican Stock Exchange (Bolsa
Mexicana de Valores) and its American Depositary Shares are listed on the New
York Stock Exchange. GID's revenues were Ps 6,075.0 million in 2000 and Ps
1,342.6 million for the three months ended March 31, 2001.
Purpose and Effects of the Exchange Offer
We are offering to issue our exchange notes in exchange for all of the
outstanding GID notes. There are US$250.0 million principal amount of GID notes
outstanding. In connection with this exchange offer, we are also seeking to
amend the indenture under which the GID notes were issued to delete
substantially all of the restrictive covenants contained in the indenture.
The exchange offer is conditioned on, among other things, the receipt of
tenders of at least 80% of the outstanding principal amount of the GID notes.
We will return your GID notes promptly after the expiration date in the event
that we do not deliver the exchange notes or make the consent payment after we
accept your tender.
The purpose of the exchange offer is to simplify and improve our capital
structure and to extend the maturity of our existing notes. The purpose of the
consent solicitation is to improve operating and financial flexibility.
----------------
We are a corporation operating under the laws of Mexico. Our legal name is
Corporacion Durango, S.A. de C.V. We were incorporated on December 16, 1991 for
a term of 99 years, which term may be extended by share-holders' approval. We
are 100% owned by members of the Rincon family, which has been involved in the
pulp, paper and converting industry for over 20 years. Our principal executive
offices are located at Torre Corporativa Durango, Potasio 150, Ciudad
Industrial, Durango, Durango, United Mexican States 34220, and our telephone
numbers are (52-18) 14-1658 and (52-18) 14-2799.
Our agent for service of process in the United States is Durango Paper
Company, 1000 Osborne Street, St. Marys, Georgia 31558.
7
[Chart describing company corporate structure and ownership. Includes percentage
ownership of subsidiaries, company and subsidiary names and places of
incorporation.]
8
The Exchange Offer and Consent Solicitation
Securities for which we
are making this exchange
offer..................... US$250 million principal amount of GID's 12 5/8%
notes due 2003. The CUSIP number of the GID notes
is 40050MAA4.
Exchange ratio;
denomination.............. We are offering to issue US$1,030 in principal
amount of exchange notes in exchange for US$1,000
in principal amount of GID notes.
Our exchange notes will be issued only in
denominations of US$1,000 principal amount and
integral multiples of US$1,000. Any fractional
principal amount of exchange notes will be paid in
cash. Only registered holders will be entitled to
receive this cash payment.
Securities offered under
this exchange offer....... You may select the form of consideration that you
will receive for your GID notes from the following
two options, subject to the limitations described
below:
. new 13 1/8% senior notes due 2006; and
. new 13 1/2% senior notes due 2008.
We are offering to exchange up to a maximum of
US$50 million in aggregate principal amount of GID
notes for 2006 notes and US$200 million in
aggregate principal amount of GID notes for 2008
notes.
You do not have to choose the same option for all
the GID notes that you tender. You do not have to
tender all of your GID notes to participate in this
exchange offer.
The 2006 notes will be treated as a single class
with our US$180.0 million 13 1/8% senior notes due
2006 that we issued in February 2001 and will be
issued under the same indenture. The CUSIP number
of the 2006 notes is 21986MAA3.
Consent Payment........... If you tender your GID notes prior to the consent
date, you will receive a consent payment equal to
US$30 per US$1,000 principal amount of GID notes
tendered and accepted. We will make the consent
payment in cash to the extent you receive 2006
notes or in additional 2008 notes to the extent you
receive 2008 notes in the exchange offer.
Because 2008 notes will be issued in denominations
of US$1,000, any fractional principal amount of
2008 notes will be paid to registered holders in
cash.
Maximum Amount of
Exchange Notes............ Assuming we issue the maximum amount of 2006 notes
offered in this exchange offer, we will issue an
additional US$51.5 million of 2006 notes in this
exchange offer and there will be a total of
US$231.5 million 2006 notes outstanding.
Assuming we issue the maximum amount of 2008 notes
offered in this exchange offer, there will be
US$212.0 million 2008 notes outstanding.
9
Oversubscription and
proration................. Either type of the exchange notes may be
oversubscribed. In the event of oversubscription,
we will issue the oversubscribed type of exchange
notes on a pro rata basis in exchange for all GID
notes tendered for the oversubscribed type of
exchange notes and will issue the other type of
exchange notes in exchange for the balance of the
tendered GID notes. Therefore, you may receive a
different type of exchange note than that for which
you tendered for a portion of the GID notes that
you tendered.
We will not determine whether either of the
exchange notes have been oversubscribed until after
the expiration of the exchange offer. When we make
this determination, we will publicly announce
whether either of the exchange notes has been
oversubscribed and the effect of any required
proration. You will not be able to withdraw your
tender of GID notes at the time we make this
determination even if it may affect the type of
exchange note you will receive.
The Consent Solicitation
and Consent Payment....... If you tender your GID notes in the exchange offer,
you will be consenting to amend the GID indenture.
These amendments will eliminate substantially all
of the covenants contained in the GID indenture,
including:
. the limitation on indebtedness;
. the limitation on restricted payments;
. the limitation on dividend and other payment
restrictions affecting subsidiaries;
. the limitation on the issuance of capital stock
and indebtedness of subsidiaries;
. the limitation on transactions with affiliates;
. the limitation on liens;
. the limitation on sale and leaseback
transactions;
. the limitation on asset sales;
. the limitation on mergers;
. the requirement to make an offer to purchase
upon a change of control;
. the requirement to file reports with the SEC;
and
. the requirement to pay taxes or other claims.
In addition, the supplemental indenture would
eliminate those events of default that are related
to the covenants described above.
The proposed amendments will be approved at the
time the holders of a majority of the outstanding
principal amount of the GID notes have
10
delivered their consent; provided, however, that
the consent solicitation will remain open until at
least the consent date. The effectiveness of the
proposed amendments will be conditioned on the
acceptance and completion of the exchange offer.
Holders of GID notes may give their consent to the
proposed amendments only by tendering their GID
notes and will be deemed to have given their
consent by so tendering.
Accrued interest.......... The exchange notes will pay interest on February 1
and August 1 of each year, commencing February 1,
2002. Interest on the exchange notes will accrue
from August 1, 2001, irrespective of the settlement
date of the exchange offer. Interest on the GID
notes for the period from February 1, 2001 to
August 1, 2001 will be paid in cash as scheduled on
August 1, 2001. No separate payment of accrued
interest on the GID notes will be made on the
settlement date of the exchange offer.
Expiration Date........... 5:00 p.m., New York City time, on August 27, 2001,
unless extended by us in our sole discretion prior
to the expiration date.
Consent Date.............. The later of (1) 5:00 p.m., New York City time, on
August 14, 2001, or (2) the time the required
consents to the proposed amendments to the GID
indenture are received.
Conditions to the
Exchange Offer and
Consent Solicitation...... We will only complete the exchange offer and pay
the consent payment if:
. We receive tenders of at least 80% of the
outstanding principal amount of the GID notes;
and
. Customary conditions applicable to the exchange
offer are complied with, which conditions may be
waived by us in our sole discretion prior to the
expiration date. See "The Exchange Offer--
Termination and Conditions."
How to Tender............. Only registered holders of GID notes can
effectively tender and consent to the proposed
amendments to the GID indenture. If you are a
beneficial owner whose GID notes are registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your GID notes in the exchange offer, you
should promptly contact the person in whose name
the GID notes are registered and instruct that
person to tender on your behalf.
Tender Procedures......... Tenders of GID notes may only be made by using the
book-entry transfer procedures and by transmitting
an agent's message to the exchange agent. In order
for a book-entry transfer to constitute a valid
tender of your GID notes in the exchange offer, The
Chase Manhattan Bank, as exchange agent, must
receive a confirmation of book-entry transfer of
your GID notes into the exchange agent's account at
the book-entry transfer facility prior to the
expiration of the exchange offer. See "The Exchange
Offer--Book-Entry Transfer."
11
Consequences to GID Note
Holders Not Tendering in
the Exchange Offer........ If you fail to tender your GID notes in the
exchange offer, and the transactions contemplated
by this prospectus and consent solicitation are
completed, your GID notes will have substantially
less protection and a substantially more limited
trading market than prior to completion of the
transactions. See "Risk Factors--If you do not
exchange your GID notes, there may be a smaller
public trading market for your GID notes" and "--If
you do not exchange your GID notes, your rights
under the GID indenture will be substantially
diminished and the market price of your GID notes
may decline" and "The Exchange Offer--Consequences
of Failure to Exchange."
Acceptance of GID Notes
and Delivery of our
Exchange Notes............ Subject to conditions described in this prospectus
and consent solicitation, we will accept for
exchange any and all GID notes properly tendered
and not withdrawn prior to the expiration date. The
consent payment and our exchange notes issued
pursuant to this exchange offer and consent
solicitation will be delivered as promptly as
practicable. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights......... Exchange Offer. Tenders of GID notes in the
exchange offer may be withdrawn at any time prior
to August 27, 2001. Any withdrawn or un-accepted
GID notes will be credited to the tendering
holder's account at the book-entry transfer
facility. For further information regarding the
withdrawal of tendered GID notes, see "The Exchange
Offer--Terms of the Exchange Offer--Expiration
Date; Extensions; Amendments; Termination" and "The
Exchange Offer--Withdrawal Rights and Revocation of
Consents."
Consent Solicitation. Consents may be withdrawn at
any time prior to the consent date by making a
valid withdrawal of the related tendered GID notes.
A withdrawal of tendered GID notes after the
consent date will not constitute a withdrawal of a
consent.
United States Federal
Income Taxation........... The exchange of GID notes for exchange notes
pursuant to this exchange offer by a U.S. Holder
will constitute a material modification of the
terms of the GID notes and, therefore, the exchange
will constitute a taxable exchange for U.S. federal
income tax purposes.
For additional information regarding United States
federal income tax considerations relating to this
exchange offer and consent solicitation, including
the U.S. federal income tax consequences of the
consent payment, and the acquisition, ownership and
disposition of our exchange notes, you should read
the discussion under the heading "United States
Federal Income Taxation."
Mexican Federal
Taxation.................. The exchange of GID notes for our exchange notes
will not give rise to any Mexican withholding or
other taxes if you are not a resident of Mexico for
tax purposes and you do not have a permanent
establishment or a fixed base in Mexico.
12
Exchange Agent............ The Chase Manhattan Bank is serving as exchange
agent for the exchange offer and consent
solicitation. You can find the address and
telephone number for the exchange agent on the back
cover page of this prospectus and consent
solicitation.
Dealer Manager and
Solicitation Agent........ Banc of America Securities LLC is serving as
exclusive dealer manager and solicitation agent for
the exchange offer and consent solicitation. You
can find the address and telephone number for the
dealer manager and solicitation agent on the back
cover page of this prospectus and consent
solicitation.
Information Agent......... D.F. King & Co., Inc. is serving as information
agent for the exchange offer and consent
solicitation. You can find the address and
telephone number for the information agent on the
back cover page of this prospectus and consent
solicitation.
Brokerage Commissions..... You are not required to pay any brokerage
commissions to the dealer manager and solicitation
agent, information agent or exchange agent.
Additional Information.... Additional copies of this prospectus and consent
solicitation may be obtained by contacting the
information agent or the dealer manager and
solicitation agent at their respective phone
numbers and addresses set forth on the inside back
cover of this prospectus and consent solicitation.
13
Our Exchange Notes
2006 Notes:
Notes Offered............. 13 1/8% senior notes due 2006 of Corporacion
Durango, S.A. de C.V.
Maturity.................. August 1, 2006
Interest Payment Dates.... February 1 and August 1 of each year. Our 2006
notes issued in the exchange offer will accrue
interest from August 1, 2001.
Optional Redemption....... We may redeem our 2006 notes, in whole or in part,
at any time at a redemption price equal to the
greater of:
. 100% of the principal amount; or
. the sum of the present values of the remaining
scheduled payments discounted to the redemption
date at the semi-annual yield to maturity of the
comparable U.S. treasury security, assuming a
treasury price expressed as a percentage of its
principal amount, equal to the average bid and
asked prices for the treasury security on the
third business day prior to the redemption date,
plus 0.50%,
plus accrued and unpaid interest to the redemption
date.
In addition, before February 5, 2004, we may also
redeem up to 35% of the 2006 notes at a redemption
price of 113.125% of their principal amount, using
the proceeds from sales of our capital stock, plus
accrued and unpaid interest to the redemption date.
For more information, see "Description of Our
Exchange Notes--2006 Notes--Optional Redemption."
2008 Notes:
Notes Offered ............ 13 1/2% senior notes due 2008 of Corporacion
Durango, S.A. de C.V.
Maturity ................. August 1, 2008
Interest Payment Dates
.......................... February 1 and August 1 of each year, commencing
February 1, 2002. Our 2008 notes issued in the
exchange offer will accrue interest from August 1,
2001.
Optional Redemption....... We may redeem any of the 2008 notes beginning on
August 1, 2005. The initial redemption price is
106.75% of their principal amount, plus accrued and
unpaid interest. The redemption price will decline
each year after 2005 and will be 100% of their
principal amount, plus accrued and unpaid interest,
beginning on August 1, 2007.
In addition, before February 5, 2005, we may also
redeem up to 35% of the 2008 notes at a redemption
price of 113.50% of their principal
14
amount, using the proceeds from sales of our
capital stock plus accrued and unpaid interest to
the redemption date.
For more information, see "Description of Our
Exchange Notes--2008 Notes--Optional Redemption."
Common Terms of the
Exchange Notes:
Redemption for Tax
Reasons................... We may redeem all, but not less than all, of each
type of our exchange notes upon at least 30 days'
notice in the event of changes to Mexican tax law
applicable to interest payments under the exchange
notes resulting in withholding taxes exceeding 10%,
at a redemption price equal to 100% of their
principal amount, plus accrued interest and
additional amounts in respect of Mexican
withholding taxes payable on accrued interest. See
"Description of Our Exchange Notes--Common Terms of
the Exchange Notes--Optional Redemption."
Withholding Taxes;
Additional Amounts........ Subject to exceptions, we will pay additional
amounts, as defined under "Description of Our
Exchange Notes--Common Terms of the Exchange
Notes--Additional Amounts", so that the net amount
received by each holder after payment of any
Mexican withholding tax will be equal to the amount
that would have been received by that holder if no
withholding tax had been payable. For additional
information about these payments, see "Description
of Our Exchange Notes--Common Terms of the Exchange
Notes--Additional Amounts."
Change of Control......... Upon a change of control, as defined under
"Description of Our Exchange Notes", of Corporacion
Durango, we will be required to make an offer to
purchase all outstanding exchange notes. The
purchase price will equal 101% of their principal
amount, plus accrued and unpaid interest to the
repurchase date.
Intercompany Note......... On the settlement date, GID will have issued two
unsubordinated promissory notes to us, one of which
will be equal to the principal amount of the 2006
notes and will have the same interest rate,
interest payment dates and maturity as the 2006
notes, and one of which will be equal to the
principal amount of the 2008 notes and will have
the same interest rate, interest payment dates and
maturity date as the 2008 notes. The GID
unsubordinated promissory notes will be owned by us
and will rank equal in right of payment to all
other existing and future unsecured unsubordinated
indebtedness of GID. Until the relevant exchange
notes are paid in full, the terms of the GID
unsubordinated promissory notes provide that the
principal amount and interest rate of the GID
unsubordinated promissory note shall be no less
than the principal amount and interest rate of the
2006 or 2008 notes, as the case may be.
15
Ranking; Collateral....... Each type of exchange notes will be separately
secured by a pledge of the relevant GID
unsubordinated promissory note until the time that
the debt of our subsidiaries and our secured debt,
other than the exchange notes and other
indebtedness secured by us to refinance existing
indebtedness of GID, amounts to 15% or less of our
total indebtedness. Until this financing condition
is satisfied, these pledges will entitle the
trustee on behalf of the holders to foreclose on
the collateral in the event a default occurs and,
subsequently, to bring a direct claim against GID
until the financing condition is satisfied.
It is our intention to meet this financial
condition as soon as market conditions permit.
After we have met this financial condition, the GID
unsubordinated promissory notes will remain
outstanding and will be owned by us, however, the
pledges will be terminated and our exchange notes
will be unsecured and will rank equally with the
other unsecured senior indebtedness of our company.
In addition, the exchange notes will be junior to
the secured indebtedness of our company and all
liabilities of our subsidiaries.
As of March 31, 2001, we had the following
indebtedness:
. Ps 1,530.3 million (US$161.2 million) of secured
debt, excluding our 2006 notes;
. Ps 5,916.5 million (US$623.2 million) of
subsidiary debt; and
. Ps 7,625.5 million (US$803.3 million) of total
indebtedness.
This secured debt and subsidiary debt is equal to
77.6% of our total indebtedness. All of our secured
debt has been incurred by our subsidiaries.
As of March 31, 2001, after giving pro forma effect
to this exchange offer (assuming all GID notes are
tendered) and the repayment of US$27.2 million of
indebtedness in May 2001, we had the following
indebtedness:
. Ps 1,272.1 million (US$134.0 million) of secured
debt, excluding the exchange notes;
. Ps 3,284.7 million (US$346.0 million) of
subsidiary debt; and
. Ps 7,495.9 (US$789.6 million) of total
indebtedness.
On a pro forma basis, this secured debt and
subsidiary debt is equal to 43.8% of our total
indebtedness.
Covenants................. The terms of our indentures will impose operating
and financial restrictions that will restrict our
ability and the ability of our Restricted
Subsidiaries to:
. incur additional debt;
. pay dividends, acquire shares of stock, make
payments on subordinated debt or make
investments;
16
. make distributions from subsidiaries;
. issue or sell capital stock of subsidiaries;
. issue guarantees;
. sell or exchange assets;
. enter into transactions with shareholders and
affiliates;
. create liens; and
. effect mergers.
The limitations are, however, subject to a number
of important qualifications and exceptions. See
"Description of Our Exchange Notes."
Book-Entry; Delivery and
Form...................... Our exchange notes issued in the exchange offer
will initially be held through The Depository Trust
Company, the book-entry transfer facility. See
"Description of Our Exchange Notes--Common Terms of
the Exchange Notes--Book-Entry Notes."
Trustee................... The Chase Manhattan Bank
Listing................... The 2006 notes are listed on the New York Stock
Exchange under the symbol "CDGO 06" and the 2008
notes will be approved for listing on the NYSE
under the symbol "CDGO 08".
17
Summary Financial Data
The following table sets forth our summary combined and consolidated
financial data for each of the periods presented. The data does not represent
all of our financial information. You should read this information together
with the audited annual combined and consolidated financial statements as of
December 31, 1999 and 2000 and for the three years then ended, the unaudited
condensed and consolidated interim financial statements as of and for the
three-month periods ended March 31, 2000 and 2001 appearing elsewhere in this
prospectus and consent solicitation and the information under "Operating and
Financial Review and Prospects".
We have controlled GID since March 2000 and we currently own 59% of GID. As a
result, the financial statements for the year ended December 31, 2000 and for
the three-month periods ended March 31, 2000 and 2001 are presented on a
consolidated basis. Prior to March 2000, GID and Corporacion Durango were under
common ownership and control of the Rincon family. Therefore, the financial
statements for the years ended December 31, 1998 and December 31, 1999 are
presented on a combined basis, combining the accounts of Corporacion Durango
and its subsidiaries and GID and its subsidiaries.
The data as of and for the years ended December 31, 1996 and 1997 has been
derived from the audited consolidated financial statements of each of
Corporacion Durango and its subsidiaries and GID and its subsidiaries which
include the necessary combination adjustments in order to be consistent with
the data presented for the three years ended December 31, 2000.
In the opinion of management, the summary consolidated statement of
operations data, other financial data, and balance sheet data as of and for the
three-month periods ended March 31, 2000 and 2001 include all adjustments
necessary for a fair presentation of our financial condition and results of
operations for those periods. The results of operations for interim periods are
not necessarily indicative of a full year's operations.
Operating income plus depreciation and amortization is referred to by us as
adjusted EBITDA. Operating income under U.S. GAAP may differ from operating
income under Mexican GAAP due to U.S. GAAP adjustments and also because
provisions for employee profit sharing are reclassified as an operating expense
under U.S. GAAP. Adjusted EBITDA to net interest is calculated as adjusted
EBITDA divided by the sum of gross interest expense and gross interest income.
Net debt to adjusted EBITDA is calculated as the sum of short-term debt and
long-term debt, less cash and temporary investments, with the resulting
difference divided by adjusted EBITDA. EBITDA is not a measure of financial
condition or performance under either Mexican GAAP or U.S. GAAP and should not
be considered as a substitute for those measures under either Mexican GAAP or
U.S. GAAP. In addition, all companies do not calculate EBITDA in a uniform
manner so that our EBITDA calculations may not be comparable to those of other
companies.
The data as of March 31, 2000 and 2001 and for the three-months then ended
included herein and throughout the prospectus and consent solicitation is
presented in constant Pesos as of March 31, 2001 whereas all other information
presented herein is presented in December 31, 2000 constant Pesos. In the
opinion of management, there is no significant impact of restatement given the
relative low inflation for the three-months ended March 31, 2001.
The Peso/Dollar exchange rate at December 31, 2000 was Ps 9.6098 = US$1.00
and at March 31, 2001, was Ps 9.4933 = US$1.00. In addition, from December 31,
2000 to March 31, 2001 inflation increased by 1.12%.
18
Three Months Ended
Year Ended December 31,
March 31,
-----------------------------------------------------------
-----------------------------
1996 1997 1998 1999 2000
2000 2000 2001 2001
-------- -------- -------- -------- --------
--------- -------- -------- ---------
(millions of
constant Pesos
restated as of
(millions of constant Pesos restated as of
(millions March 31, 2001, (millions
December 31, 2000, excluding ratios) of
US$) excluding ratios) of US$)
------------------------------------------------
--------- ------------------ ---------
Combined and Consoli-
dated Statement of In-
come Data:
Mexican GAAP:
Net sales............... 4,745.6 4,947.5 6,034.3 8,088.6 11,603.9
1,207.5 2,903.0 2,587.7 272.6
Cost of sales........... 3,276.2 3,558.3 4,485.1 6,109.8 9,556.5
994.5 2,386.5 2,141.6 225.6
Selling, general and
administrative
expenses............... 336.6 350.4 422.2 633.1 723.5
75.3 180.2 169.7 17.9
Operating income........ 1,132.8 1,038.8 1,127.0 1,345.7 1,323.9
137.8 336.3 276.4 29.1
Other income (expense).. (134.6) (180.7) (209.4) (81.3) (15.2)
(1.6) 1.3 3.7 0.4
Total financing (cost).. 439.3 (102.3) (1,050.4) 237.3 (422.8)
(44.0) 88.3 (109.5) (11.5)
Amortization of negative
goodwill............... 137.2 409.7 3,386.4 87.7 1,347.3
140.2 556.2 251.8 26.5
Net income.............. 906.1 675.1 3,199.9 969.5 1,458.9
151.8 742.2 322.8 34.0
U.S. GAAP:
Income (loss) before
income and asset taxes
and minority interest.. -- -- (261.2) 1,894.3 876.1
91.2 -- -- --
Net income (loss)....... -- -- (117.7) 1,299.8 14.5
1.5 -- -- --
Combined and Consoli-
dated
Balance Sheet Data
Mexican GAAP:
Cash and temporary
investments............ 891.6 687.1 1,154.4 845.4 730.1
76.0 731.1 488.9 51.5
Total current assets.... 2,732.3 2,721.6 3,840.4 5,220.5 5,011.7
521.5 4,995.1 4,605.3 485.1
Property, plant &
equipment, net......... 10,381.8 10,758.0 15,428.2 15,649.5 15,822.8
1,646.5 15,456.7 15,809.3 1,665.3
Total assets............ 13,745.3 14,044.5 19,653.4 21,279.8 21,334.9
2,220.1 20,935.7 21,027.6 2,215.0
Short-term debt,
including current
portion of long-term
debt................... 92.5 54.1 609.9 1,027.9 778.6
81.0 993.0 246.5 26.0
Long-term debt.......... 5,936.3 5,828.3 7,645.5 6,732.5 6,855.6
713.4 6,658.2 7,379.1 777.3
Capital Stock(1)........ 3,832.2 3,832.2 3,832.2 3,835.6 2,103.9
218.9 2,127.5 2,127.5 224.1
Total stockholders'
equity (net assets).... 6,187.8 6,256.2 9,376.6 9,255.7 7,379.7
767.9 7,622.7 7,569.2 797.3
U.S. GAAP:
Total assets............ -- -- -- 17,053.0 17,643.0
1,835.9 -- -- --
Total stockholders'
equity (net assets).... -- -- -- 2,336.8 2,359.5
245.5 -- -- --
Other Financial Data
(Mexican GAAP):
Adjusted EBITDA......... 1,472.7 1,358.2 1,461.1 1,809.7 1,832.5
190.7 452.7 391.3 41.2
Capital expenditures.... (223.7) (215.7) (962.4) (176.7) (1,006.3)
(104.7) (179.3) (220.8) (23.3)
Adjusted EBITDA to
interest expense....... 1.5 1.7 1.7 2.0 1.9
1.9 1.9 1.5 1.5
Adjusted EBITDA to net
interest expense....... 2.0 2.1 2.0 2.3 2.1
2.1 2.1 1.6 1.6
Total Debt to Adjusted
EBITDA................. 4.1 4.3 5.7 4.3 4.2
4.2 -- -- --
Net Debt to Adjusted
EBITDA................. 3.5 3.8 4.9 3.8 3.8
3.8 -- -- --
Other Financial Data
(U.S. GAAP)
Adjusted EBITDA......... -- -- 1,407.8 1,900.6 1,718.1
178.8 -- -- --
--------
(1) Capital stock is equal to capital stock plus restatement of capital stock.
19
RISK FACTORS
In addition to the other information contained in this prospectus and
consent solicitation, holders of GID notes should review carefully the
following risk factors before tendering their GID notes in the exchange offer
and delivering their consents in the consent solicitation.
Risks Relating to the Exchange Offer and Consent Solicitation
If you do not exchange your GID notes, your rights under the GID indenture
will be substantially diminished and the market price of your GID notes may
decline.
If the exchange offer is consummated and the proposed amendments to the GID
indenture governing your GID notes become effective, GID notes not exchanged
pursuant to the exchange offer will no longer be entitled to the benefits of
the restrictive covenants contained in the GID indenture. The modification of
the restrictive covenants would permit GID to take actions that could increase
the credit risks, with respect to GID, faced by the holders or that could
otherwise be adverse to the interest of the holders. In no event will the
changes effected by the proposed amendments to the GID indenture alter GID's
obligation to pay the principal of, or interest on, the GID notes, or alter
the respective maturity dates of the GID notes.
If you do not exchange your GID notes, there may be a smaller public
trading market for your GID notes.
There currently is a limited trading market for the GID notes, which from
time to time trade in the over-the-counter market. To the extent that GID
notes are tendered and accepted for exchange in our exchange offer, the
trading market for the unexchanged GID notes may become even more limited. A
debt security with a smaller outstanding principal amount available for
trading, a smaller "float", may command a lower price than would a comparable
debt security with a greater float. Therefore, the market price for the GID
notes tendered pursuant to the exchange offer reduces the float. The reduced
float also may tend to make the trading price more volatile. Holders of
unexchanged GID notes may attempt to obtain quotations for the GID notes from
their brokers. However, following the consummation of the exchange offer, a
liquid trading market for the GID notes may not develop. The extent of the
public market for the GID notes following consummation of the exchange offer
will depend upon, among other things:
. the remaining outstanding principal amount of GID notes after the
exchange offer;
. the number of GID holders remaining at that time; and
. the interest in maintaining a market in the GID notes on the part of
securities firms.
From time to time, the dealer manager and solicitation agent has made a
market in the GID notes, but it is not obligated to do so, and accordingly, a
liquid trading market for the GID notes may not develop.
You may not receive the type of exchange notes that you selected for a
portion of the GID notes that you tendered.
Either type of exchange note may be oversubscribed in this exchange offer,
resulting in tenders of either of the 2006 notes or the 2008 notes being
subject to proration. Therefore, you may receive a different type of exchange
note than that for which you tendered for a portion of the GID notes that you
tendered.
We will not determine whether either of the exchange notes have been
oversubscribed until after the expiration of the exchange offer. When we make
this determination, we will publicly announce whether any one of the exchange
notes has been oversubscribed and the effect of any required reduction or
proration. You will not be able to withdraw your tender of GID notes at the
time we make this determination even if it may affect the type of exchange
notes you will receive.
20
Risks Related to Our Exchange Notes
After the date that the trustee releases the security interest on the GID
unsubordinated promissory notes, our exchange notes in effect will rank
junior to our subsidiaries' debt and junior to our secured debt.
After the date that the trustee releases the security interest in the GID
unsubordinated promissory notes that initially secures our exchange notes, our
exchange notes will not be secured by any of our assets and will rank junior
to all of our secured debt and the secured debt of our subsidiaries to the
extent of the security. As of March 31, 2001, the amount of our secured debt
excluding our senior note due 2006 issued in January 2001 was Ps 1,530.3
million (US$161.2 million). The indentures under which our exchange notes will
be issued will allow us to incur substantial indebtedness which may be secured
in some cases. In the event of a bankruptcy, concurso mercantil
(reorganization under Mexican law), dissolution, liquidation or similar
proceeding relating to us or our subsidiaries, the secured lenders would
generally be entitled to receive preferred payment to the extent of the value
of their collateral or in full, whichever is less, prior to any payments in
respect of the exchange notes.
Our exchange notes will also in effect be subordinated to all existing and
future indebtedness of our subsidiaries after the trustee releases the
security interest on the GID unsubordinated promissory notes. As of March 31,
2001, the amount of our subsidiaries' total debt was Ps 5,916.5 million
(US$623.2 million). Our subsidiaries will have no obligation to pay any
amounts on our exchange notes and the only amounts we will receive from our
subsidiaries will be in the form of principal and interest payments on any
intercompany loans and dividends or other distributions, which can only be
made in compliance with the terms of our subsidiaries' indebtedness and
applicable law, including corporate and tax laws governing our subsidiaries.
The indenture, however, will allow our subsidiaries to incur substantial
indebtedness subject to compliance with conditions described in the indenture.
Any future indebtedness incurred by our subsidiaries will also be structurally
senior to the exchange notes.
We are a holding company and we will rely on dividend payments from our
subsidiaries and interest and principal payments on intercompany loans to
pay interest and principal on the exchange notes.
We are a holding company and as such we will conduct all our operations
through our subsidiaries. Our only material assets are the direct and indirect
equity interests in our subsidiaries, some of which, including GID, are less
than 100% owned by us. As a holding company, dividends, principal and interest
payments on intercompany loans and other intercompany transfers of funds from
our subsidiaries to us are expected to be our primary source of funds to pay
our expenses, meet our obligations and pay interest and principal on the
exchange notes. The ability of our subsidiaries to pay dividends, make
principal and interest payments on intercompany loans and make other
intercompany transfers to us will depend on the results of operations and
financial condition of our subsidiaries. In addition, payments and transfers
of funds may be restricted by the terms of any indebtedness that may be
incurred by our subsidiaries and by applicable law, including corporate and
tax laws governing our subsidiaries.
You may find it difficult to sell your exchange notes.
Our 2006 notes are listed on the NYSE and we plan to list our 2008 notes on
the NYSE, but we cannot guarantee that a market will develop for our 2008
notes or that the market for our 2006 notes will continue. The dealer manager
and solicitation agent has informed us that it currently makes a market in the
existing 2006 notes and intends to make a market in the 2008 notes. However,
it is under no obligation to do so and may discontinue making a market in
either type of exchange note at any time without notice.
The liquidity of any market for our exchange notes will depend upon many
factors, including:
. our operating performance and financial condition;
21
. securities dealers interests in making markets; and
. the market for similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused volatility in prices. It is possible that the
market for our exchange notes will be subject to disruptions. Any such
disruptions may have a negative effect on you as a holder of our exchange
notes, regardless of our prospects and financial performance.
Risks Relating to our Business and the Paper and Packaging Industry in General
We have substantial debt, so we may not be able to make payments on our
exchange notes.
At March 31, 2001, we had Ps 7,625.5 million (US$803.3 million) of total
debt, 100% of which was denominated in U.S. Dollars. In addition, our
indenture will permit us to incur substantial additional debt, subject to
specified limitations. See "Description of Our Exchange Notes."
Our substantial indebtedness could interfere with our ability to pay
interest and principal on our exchange notes, refinance existing indebtedness
before it becomes due and may have important consequences for our operations,
including:
. our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, or general corporate purposes may be
impaired;
. if we cannot refinance our existing indebtedness on a timely basis, we
would have to use cash flow from operations for the payment of principal
and interest on our debt, thus reducing the funds available to us for
other purposes, including expansion through acquisitions and our
internal growth; and
. our substantial indebtedness may hinder our ability to adjust to rapidly
changing market conditions and could make us more vulnerable in the
event of a downturn in general economic conditions or our business.
We may be unable to generate sufficient cash to service our debt.
Our ability to make scheduled interest payments or to refinance our
obligations with respect to our indebtedness will depend on the financial and
operating performance of our subsidiaries. This performance, in turn, is
subject to prevailing economic conditions in Mexico and the United States and
to financial, business and other factors beyond our control, including but not
limited to, fluctuations in international prices as well as paper and
packaging industry conditions. If our cash flow and capital resources are
insufficient to fund our debt service obligations, we may be forced to delay
future acquisitions and capital expenditures, sales of material assets or
operations, obtaining additional capital or restructuring our debt. Our
operating performance, cash flow, and capital resources may not always be
sufficient for payment of our debt in the future. In the event that we are
required to dispose of material assets or operations or restructure our debt
to meet our debt service and other obligations, we cannot assure you as to the
terms of any transaction or how soon any transaction could be completed.
We are vulnerable to cyclicality and fluctuations in pricing.
Our business is affected by trends in international prices and demand for
paper. Prices for containerboard and industrial paper and, to a lesser extent,
converted products such as corrugated containers and multi-wall sacks and bags
have historically been subject to cyclical fluctuations. Pricing is affected
not only by demand for packaging and paper products, which correlates with
real economic growth, but also by current inventory levels of customers. In
addition, the packaging and paper industries are highly capital intensive and
the impact of new production facilities may result in supply/demand
imbalances.
22
We are vulnerable to increases in inflation.
Our profitability may be negatively affected by increases in inflation. Our
Peso-based labor costs and raw material costs increase as the rate of
inflation increases. If, as in the past three years, we are unable to pass on
increased costs of our inputs, real prices of our products will not keep pace
with inflation. As a result, our revenues would decline unless we had a
comparable increase in our sales volume to offset the decline in real prices.
Our operations may be adversely affected by increases in the price of raw
materials.
The cost of our supply of recycled fiber and pulp is directly affected by
trends in international and domestic prices of old corrugated container, or
OCC, old newsprint, or ONP, material and virgin pulp, which stem from market
fluctuations caused by factors beyond our control. Generally, demand and
prices for these raw materials vary directly with demand and prices for
finished paper. In addition, the cost of OCC in Mexico is affected both by the
inflation and exchange rates. We might not be able to recoup any future
increases in the costs of raw materials through increases in sales prices for
our products, which would adversely affect our operating income.
We are vulnerable to competition from international paper producers with
substantial resources.
We currently face increasing competition from non-Mexican producers due in
part to significantly enhanced market access for imported products. Many of
our competitors are large international paper producers with substantial
resources at their disposal. We try to maintain our prices below U.S. prices
and in the past, this price differential, combined with protective tariffs,
has discouraged imports from the United States. With the gradual elimination
of tariffs and generally low prices for paper and packaging products in the
United States over the last three years, competition from imports has
increased and may increase further. Increased competition from imports may
have a material adverse effect on us by driving down our prices and decreasing
our revenues.
We may make significant acquisitions in the future which, if unsuccessful,
may adversely affect our operating results.
We have made significant acquisitions in the past and may make significant
acquisitions in the future to continue our growth. Most recently, we acquired
Durango Paper Company for Ps 1,191.2 million (US$119.9 million) in 1999 and
Grupo Pipsamex for Ps 1,009.0 million (US$105.0 million) in 1998. Although
these acquisitions have generally been successful, acquisitions involve a
number of risks, including:
. failure of the acquired businesses to achieve expected results;
. potential inability to retain or hire key personnel of the acquired
businesses;
. potential inability to reduce financial inefficiencies affecting those
businesses;
. unanticipated events or liabilities;
. potential disruption of our business as management works to integrate new
acquisitions; and
. customer dissatisfaction or performance problems as a result of
integration challenges at the acquired businesses.
If we are unable to integrate or successfully manage the companies we have
acquired, or the businesses that we may acquire in the future, we may not
realize anticipated cost savings, revenue growth and levels of integration,
which may result in reduced profitability or operating losses.
In addition, much of our strategy and success has been based on the
acquisition of synergistic companies with unrealized earnings potential,
cutting their costs and transforming them into more profitable companies. The
strength of our earnings and cash flow depends as much on similar
opportunities for profitable acquisitions in the future as on our ability to
finance future acquisitions and realize the full potential of the acquired
companies.
23
In the past we have funded our acquisitions with funds from operating cash
flows, bank financings, seller financings, and debt offerings in the capital
markets. If we finance our acquisitions through the issuance of debt or bank
financings, we may have to agree to financial covenants that limit our
operational and financial flexibility. In addition, under our indenture we or
our subsidiaries may issue secured debt to finance our acquisitions and,
accordingly, our exchange notes would rank junior to this secured debt.
We may encounter difficulties in managing our growth.
Our recent growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. To
manage future growth, we must continue to implement and improve our
operational and financial systems, and must expand, integrate, train, and
manage our expanded employee base. If we continue to expand successfully, we
may encounter unexpected difficulties in managing the expansion of our
operations as our systems, products and controls may be inadequate to support
our expanded operations. Any inability to manage growth effectively could have
a materially adverse effect on our business, results of operations, and
financial condition.
The indenture that governs our 2006 notes restricts our operations.
The indenture that governs the 2006 notes imposes operating and financial
restrictions on us that limits our ability to:
. incur additional debt;
. pay dividends, acquire shares of stock, make payments on subordinated
debt or make investments;
. make distributions from subsidiaries;
. issue or sell capital stock of subsidiaries;
. issue guarantees;
. sell or exchange assets;
. enter into transactions with shareholders and affiliates;
. create liens; and
. effect mergers.
The indenture that will govern the 2008 notes will have identical covenants
to those in the 2006 indenture.
If we fail to comply with the restrictive covenants under our indentures or
under any additional financing arrangements, our obligation to repay the
exchange notes may be accelerated.
We may be adversely affected by the imposition and enforcement of more
stringent environmental and safety requirements.
We are subject to strict environmental regulations in Mexico and the United
States. Changes in environmental regulations, or changes in the policy of
enforcement of existing environmental regulations, could adversely affect us.
Our Mexican operations are supervised by the Ministry of the Environment and
Natural Resources and Fisheries (Secretaria del Medio Ambiente, Recursos
Naturales y Pesca) and our U.S. operations are supervised by the Environmental
Protection Agency, or EPA, and other federal, state and local regulatory
agencies. These agencies are responsible for the implementation of pollution
control laws and regulations and could take action against us by shutting down
plants, revoking licenses, imposing fines or obligating us to clean up waste
produced by us, if we fail to comply with their environmental regulations. It
is also possible that the relevant governmental agencies will issue additional
regulations, will seek a more stringent interpretation of existing regulations
or will exercise stricter enforcement actions that would require us to spend
additional funds on environmental matters.
24
In addition, the enactment of new environmental laws or regulations in
Mexico or the United States may cause us to spend additional funds, which may
be material, in order to meet compliance with the new laws or regulations. For
example, in 1998 the EPA enacted new regulations relating to air and water
emissions, commonly known as the Cluster Rules, from factories in the pulp and
paper industry. Our Durango Paper Company operations in St. Marys, Georgia
will be required to comply with these more stringent regulations as they are
implemented over the next few years, including new water effluent quality
standards for unbleached paper mills which have been and will have been put
into effect in 2000 through 2002. Compliance with the Cluster Rules will
require modifications at our paper mill in St. Marys, Georgia and will cause
us to incur significant capital expenditures and additional operating expenses
as the modifications are implemented and the new equipment is put into
service.
Our principal stockholders own all of our shares and may take actions not
in your interest as a holder of our exchange notes.
We are controlled by the Rincon family, which directly owns 100% of our
outstanding voting stock. As a result, the Rincon family has the power to
elect all of our directors and determine the outcome of any action requiring
shareholder approval, including transactions with related parties, corporate
reorganizations and the timing and payment of any future dividends. The
interest of the Rincon family as equity holders may differ from your interests
as holders of our exchange notes. See "Major Stockholders and Related Party
Transactions".
If we lose key members of our management team and are unable to attract
other qualified personnel, our business could be adversely affected.
Our success largely depends on the continuing contributions of our
management. Our managers have been with our company for an average of 15 years
and have successfully implemented our past strategic acquisitions. In
particular, our chief executive officer, chief operations officer, and chief
financial officer have been with our company since its founding. The loss of
key personnel or our potential inability to attract and retain other qualified
managers could adversely affect us.
Risks Relating to Mexico
If Mexico experiences future political and economic crises, our business
could be adversely affected.
We are a Mexican company with a substantial part of our operations in
Mexico. As a result, the political and economic environment within Mexico can
have a significant impact on our financial condition and results of
operations.
The Mexican government has exercised, and continues to exercise, significant
influence over the Mexican economy. Mexican governmental actions concerning
the economy and state-owned enterprises could have a significant impact on
Mexican private sector entities, in general, and on us, in particular, and on
market conditions, prices, and returns on Mexican securities, including our
securities.
In the past, Mexico has experienced economic crises, caused by internal and
external factors, characterized by negative economic growth, exchange rate
instability, high inflation, high domestic interest rates, reduced liquidity
in the banking sector, reduced consumer purchasing power, and high
unemployment. The last economic crisis in 1994 occurred as a result of a
series of internal disruptions and political events, including a large fiscal
deficit, the assassination of two political figures, substantial outflows of
foreign exchange capital, significant devaluation of the Peso, and civil
unrest in the southern state of Chiapas.
Similar crises could have a material adverse effect on our financial
condition and results of operations by causing volatility in domestic demand
for packaging and paper products and domestic shipment volumes, a substantial
increase in our interest expense, and an increase in our cost of goods and
services purchased in Pesos.
25
Our profitability may be adversely affected by currency fluctuations.
As at March 31, 2001, we had Ps 7,379.1 million (US$777.3 million) of
outstanding long-term debt, 100% of which was denominated in U.S. Dollars. We
are exposed to a Peso devaluation risk. The Peso has devalued substantially
against the U.S. Dollar in the past and may devalue significantly in the
future. The value of the Peso, based on the representative rate, the exchange
rate which is calculated and published by the Mexican Central Bank (Banco de
Mexico), declined by 61% against the U.S. Dollar during 1994, by an additional
54% during 1995 and continued to weaken between 1995 and 1998. A devaluation
of the Peso would negatively affect our results of operations by increasing
our cost of borrowing since the Peso cost of interest payments on our U.S.
Dollar indebtedness would increase.
In 2000, the Peso appreciated against the U.S. Dollar. An appreciation of
the Peso against the U.S. Dollar generally results in our receiving less Pesos
for our U.S. Dollar sales, but our U.S. Dollar-based costs decrease. An
appreciation of the Peso against the U.S. Dollar may negatively affect us
because we may not be able to pass along our increased Peso denominated costs
through new increases that keep pace with inflation. In addition, an
appreciation would result in intensified competition from U.S. Dollar
denominated imports, which would become cheaper in Peso terms.
Since a majority of our sales are either denominated in U.S. Dollars or
linked to movements in the value of the U.S. Dollar, we do not currently
engage in hedging activities to protect operations and future obligations in
foreign currencies. Declines in the value of the Peso relative to the U.S.
Dollar could temporarily adversely affect our ability to meet our U.S. Dollar
denominated obligations, including our exchange notes, increase our interest
expense and operating costs, and negatively affect the value of Mexican
securities such as ours.
We may not be able to make payments in U.S. Dollars.
In the past, the Mexican economy has experienced balance of payment deficits
and shortages in foreign exchange reserves, and the Mexican government has
responded by restricting the ability of Mexican or foreign persons or entities
to convert Pesos to foreign currencies generally, and U.S. Dollars in
particular. The Mexican government may institute a restrictive exchange
control policy in the future. Any restrictive exchange control policy could
prevent or restrict our access to U.S. Dollars to meet our U.S. Dollar
obligations, including our obligations on the exchange notes, and could also
have a material adverse effect on our business, financial condition and
results of operations. We cannot predict the impact of any such measures on
the Mexican economy.
The price of our exchange notes may be affected by economic developments in
other emerging market countries.
The market value of securities of Mexican companies is, to varying degrees,
affected by economic and market conditions in other emerging market countries.
Investors' reactions to developments in any of these other countries may have
an adverse effect on the market value of securities of Mexican issuers. In
1997 and 1998, prices of both Mexican debt securities and Mexican equity
securities dropped substantially as a result of a sharp drop in the value of
Asian markets and by the economic crises in Russia and in Brazil. The market
value of our exchange notes could be adversely affected by events elsewhere,
especially in emerging market countries.
Because we are not required to disclose as much financial information under
Mexican law as in the United States and because our accounting standards
are different than in other countries, investors may find it difficult to
accurately assess our business and financial operations.
We are a privately held entity, with the Rincon family holding 100% of our
capital stock. We are not registered with the Mexican Stock Exchange and are
under no obligation to disclose information in this regard. There is less
publicly available information about our business than would be available
about public issuers in the United States or other countries, which may result
in investors having less information with which to monitor and analyze our
business.
26
We prepare our financial statements in accordance with Mexican GAAP. These
principles differ in signifi-cant respects from U.S. GAAP as further discussed
in Note 21 to our audited financial statements. In particular, all Mexican
companies must incorporate the effects of inflation directly in their
accounting records and in pub-lished financial statements. The effects of
inflation accounting under Mexican GAAP are not eliminated in the
reconciliation to U.S. GAAP. For this and other reasons, the presentation of
our financial statements and reported earnings may differ from that of
companies in other countries. In addition, as a foreign registrant, the
preparation of U.S. GAAP information is only performed on an annual basis.
Judgments of Mexican courts enforcing our obligation under the exchange
notes would be payable only in Pesos.
If proceedings were brought in Mexico seeking to enforce our obligations
under the exchange notes, we would not be required to discharge our
obligations in a currency other than Pesos. Under the Mexican Monetary Law, an
obligation to pay amounts denominated in a currency other than Mexican
currency, which is payable in Mexico, may be satisfied in Mexican currency at
the rate of exchange in effect on the date of payment. This rate is currently
determined daily by the Mexican Central Bank (Banco de Mexico) and published
in the Mexican Official Gazette of the Federation.
If we were declared bankrupt, you may find it difficult to collect payment
on the exchange notes.
If we were declared bankrupt by a Mexican court or if we were subject to a
concurso mercantil proceeding in a Mexican court, our obligations under the
exchange notes:
. would be converted into Pesos at the exchange rate prevailing at the
time of a declaration of bank-ruptcy or concurso mercantil and from
Pesos into inflation indexed units at the exchange rate prevailing at
that time;
. would be dependent upon the outcome of the bankruptcy or concurso
mercantil proceedings and payment, if any, would occur at the time
claims of all of our unsecured creditors are satisfied if and to the
extent funds are sufficient; and
. would cease to accrue interest.
27
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and consent solicitation contains forward-looking statements
that involve substantial risks and uncertainties, including, in particular
statements about our plans, strategies and prospects under the captions
"Summary", "Operating and Financial Review and Prospects" and "Business". You
can identify these statements by forward-looking words such as "anticipate",
"believe", "could", "estimate", "expect", "intend", "may", "should", "will",
and "would" or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position
or state other "forward-looking" information. We believe that it is important
to communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control.
The factors listed above in the section captioned "Risk Factors", as well as
any cautionary language in this prospectus and consent solicitation, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you tender your GID notes for our exchange notes, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus and consent solicitation could have a
material adverse effect on our business, financial condition, and results of
operations. The forward-looking statements are subject to risks,
uncertainties, and assumptions about us, including, among other things:
. our substantial debt and significant debt service obligations;
. developments in, or changes to, the laws, regulations and governmental
policies governing our business, including environmental liabilities;
. the competitive nature of the industries in which we are operating;
. changes in the U.S. Dollar-Peso exchange rate, interest rates and other
domestic, and international market and industry conditions;
. the cyclicality of the paper and packaging industries; and
. our ability to keep key personnel required to operate our business.
28
THE EXCHANGE OFFER
Terms of the Exchange Offer
General
Upon the terms and subject to the conditions set forth in this prospectus
and consent solicitation, we are offering to issue our exchange notes in
exchange for your GID notes. We are offering to issue US$1,030 in principal
amount of exchange notes for US$1,000 in principal amount of GID notes. In
addition, we are offering to make a consent payment equal to US$30 per
US$1,000 principal amount of GID notes that you tender, which is payable as
described under "--Consent Solicitation." Including the consent payment, the
total consideration being offered is equal to US$1,060 per US$1,000 principal
amount of tendered GID notes.
You may select the form of consideration that you will receive for your GID
notes from the following two options, subject to the limitations described
below:
. new 13 1/8% senior notes due 2006; and
. new 13 1/2% senior notes due 2008.
We are offering to exchange up to a maximum of US$50 million in aggregate
principal amount of GID notes for 2006 notes and US$200 million in aggregate
principal amount of GID notes for 2008 notes.
You do not have to choose the same option for all the GID notes that you
tender. You do not have to tender all your GID notes to participate in this
exchange offer.
The 2006 notes will be treated as a single class with our US$180.0 million
13 1/8% senior notes due 2006 that we issued in February 2001 and will be
issued under the same indenture. The CUSIP number of the 2006 notes is
21986MAA3. Assuming we issue the maximum amount of 2006 notes offered in this
exchange offer, we will issue an additional US$51.5 million of 2006 notes and
there will be US$231.5 million 2006 notes outstanding.
Our exchange notes will be issued only in denominations of US$1,000
principal amount and integral multiples of US$1,000. Any fractional principal
amount of exchange notes which a registered holder is entitled to receive in
will be paid in cash. Only registered holders will be entitled to receive this
cash payment.
Either type of the exchange notes may be oversubscribed. In the event of
oversubscription, we will issue the oversubscribed type of exchange notes on a
pro rata basis in exchange for all GID notes tendered for the oversubscribed
type of exchange notes and will issue the other type of exchange notes in
exchange for the balance of the tendered GID notes. Therefore, you may receive
a different type of exchange note than that for which you tendered for a
portion of the GID notes that you tendered.
We will not determine whether either of the exchange notes have been
oversubscribed until after the expiration of the exchange offer. When we make
this determination, we will publicly announce whether either of the exchange
notes has been oversubscribed and the effect of any required reduction or
proration. You will not be able to withdraw your tender of GID notes at the
time we make this determination even if it may affect the type of exchange
note you will receive.
29
The following tables illustrate how our exchange notes will be distributed
for every US$1,000 principal amount of GID notes in the following scenarios:
Assuming all of the tendering holders select the 2008 notes by the consent
date:
%
Allocation of
Principal amount of 2008
Participation tendered GID notes 2006 notes issued 2008 notes issued notes
selected
------------- ------------------- ----------------- -----------------
---------------
100% $250.00 million $51.50 million $212.00 million
80.00%
90% 225.00 million 25.75 million 212.00 million
88.89%
80% 200.00 million -- 212.00 million
100.00%
As an example, assume a registered holder tenders US$10,000,000 of GID notes
prior to the consent date and elects to receive 2008 notes only. Assume 80% of
the GID notes are tendered in the exchange offer. We would exchange
US$10,000,000 million in principal amount of GID notes for US$10,300,000
million principal amount of 2008 notes. In addition, the holder would receive
a consent payment of US$300,000 in principal amount of additional 2008 notes.
Assuming all of the tendering holders select the 2006 notes by the consent
date:
%
Allocation of
Principal amount of 2006
Participation tendered GID notes 2006 notes issued 2008 notes issued notes
selected
------------- ------------------- ----------------- -----------------
---------------
100% $250.00 million $51.50 million $212.00 million
20.00%
90% 225.00 million 51.50 million 185.50 million
22.22%
80% 200.00 million 51.50 million 159.00 million
25.00%
As an example, assume a registered holder tenders US$10,000,000 of GID notes
prior to the consent date and elects to receive 2006 notes only. Assume 80% of
the GID notes are tendered in the exchange offer. We would exchange
US$2,500,000 million in principal amount of GID notes for US$2,575,000 million
in principal amount of 2006 notes and US$7,500,000 million in principal amount
of GID notes for US$7,725,000 million principal amount of 2008 notes. In
addition, the holder would receive a consent payment of US$75,000 in cash and
US$225,000 in principal amount of additional 2008 notes.
Any fractional principal amount of exchange notes due will be paid to
registered holders in cash.
The GID notes will be deemed to have been accepted as validly tendered when,
as and if we have given oral or written notice to the exchange agent. The
exchange agent will act as agent for the tendering holders of GID notes for
the purposes of receiving our exchange notes and cash and delivering our
exchange notes and cash to the holders.
Holders of GID notes who desire to tender their GID notes will be required
to consent to the proposed amendments to the GID indenture. The delivery of an
agent's message will constitute the consent of the holder to the proposed
amendments.
As of the date of this prospectus and consent solicitation, US$250 million
aggregate principal amount of the GID notes are outstanding. This prospectus
and consent solicitation and the enclosed consent and letter of
30
transmittal are first being sent on or about July 30, 2001, to all holders of
GID notes known to us. Subject to the conditions set forth in this prospectus
and consent solicitation, we will accept for exchange all GID notes which are
properly tendered on or prior to the expiration date and not withdrawn as
permitted below. See "--Termination and Conditions."
Only registered holders of GID notes can effectively tender and consent to
the proposed amendments to the GID indenture. Beneficial owners of GID notes
registered in the name of a broker, dealer, commercial bank, trust company or
nominee are urged to contact the registered holder promptly and instruct the
registered holder to tender and consent on your behalf.
We reserve our right to purchase or make offers for any GID notes that
remain outstanding subsequent to the expiration date or, to terminate the
exchange offer as set forth under "--Termination and Conditions." We also
reserve our right to redeem GID notes as a whole or in part and from time to
time, as permitted by the GID indenture, and to purchase GID notes in the open
market in privately negotiated transactions or otherwise, to the extent
permitted by applicable law. Following consummation of the exchange offer, the
terms of any purchases or offers could differ from the terms of the exchange
offer.
Tendering holders of GID notes will not be required to pay any brokerage
commissions or fees or, subject to the instructions in the consent and letter
of transmittal, transfer taxes with respect to the exchange of GID notes
pursuant to the exchange offer. We will pay all charges and expenses, other
than applicable taxes, in connection with this exchange offer. See "--Fees and
Expenses" below.
Expiration Date; Extensions; Amendments; Termination
The exchange offer will expire at 5:00 p.m., New York City time on August
27, 2001, unless extended. When we use the term "expiration date" in this
prospectus and consent solicitation, we mean 5:00 p.m., New York City time on
August 27, 2001, unless we, in our sole discretion prior to the expiration
date, extend the exchange offer, in which case the expiration date shall be
the latest date to which we extend the exchange offer. If we make a material
change in the terms of the exchange offer, or if we waive a material condition
of the exchange offer, we will extend the exchange offer to the extent
required under the Securities Exchange Act of 1934, as amended.
To extend the expiration date, we will notify the exchange agent of any
extension by oral or written notice prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date and we
will notify the holders of GID notes, or cause them to be notified, as
promptly as practicable after the expiration date. Notification may state that
we are extending the exchange offer for a specified period of time.
We reserve the right (1) to delay acceptance of any GID notes, to extend the
exchange offer or to terminate the exchange offer and not accept GID notes not
previously accepted if any of the conditions shall not have been satisfied or
waived by us prior to the expiration date, by giving oral or written notice of
delay, extension or termination to the exchange agent; or (2) to amend the
terms of the exchange offer in any manner deemed by us to be advantageous to
the holders of the GID notes. Any delay in acceptance, extension, termination
or amendment will be followed as promptly as practicable by oral or written
notice to the exchange agent. If the exchange offer is amended in a manner
determined by us to constitute a material change, we will promptly disclose
the amendment in a manner reasonably calculated to inform the holders of the
GID notes of the amendment and extend the exchange offer to the extent
required by the Securities Exchange Act. In particular, Rule 14e-1 requires us
to (1) extend the exchange offer for ten business days if we increase or
decrease the amount of GID notes sought for tender and (2) issue a press
release or other public announcement if we extend the exchange offer. See "--
Termination and Conditions."
Revocations of consents by holders of GID notes who have tendered their GID
notes for exchange may only be effected by the holders by a timely and proper
revocation of consent and withdrawal of their GID notes to which revocations
pertain. Withdrawal will exclude the withdrawn GID notes from the exchange
offer unless
31
the GID notes are validly re-tendered and not withdrawn. Withdrawal of your
GID notes, however, after the consent date, will not revoke your consent. See
"--Withdrawal Rights and Revocation of Consents."
Termination and Conditions
Notwithstanding any other provision of the exchange offer and consent
solicitation, or any extension of the exchange offer and consent solicitation,
we shall not be required to accept for exchange any GID notes, issue any of
our exchange notes or make any payment for the consents, and we may terminate
or amend the exchange offer and consent solicitation if at any time prior to
or on the expiration date, we determine, in our reasonable judgment, that any
of the following conditions has not been satisfied:
. we shall have received more than 80% of the outstanding principal
amount of the GID notes in this exchange offer;
. there shall not have occurred or be likely to occur any event affecting
our business or financial affairs that would or might prohibit,
prevent, restrict or delay consummation of the exchange offer, the
consent solicitation or the proposed amendments or that will, or is
reasonably likely to impair the contemplated benefits of the exchange
offer, the consent solicitation or the proposed amendments to us or
might be material to holders of GID notes in deciding whether to accept
the exchange offer and give their consents;
. there shall not have been any action taken or threatened, or any
statute, rule, regulation, judgment, order, stay, decree or injunction
promulgated, enacted, entered, enforced or deemed applicable to the
exchange offer, the exchange of GID notes pursuant to the exchange
offer, the consent solicitation or the proposed amendments by or before
any court or governmental regulatory or administrative agency or
authority, tribunal, domestic or foreign, which (1) challenges the
making of the exchange offer, the consent solicitation or the proposed
amendments or might, directly or indirectly, prohibit, prevent,
restrict or delay consummation of, or might otherwise adversely affect
in any material manner, the exchange offer, the consent solicitation or
the proposed amendments or (2) could materially adversely affect our
business, condition, financial or otherwise, income, operations,
properties, assets, liabilities or prospects, or materially impair the
contemplated benefits of the exchange offer, the consent solicitation
or the proposed amendments to us or might be material to holders of GID
notes in deciding whether to accept the exchange offer and give their
consents; and
. the trustee under the GID indenture shall have executed and delivered
the supplemental indenture relating to the respective proposed
amendments and shall not have objected in any respect to, or taken any
action that could adversely affect the consummation of the exchange
offer, the consent solicitation or our ability to effect the proposed
amendments nor shall the trustee under the GID indenture have taken any
action that challenges the validity or effectiveness of the procedures
used by us in soliciting consents, including the form of the consent,
or in making the exchange offer or the consent solicitation.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any condition or may be waived
by us in whole or in part at any time and from time to time in our sole
reasonable discretion prior to or on the expiration date. The failure by us at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any right and each right shall be deemed an ongoing right which may be
asserted at any time and from time to time by us.
We note that the Exchange Act requires that we deliver the consideration
offered or return your tendered GID notes promptly after termination or
withdrawal of a tender offer. Therefore, if we terminate or withdraw the
exchange offer, we will promptly return any tendered GID notes to you.
Acceptance of the GID notes for Exchange; Delivery of our Exchange Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
all GID notes properly tendered and not withdrawn will be accepted and our
exchange notes will be issued promptly after our acceptance. For
32
purposes of the exchange offer, GID notes shall be deemed to have been
accepted as validly tendered for exchange when, as and if we have given oral
or written notice to the exchange agent.
In all cases, issuance of our exchange notes for GID notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of:
. an agent's message and a timely book-entry confirmation of a book-entry
transfer of the GID notes to the exchange agent's account at the book-
entry transfer facility; and
. all other required documents.
If any tendered GID notes are not accepted for any reason, the unaccepted or
nonexchanged GID notes will be credited to an account maintained with the
book-entry transfer facility as promptly as practicable after the expiration
or termination of the exchange offer. Consents related to the returned GID
notes shall be deemed revoked.
How to Tender
GID notes tendered in the exchange offer must be in denominations of
US$1,000 principal amount and any integral multiple of US$1,000.
When you tender your GID notes, and we accept the GID notes, this will
constitute a binding agreement between you and us, subject to the terms and
conditions set forth in this prospectus and consent solicitation and the
enclosed consent and letter of transmittal.
On or prior to the expiration date, in order to participate in the exchange
offer you must tender and deliver your GID notes by delivering to the exchange
agent a computer generated message, called an "agent's message", transmitted
by means of the book-entry transfer facility's Automated Tender Offer Program
("ATOP") system. The agent's message, in part, confirms that a book-entry
transfer of the GID notes into the exchange agent's account at the book-entry
transfer facility has occurred. It also states that the book-entry facility
has received an express acknowledgment from the participant of the book-entry
transfer facility who is tendering the GID notes that:
. the participant has received the consent and letter of transmittal;
. the participant has agreed to be bound by its terms; and
. we may enforce the terms of the consent and letter of transmittal.
In order for a book-entry transfer to constitute a valid tender of your GID
notes in the exchange offer, the exchange agent must receive a confirmation of
book-entry transfer of your GID notes into the exchange agent's account at the
book-entry transfer facility prior to the expiration date.
The method of delivery of agent's messages and all other required documents
is at your election and at the risk of the holder. In all cases, you should
allow sufficient time to assure timely delivery. Do not send letters of
transmittal or agent's messages or other required documents to us.
We will determine all questions as to the validity, form, eligibility--
including time of receipt--and acceptance of GID notes tendered for exchange
in our sole discretion prior to the expiration date. Our determination will be
final and binding. We reserve the absolute right to reject any and all tenders
of GID notes improperly tendered or to not accept any GID notes, the
acceptance of which might be unlawful as determined by us or our counsel. We
also reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any GID notes either before or after
the expiration of the exchange offer--including the right to waive the
ineligibility of any holder who seeks to tender GID notes in the exchange
offer. Our interpretation of the terms and conditions of the exchange offer as
to any particular GID notes either before or
33
after the expiration of the exchange offer--including the terms and conditions
of the consent and letter of transmittal and the accompanying instructions--
will be final and binding. Unless waived, any defects or irregularities in
connection with tenders of GID notes for exchange must be cured within a
reasonable period of time, as determined by us. Neither we, The Chase
Manhattan Bank, as exchange agent, nor any other person has any duty to give
notification of any defect or irregularity with respect to any tender of GID
notes for exchange, nor will we have any liability for failure to give this
notification.
Signatures and Signature Guarantees
A participant of the book-entry facility might require that a beneficial
holder of a GID note sign the consent and letter of transmittal or a notice of
withdrawal, as the case may be, and provide a signature guaranty. Signatures
on a consent and letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless you are either (1) a registered GID note
holder and have not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the consent and letter of transmittal or
(2) you are exchanging GID notes for the account of an eligible guarantor
institution. An eligible guarantor institution means:
. Banks, as defined in Section 3(a) of the Federal Deposit Insurance Act;
. Brokers, dealers, municipal securities dealers, municipal securities
brokers, government securities dealers and government securities
brokers, as defined in the Exchange Act;
. Credit unions, as defined in Section 19B(1)(A) of the Federal Reserve
Act;
. National securities exchanges, registered securities associations, and
clearing agencies, as these terms are defined in the Exchange Act; and
. Savings associations, as defined in Section 3(b) of the Federal Deposit
Insurance Act.
If signatures on a consent and letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantor must be an eligible
guarantor institution.
If you are a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation, or act in a similar fiduciary or representative
capacity, and are requested to sign the consent and letter of transmittal or a
notice of withdrawal, you must indicate your status when signing. If you are
acting in any of these capacities, you must submit proper evidence
satisfactory to us of your authority to so act unless we waive this
requirement.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the GID notes at the book-entry transfer facility's ATOP system for
purposes of the exchange offer within two business days after the date of this
prospectus and consent solicitation. Once established, any financial
institution that is a participant in the book-entry transfer facility's
systems may make book-entry delivery of GID notes by causing the book-entry
transfer facility to transfer the GID notes into the exchange agent's account
at the book-entry transfer facility in accordance with the book-entry transfer
facility's procedures for transfer. When you tender your notes by book-entry
delivery, you are still bound by the terms of the consent and letter of
transmittal.
Withdrawal Rights and Revocation of Consents
Tenders of GID notes may be withdrawn at any time prior to August 27, 2001.
You may revoke your consent only by withdrawing your tendered GID notes prior
to the consent date. You may not revoke your consent to the proposed
amendments to the GID indenture after the consent date.
For a withdrawal of a tender to be effective, a written notice of withdrawal
must be received by the exchange agent prior to August 27, 2001 at the address
set forth on the inside back cover of this prospectus and consent
solicitation. Any notice of withdrawal must:
. specify the name of the person that tendered the GID notes to be
withdrawn;
34
. identify the GID notes to be withdrawn, including the principal
amount of GID notes;
. specify the number of the account at the book-entry transfer
facility from which the GID notes were tendered and specify the name
and number of the account at the book-entry transfer facility to be
credited with the withdrawn GID notes and otherwise comply with the
procedures of the facility;
. contain a statement that the holder is withdrawing its election to
have the GID notes exchanged; and
. specify the name in which the GID notes are to be registered, if
different form the person who tendered the GID notes.
We will determine all questions as to the validity, form, eligibility and
time of receipt of the notice, and our determination shall be final and
binding on all parties. Any GID notes so withdrawn will be deemed not to have
validly tendered for exchange for purposes of the exchange offer. Any GID
notes that have been tendered for exchange but are not exchanged for any
reason will be credited to an account maintained with the applicable book-
entry transfer facility for the GID notes as soon as practicable after
withdrawal, rejection of tender of termination of the exchange offer. Properly
withdrawn GID notes may be retendered by following the procedures described
under "--How to Tender" above at any time prior to the expiration date.
Exchange Agent
The Chase Manhattan Bank has been appointed as exchange agent for the
exchange offer and consent solici-tation. Agent's messages and all
correspondence in connection with the exchange offer should be sent or
delivered by each GID note holder or a beneficial owner's broker, dealer,
commercial bank, trust company or other nominee to the exchange agent at the
addresses set forth on the back cover page of the prospectus and consent
solicitation and on the final page of the consent and letter of transmittal.
We will pay the exchange agent reasonable and customary fees for its services
and will reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
Information Agent
D.F. King & Co., Inc. has been appointed as information agent for the
exchange offer and consent solicita-tion, and will receive customary
compensation for its services. We will also reimburse the information agent
for its reasonable out-of-pocket expenses. Questions concerning tender
procedures and requests for additional copies of this prospectus and consent
solicitation or the consent and letter of transmittal should be directed to
the information agent at the address and telephone numbers set forth on the
back cover page of the prospectus and consent solicitation and on the final
page of the consent and letter of transmittal. Holders of GID notes may also
contact their broker, dealer, commercial bank or trust company for assistance
concerning the exchange offer and consent solicitation.
Dealer Manager and Solicitation Agent
We have retained Banc of America Securities LLC as our exclusive dealer
manager and solicitation agent in connection with the exchange offer. We will
pay Banc of America Securities a customary fee for its services. We have also
agreed to reimburse Banc of America Securities for its out-of-pocket expenses
and to indemnify it against certain liabilities, including liabilities under
federal securities laws. Any questions regarding the terms of the exchange
offer or consent solicitation should be directed to the dealer manager and
solicitation agent at the address and telephone number set forth on the back
cover page of the prospectus and consent solicitation and on the final page of
the consent and letter of transmittal.
Banc of America Securities and/or its affiliates provide banking and
investment banking services to us including actively trading in the GID notes
and existing 2006 notes. From time to time, Banc of America Securities and/or
its affiliates may provide other banking, investment banking or advisory
services to us and our subsidiaries. Banc of America Securities expects to
trade the exchange notes for its own account or for the accounts of its
customers. Accordingly, Banc of America Securities may hold long or short
positions in the exchange notes at any time.
35
Fees and Expenses
The expenses of soliciting tenders, consents, and waivers pursuant to the
exchange offer and consent solicitation will be paid by us.
Payment of Solicitation Fee
We will pay to soliciting dealers a solicitation fee of US$2.50 per US$1,000
in principal amount of GID notes tendered, not withdrawn and accepted for
purchase and paid pursuant to the exchange offer, provided, that the aggregate
solicitation fee paid to any one soliciting dealer shall not exceed US$15,000.
As used herein, a "soliciting dealer" is an entity covered by a letter of
transmittal which designated its name as having solicited and obtained the
tender, and is:
. any broker or dealer in securities, excluding the dealer manager and
solicitation agent which is a member of any national securities
exchange or of the National Association of Securities Dealers
(NASD);
. any foreign broker or dealer not eligible for membership in the NASD
which agrees to conform to the NASD's Rules of Fair Practice in
soliciting tenders outside the United States to the same extent as
though it were an NASD member; or
. any bank or trust company.
No such fee shall be payable to a soliciting dealer with respect to the
tender of GID notes by a holder unless the letter of transmittal accompanying
such tender designates such soliciting dealer. No such fee shall be payable to
a soliciting dealer in respect of GID notes registered in the name of such
soliciting dealer unless such GID notes are held by such soliciting dealer as
nominee and are being tendered for the benefit of one or more beneficial
owners identified on the letter of transmittal. No such fee shall be payable
to a soliciting dealer if such soliciting dealer is required for any reason to
transfer the amount of such fee to a depositing holder (other than itself). No
such fee shall be paid to a soliciting dealer with respect to GID notes
tendered for such soliciting dealer's own account. No broker, dealer, bank,
trust company or fiduciary shall be deemed to be the agent of us, DTC, the
dealer manager and solicitation agent or the information agent for purposes of
the exchange offer. For all purposes noted in all materials related to the
exchange offer, the term "solicit" shall be deemed to mean no more than
"processing GID note tendered" or "forwarding to customers materials relating
to the exchange offer."
We will also, upon request, reimburse soliciting dealers for reasonable and
customary handling and mailing expenses incurred by them in forwarding
materials relating to the exchange offer to their customers.
We will also pay all transfer taxes, if any, applicable to the exchange of
GID notes pursuant to the exchange offer. If, however, our exchange notes or
GID notes for principal amounts not tendered or accepted for exchange are to
be issued in the name of any person other than the registered holder of the
GID notes tendered, or if tendered GID notes are registered in the name of any
person other than the person for whom the agent's message is being
transmitted, or if a transfer tax is imposed for any reason other than the
exchange of GID notes pursuant to this exchange offer, then the amount of any
transfer taxes imposed on the registered holder or any other persons will be
payable by the tendering holder. If satisfactory evidence of payment of taxes
or exemption therefrom is not submitted to the exchange agent, the amount of
transfer taxes will be billed directly to the tendering holder.
Consequences of Failure to Exchange
Consummation of the transactions contemplated by this prospectus and consent
solicitation will have conse-quences to holders of the GID notes who do not
tender their GID notes in the exchange offer, including, without limitation,
that the covenants and other terms set forth in the GID indenture, as proposed
to be amended, with respect to the GID notes will be less restrictive, and
will afford less protection to holders than those in that GID indenture. The
proposed amendments would, among other things, eliminate substantially all of
the restrictive covenants contained in the GID indenture. See "The Consent
Solicitation--The Proposed Amendments."
36
In addition, the trading market for unexchanged GID notes could become
limited or nonexistent due to the reduction in the amount of the GID notes
outstanding after completion of the exchange offer, which may adversely affect
the market price and price volatility of the GID notes. See "Risk Factors--If
you do not exchange your GID notes, there may be a smaller public trading
market for your GID notes" and "--If you do not exchange your GID notes, your
rights under the GID indenture will be substantially diminished and the market
price of your GID notes may decline."
37
THE CONSENT SOLICITATION
Concurrently with the exchange offer, we are soliciting consents from the
holders of the GID notes to the proposed amendments to the GID indenture. The
delivery of an agent's message will constitute the consent of the tendering
holder to the proposed amendments. Holders may not deliver consents without
tendering their GID notes in the exchange offer. You may not revoke your
consent after the consent date.
Consent Date
The consent date is the later of (1) 5:00 p.m., New York City time, on
August 14, 2001, or (2) the time the required consent to the proposed
amendments is received.
Required Consents
Consents from holders of a majority in principal amount of GID notes
outstanding must be received in order to amend the GID indenture in the manner
contemplated by the consent solicitation. For a description of the proposed
amendments to the GID indenture, see "--The Proposed Amendments."
If the requisite consent is received with respect to the GID notes and the
exchange offer is consummated, then GID and the GID indenture trustee will
execute a supplemental indenture setting forth the proposed amendments with
respect to the GID notes and the GID indenture, as so supplemented, will
become effective on the date we consummate the exchange offer. Each non-
exchanging holder of GID notes will be bound by the supplemental indenture
even if the holder did not give its consent. The GID indenture, without giving
effect to the proposed amendments, will remain in effect until the proposed
amendments become effective upon the consummation of the exchange offer. If
the exchange offer is terminated or withdrawn, the proposed amendments will
not become effective and all consents and waivers will be deemed revoked. See
"--The Proposed Amendments."
Revocation of Consents
Consents may be revoked at any time prior to the consent date by the
withdrawal of a tender of the GID notes in accordance with the instructions
for withdrawal. See "The Exchange Offer--Withdrawal Rights and Revocation of
Consents." Any withdrawal of tendered GID notes prior to the consent date will
be deemed to be a revocation of the related consent.
Consent Payment
If we receive the required consent with respect to the GID notes, then on
the date we consummate the exchange offer, each holder of GID notes who, as of
the consent date, has given a valid consent shall be entitled to receive a
consent payment. The consent payment will be equal to US$30 per US$1,000
principal amount of GID notes validly tendered and not withdrawn, payable in
(i) cash to the extent that you receive 2006 notes and (ii) additional 2008
notes to the extent you receive 2008 notes. Because 2008 notes will be issued
in denominations of US$1,000, any fractional principal amount of 2008 notes
will be paid in cash. Only registered holders will be entitled to receive the
cash payment.
If, prior to the consent date, a holder's GID notes are not validly tendered
and the related consent is not validly given pursuant to the exchange offer
and consent solicitation, the holder will not receive the consent pay-ment
even if the proposed amendments become effective. We will not pay the consent
payment if we do not receive a majority of the holders with respect to the GID
notes or if we do not consummate the exchange offer. Holders who tender their
GID notes after the consent date will not receive the consent payment.
Holders of GID notes may give their consent to the proposed amendments only
by tendering their GID notes in the exchange offer and will be deemed to have
given their consent by so tendering. The delivery of an agent's message with
respect to a holder's GID notes will constitute the delivery of a consent with
respect to their GID notes.
38
The Proposed Amendments
We are soliciting the consent of the holders of GID notes to the proposed
amendments to the GID indenture. The proposals, if adopted and effected, will
eliminate substantially all of the restrictive covenants in the GID indenture.
The following is a list of the covenants proposed to be deleted. For more
complete information regard-ing the covenants to be deleted and the effects of
the proposed amendments, we urge you to review the GID indenture.
The supplemental indenture would, in substance, eliminate the following
covenants from the GID Indenture:
. the limitation on indebtedness;
. the limitation on restricted payments;
. the limitation on dividend and other payment restrictions affecting
subsidiaries;
. the limitation on the issuance of capital stock and indebtedness of
subsidiaries;
. the limitation on transactions with affiliates;
. the limitation on liens;
. the limitation on sale and leaseback transactions;
. the limitation on asset sales;
. the limitation on mergers;
. the requirement to make an offer to purchase upon a change of
control;
. the requirement to file reports with the SEC; and
. the requirement to pay taxes or other claims.
In addition, the supplemental indenture eliminates those events of default
that are related to the covenants described above.
39
EXCHANGE RATES
The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rate, or, as the case may be, noon buying
rate as reported by the Federal Reserve Bank of New York, for the purchase of
U.S. Dollars, expressed in nominal Peso/Dollar.
Noon Buying Rate(1)
------------------------------
Period
High Low Average(2) End
------ ----- ---------- ------
Year ended December 31,
1996........................................... 8.045 7.325 7.635 7.881
1997........................................... 8.410 7.717 7.917 8.070
1998........................................... 10.630 8.040 9.152 9.901
1999........................................... 10.600 9.243 9.563 9.480
2000 (full year)............................... 10.087 9.188 9.475 9.618
December..................................... 9.618 9.370 9.467 9.618
Noon Buying Rate(1)
-----------------------------
Period
High Low Average(2) End
----- ----- ---------- ------
February 2001..................................... 9.780 9.657 9.711 9.692
March 2001........................................ 9.706 9.485 9.599 9.485
April 2001........................................ 9.422 9.187 9.328 9.261
May 2001.......................................... 9.291 8.946 9.147 9.165
June 2001......................................... 9.180 9.045 9.088 9.000
July 1 through July 24, 2001...................... 9.360 9.027 9.171 9.107
--------
(1) Source: Federal Reserve Bank of New York.
(2) Average of month-end rates.
40
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the exchange notes. We
will use our own cash to pay the fees and expenses relating to this exchange
offer (excluding consent fees) estimated at US$3.0 million (Ps28.5 million),
assuming all of the GID notes are tendered in the exchange offer.
41
CAPITALIZATION
The following table sets forth our historical consolidated short-term debt
and capitalization on a Mexican GAAP basis as of March 31, 2001.
The adjusted column gives effect to the exchange offer assuming all of the
GID notes are tendered in the exchange offer. The adjusted column also gives
effect to the prepayment of certain outstanding indebtedness in May 2001.
March 31, 2001
--------------------
Actual As adjusted As adjusted
-------- ----------- -----------
(millions of
constant Pesos (in
restated as of March millions of
31, 2001) US$)(1)
Cash and temporary investments............... 488.9 446.2(2) 47.0
Short-term debt:
Bank loans................................. 246.5 246.5 26.0
-------- -------- -------
Total short-term debt...................... 246.5 246.5 26.0
-------- -------- -------
Long-term debt:
Seller note (3)............................ 404.4 404.4 42.6
Bank loans (4)............................. 2,892.6 2,634.4 277.5
GID notes.................................. 2,373.3 -- --
2006 notes (5)............................. 1,708.8 2,197.7 231.5
2008 notes (6)............................. -- 2,012.6 212.0
-------- -------- -------
Total long-term debt..................... 7,379.1 7,249.1 763.6
-------- -------- -------
Total debt................................... 7,625.5 7,495.6 789.6
======== ======== =======
Stockholders' equity:
Total stockholder's equity................. 7,569.2 7,569.2 797.3
-------- -------- -------
Total majority interest.................. 6,170.5 6,170.5 650.0
Total minority interest.................. 1,398.7 1,398.7 147.3
-------- -------- -------
Total capitalization..................... 15,194.7 15,064.8 1,586.9
======== ======== =======
--------
(1) Translated using the exchange rate of March 31, 2001 of US$1.00 to Ps
9.4933 published by the Mexican Central Bank (Banco de Mexico).
(2) We will pay the cash expenses to be incurred in connection with the
exchange offer, which are estimated in the aggregate to be approximately
US$3.0 million. Such expenses include fees and expenses of the
information agent, the exchange agent and trustee, expenses of soliciting
dealers, accounting and legal fees and printing costs, among others. In
addition, we will pay US$1.5 million in cash related to the cash portion
of the consent fee.
(3) As a result of the acquisition of Durango Paper Company we issued a
seller subordinated note in the amount of US$27.5 million (Ps 259.8
million) in favor of HG Estate. After a purchase price adjustment, the
amount is now US$24.5 million (Ps 231.4 million). In 2000, an additional
US$18.1 million (Ps 173.0 million) in seller subordinated notes were
issued for financing a portion of the "cluster rules" investment, of
which US$18.1 million (Ps 173.0 million) was outstanding at March 31,
2001. For a discussion of our "cluster rules" investment, see "Business--
Environmental Matters."
(4) Reflects the receipt of US$27.2 million in net proceeds from the sale of
two converting facilities of Durango Paper Company which was used to
prepay part of the Bank of America loan in May 2001.
(5) Reflects the issuance of additional 2006 notes in this exchange offer on
the basis of US$1,030 in principal amount of 2006 notes for US$1,000 in
principal amount of GID notes.
(6) Reflects the issuance of the 2008 notes in this exchange offer on the
basis of US$1,030 in principal amount of 2008 notes for US$1,000 in
principal amount of GID notes, as well as the payment of the consent
payment in additional 2008 notes.
42
SELECTED FINANCIAL DATA
The following table sets forth our selected combined and consolidated
financial data for each of the periods presented. The data does not represent
all of our financial information. You should read this information together
with the audited annual combined and consolidated financial statements as of
December 31, 1999 and 2000 and for the three years then ended, the unaudited
condensed consolidated interim financial statements as of and for the three-
month periods ended March 31, 2000 and 2001 appearing elsewhere in this
prospectus and consent solicitation and the information under "Operating and
Financial Review and Prospects."
We have controlled GID since March 2000 and we currently own 59% of GID. As
a result, the financial statements for the year ended December 31, 2000 and
for the three-month periods ended March 31, 2000 and 2001 are presented on a
consolidated basis. Prior to March 2000, GID and Corporacion Durango were
under common ownership and control of the Rincon family. Therefore, the
financial statements for the years ended December 31, 1998 and December 31,
1999 are presented on a combined basis, combining the accounts of Corporacion
Durango and its subsidiaries and GID and its subsidiaries.
The data as of and for the years ended 1996 and 1997 has been derived from
the audited consolidated financial statements of each of Corporacion Durango
and its subsidiaries and GID and its subsidiaries which include the necessary
combination adjustments in order to be consistent with the data presented for
the three years ended December 31, 2000.
In the opinion of management, the selected consolidated statement of
operations data, other financial data, and balance sheet data as of and for
the three-month periods ended March 31, 2000 and 2001 include all adjustments
necessary for a fair presentation of our financial condition and results of
operations for those periods. The results of operations for interim periods
are not necessarily indicative of a full year's operations.
Operating income plus depreciation and amortization is referred to by us as
adjusted EBITDA. Operating income under U.S. GAAP may differ from operating
income under Mexican GAAP due to U.S. GAAP adjustments and also because
provisions for employee profit sharing are reclassified as an operating
expense under U.S. GAAP. Adjusted EBITDA to net interest is calculated as
adjusted EBITDA divided by the sum of gross interest expense and gross
interest income. Net debt to adjusted EBITDA is calculated as the sum of
short-term debt and long-term debt, less cash and temporary investments, with
the resulting difference divided by adjusted EBITDA. EBITDA is not a measure
of financial condition or performance under either Mexican GAAP or U.S. GAAP
and should not be considered as a substitute for those measures under either
Mexican GAAP or U.S. GAAP. In addition, all companies do not calculate EBITDA
in a uniform manner so that our EBITDA calculations may not be comparable to
those of other companies.
The data as of March 31, 2000 and 2001 and for the three months then ended
included herein and throughout this prospectus and consent solicitation is
presented in constant Pesos as of March 31, 2001 whereas all other information
presented herein is presented in December 31, 2000 constant Pesos. In the
opinion of management, the restatement has not had a significant impact given
the relative low inflation for the three months ended March 31, 2001.
The Peso/Dollar exchange rate at December 31, 2000 was Ps 9.6098 = US$1.00
and at March 31, 2001, was Ps 9.4933 = US$1.00. In addition, inflation
increased 1.12% from December 31, 2000 to March 31, 2001.
43
Year Ended December 31,
Three Months Ended March 31,
-----------------------------------------------------------
---------------------------------
1996 1997 1998 1999 2000
2000 2000 2001 2001
-------- -------- -------- -------- --------
--------- ---------- ---------- ---------
(millions of constant
Pesos restated as of
(millions of constant Pesos restated
(millions March 31, 2001, (millions
as of December 31, 2000, excluding ratios) of
US$) excluding ratios) of US$)
Combined and
Consolidated Statement
of Income Data:
Mexican GAAP:
Net sales............... 4,745.6 4,947.5 6,034.3 8,088.6 11,603.9
1,207.5 2,903.0 2,587.7 272.6
Cost of sales........... 3,276.2 3,558.3 4,485.1 6,109.8 9,556.5
994.5 2,386.5 2,141.6 225.6
Gross profit............ 1,469.4 1,389.2 1,549.2 1,978.8 2,047.4
213.1 516.5 446.1 47.0
Selling, general and
administrative
expenses............... 336.6 350.4 422.2 633.1 723.5
75.3 180.2 169.7 17.9
Operating income........ 1,132.8 1,038.8 1,127.0 1,345.7 1,323.9
137.8 336.3 276.4 29.1
Other income (expense).. (134.6) (180.7) (209.4) (81.3) (15.2)
(1.6) 1.3 3.7 0.4
Financing (cost) result:
Interest expense........ (970.9) (794.0) (849.9) (896.7) (986.0)
(102.6) (241.4) (268.5) (28.3)
Interest income......... 228.7 146.8 113.7 106.0 111.5
11.6 25.9 19.4 2.0
Foreign exchange gain
(loss), net............ (230.1) (181.1) (1,135.6) 301.2 (92.1)
(9.6) 148.4 57.5 6.1
Gain from monetary
position............... 1,411.6 726.0 821.4 726.8 543.8
56.6 155.4 82.1 8.6
-------- -------- -------- -------- --------
------- ---------- ---------- -------
Total financing (cost).. 439.3 (102.3) (1,050.4) 237.3 (422.8)
(44.0) 88.3 (109.5) (11.5)
-------- -------- -------- -------- --------
-------
Amortization of negative
goodwill............... 137.2 409.7 3,386.4 87.7 1,347.3
140.2 556.2 251.8 26.5
Income before income tax
and asset taxes, profit
sharing and minority
interest............... 1,574.7 1,165.5 3,253.6 1,589.5 2,233.1
232.4 982.1 422.4 44.5
Provisions for:
Income and asset
taxes................. (7.0) (0.8) (15.5) (167.2) (262.1)
(27.3) (57.8) (62.9) (6.6)
Employee profit
sharing............... (12.9) (13.2) (11.6) (5.8) (6.9)
(0.7) (3.5) (1.7) (0.2)
Tax loss carryforwards.. -- -- 6.9 6.9 --
-- -- -- --
Deferred utilization of
income tax............ -- -- -- -- (347.5)
(36.2) (91.5) 19.7 2.1
Net income before
minority interest...... 1,554.8 1,151.5 3,233.5 1,423.4 1,616.7
168.2 829.4 377.5 39.8
Minority interest....... 648.7 476.4 33.5 454.0 157.8
16.4 87.1 54.8 5.8
-------- -------- -------- -------- --------
------- ---------- ---------- -------
Net income.............. 906.1 675.1 3,199.9 969.5 1,458.9
151.8 742.2 322.8 34.0
-------- -------- -------- -------- --------
------- ---------- ---------- -------
U.S. GAAP:
Income (loss) before
income and asset taxes
and minority interest.. -- -- (261.2) 1,894.3 876.1
91.2 -- -- --
Net income (loss)....... -- -- (117.7) 1,299.8 14.5
1.5 -- -- --
Combined and
Consolidated Balance
Sheet Data
Mexican GAAP:
Cash and temporary
investments............ 891.6 687.1 1,154.4 845.4 730.1
76.0 731.1 488.9 51.5
Total current assets.... 2,732.3 2,721.6 3,840.4 5,220.5 5,011.7
521.5 4,995.1 4,605.3 485.1
Property, plant &
equipment, net......... 10,381.8 10,758.0 15,428.2 15,649.5 15,822.9
1,646.5 15,456.7 15,809.3 1,665.3
Total assets............ 13,745.3 14,044.5 19,653.4 21,279.8 21,334.9
2,220.1 20,935.7 21,027.6 2,215.0
Short-term debt,
including current
portion of long-term
debt................... 92.5 54.1 609.9 1,027.9 778.6
81.0 993.0 246.5 26.0
Long-term debt.......... 5,936.3 5,828.3 7,645.5 6,732.5 6,855.6
713.4 6,658.2 7,379.1 777.3
Capital stock(1)........ 3,832.2 3,832.2 3,832.2 3,835.6 2,103.9
218.9 2,127.5 2,127.5 224.1
Total majority
stockholders' equity... 3,858.0 3,842.8 6,953.6 6,895.8 5,975.8
621.8 6,025.7 6,170.5 650.0
Total minority
stockholders' equity... 2,329.8 2,413.3 2,423.0 2,359.8 1,403.9
146.1 1,597.0 1,398.7 147.3
-------- -------- -------- -------- --------
------- ---------- ---------- -------
Total stockholders'
equity (net assets).... 6,187.8 6,256.2 9,376.6 9,255.7 7,379.7
767.9 7,622.7 7,569.2 797.3
-------- -------- -------- -------- --------
------- ---------- ---------- -------
U.S. GAAP:
Total assets............ -- -- -- 17,053.0 17,643.0
1,835.9 -- -- --
Total stockholders'
equity (net assets).... -- -- -- 2,336.8 2,359.5
245.5 -- -- --
--------
(1) Capital stock is equal to capital stock plus restatement of capital stock.
44
Year Ended December 31,
Three Months Ended March 31,
-----------------------------------------------------------
---------------------------------
1996 1997 1998 1999 2000
2000 2000 2001 2001
-------- -------- -------- -------- --------
--------- ----------- ---------- ---------
(millions of constant
Pesos restated as of
(millions of constant Pesos restated
(millions March 31, 2001, (millions
as of December 31, 2000, excluding ratios) of
US$) excluding ratios) of US$)
Other Financial Data
(Mexican GAAP):
Adjusted EBITDA......... 1,472.7 1,358.2 1,461.1 1,809.7 1,832.5
190.7 452.7 391.3 41.2
Resources generated by
operating activities... 1,910.9 1,122.2 1,411.2 1,467.1 1,263.2
131.4 161.3 96.3 10.1
Resources generated by
(used in) financing
activities............. 108.3 (214.0) 1,148.6 (352.7) 1,695.9
176.5 1,877.3 (11.5) (1.2)
Resources used in
investing activities... (1,734.0) (1,112.7) (2,092.4) (1,423.4) (3,074.3)
(319.9) (2,159.8) (331.3) (34.9)
Capital expenditures.... (223.7) (215.7) (962.4) (176.7) (1,006.3)
(104.7) (179.3) (220.8) (23.3)
Adjusted EBITDA to
interest expense....... 1.5 1.7 1.7 2.0 1.9
1.9 1.9 1.5 1.5
Adjusted EBITDA to net
interest expense....... 2.0 2.1 2.0 2.3 2.1
2.1 2.1 1.6 1.6
Total Debt to Adjusted
EBITDA................. 4.1 4.3 5.7 4.3 4.2
4.2 -- -- --
Net Debt to Adjusted
EBITDA................. 3.5 3.8 4.9 3.8 3.8
3.8 -- -- --
Other Financial Data
(U.S. GAAP)
Adjusted EBITDA......... -- -- 1,407.8 1,900.6 1,718.1
178.8 -- -- --
Cash flow provided by
operating activities... -- -- 638.5 732.0 624.7
65.0 -- -- --
Cash flow provided by
(used in) financing
activities............. -- -- 1,970.3 (285.2) 295.0
30.7 -- -- --
Cash flow used in
investing activities... -- -- (2,305.8) (1,486.8) (1,145.9)
(119.2) -- -- --
45
RATIO OF EARNINGS TO FIXED CHARGES
Ratio of earnings to fixed charges is calculated as earnings from continuing
operations before income taxes divided by fixed charges. Earnings for this
purpose consist of earnings before provision for income tax plus fixed
charges. Fixed charges for this purpose consist of interest expenses plus the
portion of rental expenses deemed to represent interest expense under
operating lease agreements and the capitalization of deferred costs related to
the issuance of bonds during the period. Under U.S. GAAP, earnings for the
year ended December 31, 1998 were insufficient to cover fixed charges by the
amount of Ps 261.2 million.
Three Months
Ended
Year Ended December 31, March 31,
------------------------ --------------
1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ------ ------
Ratio of earnings to fixed charges
under Mexican GAAP................... 2.6 2.5 4.8 2.7 3.1 5.0 2.1
Ratio of earnings to fixed charges
under U.S. GAAP...................... -- -- 0.8 3.1 1.8 -- --
46
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read this discussion in conjunction with our audited combined and
consolidated financial statements and the notes thereto and other financial
information included elsewhere in this prospectus and consent solicitation.
Overview
We have controlled GID since March 2000 and we currently own 59% of GID. As
a result, the financial statements for the year ended December 31, 2000 and
for the three-month periods ended March 31, 2000 and 2001 are presented on a
consolidated basis. Prior to March 2000, GID and Corporacion Durango were
under common ownership and control of the Rincon family. Therefore, the
financial statements for the years ended December 31, 1998 and December 31,
1999 are presented on a combined basis, combining the accounts of Corporacion
Durango and its subsidiaries and GID and its subsidiaries.
All significant inter-company accounts and transactions of GID and
Corporacion Durango have been eliminated in the combination and consolidation,
and the minority interest reflects the 41% equity interest we do not own of
GID.
Except for financial data for March 31, 2001 and March 31, 2000, which have
been restated in constant Pesos of March 31, 2001, financial data for all
periods throughout this section have been restated in constant Pesos as of
December 31, 2000. The Peso/dollar exchange rate at December 31, 2000 was Ps
9.6098 = US$1.00 and at March 31, 2001 was Ps 9.4933 = US$1.00. Inflation
increased 1.12% from December 31, 2000 to March 31, 2001.
Effects of Recent Acquisitions
Our results of operations for 1998, 1999 and 2000 have been significantly
influenced by the steady growth in our revenues and cost of sales resulting
from the substantial acquisitions we made in the United States and Mexico
during these periods. It is therefore difficult to compare our levels of net
sales and cost of sales between these periods since these acquisitions have
had a significant impact on our results of operations.
These acquisitions include:
Corrugated container facilities located in Houston, TX,
Dallas, TX and Nogales, AZ................................. January 1998
Grupo Pipsamex.............................................. December 1998
Durango Paper Company....................................... December 1999
Primarily as a result of these acquisitions, our production increased
approximately 61.3% during the last three years, from 1.5 million short tons
in 1998 to 2.5 million short tons in 2000.
For the three year period ended December 31, 2000, GID's operating income as
a percentage of net sales, or operating margin, remained relatively stable,
despite volatile prices, increased costs, increased competition, and Peso
appreciation. Corporacion Durango's operating margin, however, has decreased
throughout the three year period, as a result of integrating new businesses
into its operations. The following table shows our and GID's operating margin
for the periods indicated.
47
Corporacion Durango GID
1998 18.7% 18.6%
1999 16.6% 18.7%
2000 11.4% 17.9%
We have benefited from acquiring low performing assets and making them
profitable by integrating them into our company. Our acquisitions have also
substantially affected our product mix. In addition, we expect that the
diversification of our product base will better position us to withstand
cyclical fluctuations in the market. We also expect to benefit from the
geographic diversification of our acquisitions, which allows us to naturally
hedge our U.S. Dollar-denominated debt and to take advantage of exchange rate
and price differentials in order to maximize our profit margins. Finally, with
the acquisition of Grupo Pipsamex and Durango Paper Company, we acquired a
substantial tax loss carry-forward totaling Ps 1,870.7 million at December 31,
2000.
Recent Market Conditions
We began to experience a decline in operating margins in the fourth quarter
of 2000, which decline continued in the first quarter of 2001, largely as a
result of the market downturn in Mexico and the United States which began in
the fall 2000 and continued into 2001. Our operating margins were 10.2% in the
fourth quarter of 2000 and 10.7% in the first quarter of 2001, as compared to
11.6% in the first quarter of 2000. GID's operating margins were 15.1% in the
fourth quarter of 2000 and 18.4% in the first quarter of 2001, as compared to
19.1% in the first quarter of 2000. We expect to see an improvement in
operating margins by the end of 2001 when we expect market conditions to
improve. Our adjusted EBITDA margins were 15.0% in the fourth quarter of 2000
and 15.5% in the first quarter of 2001, as compared to 15.7% in the first
quarter of 2000. GID's adjusted EBITDA margins were 21.5% in the fourth
quarter of 2000 and 23.7% in the first quarter of 2001, as compared to 24.2%
in the first quarter of 2000.
In addition, as a result of the slowdown in the U.S. and Mexican economy and
the Peso appreciation, our paper and packaging shipments, except newsprint
shipments, began to decline in the fourth quarter of 2000 in all of our
products, decreasing by 2% from the third quarter of 2000, which trend
continued in the first quarter of 2001. This decline resulted in lower backlog
and in the inability of the paper and packaging industry to increase prices.
We expect these sales to remain stagnant in the second and third quarters of
2001, and expect an improvement in sales in the fourth quarter of 2001.
Sales
We produce paper, packaging and forest products in Mexico and the United
States. In 2000, paper and packaging products accounted for approximately
95.7% of our total sales. In 2000, we sold approximately 59.2% of our paper
and packaging products in Mexico and the remaining 40.8% in the United States.
In 2000,
48
approximately 40% of our total packaging sales were to Mexican companies that
primarily export their products, including exporters located in the border
region, maquiladoras located outside of the border region and other Mexican
exporters.
For the three months ended March 31, 2001, approximately 44.2% of our sales
were made in U.S. Dollars, with the balance primarily U.S. Dollar-linked.
Pricing
From 1998 through 2000, the pricing of our products has been influenced by a
number of factors, including:
. international prices for paper and packaging products, which are
significantly influenced by industry capacity utilization rates and by
significant increases in capacity due to the capital intensive nature of
the paper and packaging industry;
. growth in the demand for packaging products as a result of the growth of
the Mexican and U.S. economies;
. fluctuations in the exchange rate between the Peso and the U.S. Dollar;
and
. economic conditions in each of Mexico and the United States including
prevailing inflation rates.
Paper products, excluding newsprint. The paper industry is cyclical, with
demand closely correlated with overall economic activity. Prices for our paper
products primarily reflect international paper prices. From 1997 through June
1999, international prices for paper products were low compared to the prior
four years. However, from June 1999 through December 2000, international
prices for paper products recovered, the benefits of which were felt in
Mexico. However, in 2001, prices remained at the same levels and the industry
was unable to implement expected price increases.
Prices for paper products in Mexico are lower than prices in the United
States, reflecting the generally lower cost structure in Mexico. We compete
with U.S. and Mexican producers in both the United States and Mexico.
As a result of our production flexibility resulting from our vertical
integration, we have been able to maintain a higher level of operating income
during the down cycle in international paper prices than we could have
achieved without vertical integration. When prices for paper products are low,
we use virtually all of our paper production in our converting operations
because finished products, like packaging, earn higher margins. During down
cycles, our sales and cost of sales are reduced, but the overall impact on our
operating income is small. During periods of higher international paper
prices, we purchase paper for use in our converting operations from small
Mexican paper producers at favorable rates. This allows us to export a
significant portion of our higher-quality paper production and take advantage
of the increased margins available from sales of our paper products outside of
Mexico.
Packaging products. In general, the prices of our packaging products
fluctuate in accordance with international prices. Prices for corrugated
containers in Mexico have historically tended to be approximately 15% below
corrugated container prices in the United States and prices for Mexican
containerboard have tended to be 10% to 15% lower than in the United States.
In the past, this price differential, combined with protective tariffs, has
discouraged imports from the United States. With the gradual elimination of
tariffs and generally low prices for packaging products in the United States
over the last three years, competition from imports has increased. Our prices
for packaging products over the last three years have declined in the face of
competition from imports.
Newsprint. The overall global newsprint pricing environment during 1998 and
1999 was depressed by oversupply resulting in low capacity utilization and
operating margins worldwide. This environment, coupled with the elimination of
tariffs effective January 1, 1999, has significantly reduced newsprint prices
in Mexico. However, global prices for newsprint began to rise at the end of
1999 and we have seen higher prices for newsprint in 2000 and the first
quarter of 2001. Since our acquisition of Grupo Pipsamex at the end of 1998,
we are the only producer of newsprint in Mexico.
49
Cost of Production
Historically, costs of production have been incurred in Pesos, and consist
primarily of raw materials, labor, energy and depreciation costs. A portion of
our costs and operating expenses in Mexico are denominated in U.S. Dollars,
primarily the cost of imported old corrugated containers, or OCC, and old
newsprint, or ONP, which are the primary raw materials used in our paper
making activities.
The cost of virgin pulp, OCC and ONP, the primary raw materials used in the
production of our paper products, is significantly affected by international
prices for those products, which vary depending upon the supply and demand for
finished paper. Changes in the Peso-U.S. Dollar exchange rate also affect our
cost of importing OCC and ONP into Mexico. Mexican OCC or ONP prices tend to
follow price movements in the United States, but are generally lower because
Mexican OCC or ONP is lower in quality. We have made substantial investments
to improve production, technology and domestic collection efforts, which have
resulted in greater efficiency, increased yields of recyclable waste paper and
higher collections of Mexican OCC and ONP, all of which result in reduced
costs.
Our energy cost represents approximately 12% of our cost of production. In
particular, our mills are run primarily by electricity. We purchase 60% of our
electricity needs from Comision Federal de Electricidad, the Mexican state-
owned electric company, under long term contracts and we produce the remainder
at our own power plants. These long term contracts guarantee the supply of
electricity at prices that have historically increased by the Mexican
inflation rate. We use heating oil, instead of natural gas, to produce
electricity at our power plants. The prices for heating oil in Mexico have
fluctuated less in 2000 than the prices for natural gas because the prices for
heating oil are regulated by Petroleos Mexicanos, the Mexican state-owned oil
company. Generally, the price for heating oil is not influenced by price
changes in the open market because of the price regulation of the Mexican
government. Instead, heating oil prices in Mexico have historically followed
the trend of the Mexican inflation rate. As a result, our energy costs have
risen less than if we had to purchase heating oil or natural gas on the open
market. See "Business--Raw Materials--Energy."
Inflation
The table below shows Mexican inflation and gain from monetary position for
the periods indicated according to the NCPI:
Year Ended December 31,
----------------------- March 31, March 31,
1998 1999 2000 2000 2001
------- ------- ------- --------- ---------
(in thousands of (in thousands of
constant Pesos restated constant Pesos
at December 31, 2000, restated at
except percentages) March 31, 2001,
except percentages)
Inflation.......................... 18.6% 12.3% 8.9% 2.9% 1.1%
Gain from monetary position........ 821,355 726,751 543,756 155,407 82,084
Generally, these levels of inflation have resulted in lower real prices
since we have not been able to increase prices in line with increases in
inflation. High levels of inflation have also resulted in higher Peso-based
labor and raw material costs. As a result, during the periods under
discussion, operating margins and net income have been negatively affected.
In addition, a component of our "Financing Cost" includes our gain or loss
from monetary position which refers to the gains or losses, due to the effects
of inflation, from holding net monetary liabilities or assets. A gain from
monetary position results from holding net monetary liabilities during periods
of inflation as the purchasing power represented by nominal Peso liabilities
declines over time. Accordingly, since our monetary liabilities, debt and
other payables exceeded our monetary assets, cash, temporary investments and
accounts receivable, in 1998, 1999 and 2000 and March 31, 2000 and 2001 we
recorded a gain from monetary position for those periods. This had a non-cash
benefit on the income statement.
50
Exchange Rates
The table below shows the appreciation and devaluation of the Mexican
currency against the U.S. Dollar and the period-end exchange rates for the
periods indicated:
Three
Months
Ended
Year Ended December 31, March 31,
--------------------------- -----------
1998 1999 2000 2000 2001
------- ------- ------- ---- ----
Peso devaluation (revaluation)
against the U.S. Dollar(1)....... 22.7% (4.0)% 1.2% (2.2)% (1.2)%
Mexican inflation (based on
changes in NCPI)(1).............. 18.6% 12.3% 8.9% 2.8% 1.1%
United States inflation (based on
changes in CPI)(1)............... 1.6% 2.7% 3.4% 1.7% 1.0%
Inflation differential (Mexican
vs. U.S.)(2)..................... 16.7% 9.4% 5.3% 1.1% 0.1%
Change in relative value of the
Peso to the U.S. Dollar(2)....... (5.1)% 12.3% (3.9)% 3.3% 1.3%
--------
(1) The relevant rates and their indices used to calculate the percentages in
the table were as follows:
NCPI CPI Exchange Rate
------ ------ -------------
December 31, 1998.............................. 275.04 163.90 9.8963
December 31, 1999.............................. 308.92 168.30 9.4986
December 31, 2000.............................. 336.60 174.0 9.6098
March 31, 2000................................. 317.60 171.2 9.2845
March 31, 2001................................. 340.38 175.8 9.4933
(2) Compounded
In 1998, the Peso devalued significantly against the U.S. Dollar. A
devaluation of the Peso affects our results of operations by increasing our
cost of borrowing since the Peso cost of interest payments on our U.S. Dollar
indebtedness increases and a foreign exchange loss is recognized on the
outstanding U.S. dollar denominated indebtedness. In addition, a devaluation
generally benefits Mexican traditional exports and maquiladora exports. Our
ability to maintain profitable operations during periods of devaluation has
been in large part a result of our strength in marketing to export-oriented
customers.
In 1999, the Peso appreciated against the U.S. Dollar. An appreciation of
the Peso against the U.S. Dollar generally results in our receiving less Pesos
for our U.S. Dollar sales but our U.S. Dollar-based costs decrease. An
appreciation of the Peso against the U.S. Dollar negatively affects us because
we have not passed along our increased costs through price increases that keep
pace with inflation. In addition, we face intensified competition from U.S.
Dollar-denominated imports, which become cheaper in Peso terms.
In 2000, the Peso fluctuated throughout the year, primarily appreciating
throughout the year. However, in November and December, the Peso devalued
against the U.S. Dollar resulting in a devaluation of 1.2% for the year. A
devaluation of the Peso against the U.S. Dollar generally results in our
receiving more Pesos for our U.S. Dollar sales but our U.S. Dollar-based costs
increase. In the first three months of 2001, the Peso appreciated against the
U.S. Dollar, which negatively affected us because of the increased competition
from U.S. dollar denominated imports, which were cheaper in Peso terms.
The impact of exchange rate and inflation fluctuations on our interest
expense and interest income are reflected in the "Interest Expense" and
"Interest Income" components of "Financing Cost."
In addition, we record a foreign exchange gain or loss with respect to U.S.
Dollar-denominated monetary assets or liabilities of our Mexican subsidiaries
when the Peso appreciates or depreciates in relation to the U.S. Dollar. Our
U.S. Dollar-denominated monetary liabilities, which principally consist of our
U.S. Dollar-denominated indebtedness for borrowed money, exceed our U.S.
Dollar-denominated monetary assets, which principally consist of U.S. Dollar
bank deposits. As a result, we have recorded a foreign exchange loss during
each period in which the Peso depreciated in relation to the U.S. Dollar and a
foreign exchange gain for each period in which the Peso appreciated in
relation to the U.S. Dollar.
51
Capacity Utilization
Our operations have high fixed costs. Accordingly, to obtain low unit
production costs and maintain adequate operating margins, we seek to maintain
a high capacity utilization rate. Our paper mills operated at an average
capacity of approximately 98% in 1998, 93% in 1999, 95% in 2000 and 87% in the
first quarter of 2001. We believe that our vertically integrated operations
will allow us to maintain high levels of capacity utilization even during
industry down cycles. However, we cannot assure you that this will be the
case.
Segment Reporting
We manage our business on a product basis. Our reportable segments are:
. Packaging: this segment includes the manufacturing and selling of
corrugated containers, molded pulp, and multi-wall sacks and bags. This
segment includes the operating results of Titan.
. Paper: this segment includes the manufacturing and selling of kraft
paper, containerboard (linerboard, corrugating medium and multi-wall
paper), newsprint, uncoated free sheet and coated bleached board and
paper, made from natural and recycled fibers. This segment includes the
operating results of Pamex, Grupo Pipsamex, McKinley Paper Company and
Durango Paper Company.
. Other business: this segment includes the manufacturing and selling of
plywood, particleboard and lumber. This segment includes the operating
results of Ponderosa.
The following table shows our total sales, intersegment sales, sales to
third parties, operating income and adjusted EBITDA by segment:
As of March 31, 2000
--------------------------------------------------------------------------
(in thousands of constant Pesos restated at March
31, 2001)
Operating income
Intersegment Sales to Operating
before depreciation
Total sales sales third parties income
and amortization
------------- ------------ ------------- -----------
-------------------
Packaging............... Ps. 1,361,680 Ps. (16,827) Ps. 1,344,853 Ps. 192,172
Ps. 221,005
Paper................... 2,499,715 (1,072,017) 1,427,698 114,783
194,840
Other................... 145,024 (14,547) 130,477 21,707
29,219
Eliminations............ (1,103,391) 1,103,391 -- 7,631
7,631
------------- ------------- -----------
-----------
Consolidated Total.... Ps. 2,903,028 Ps. 2,903,028 Ps. 336,293
Ps. 452,695
============= ============= ===========
===========
As of March 31, 2001
---------------------------------------------------------------------------
(in thousands of constant Pesos restated at March
31, 2001)
Operating income
Intersegment Sales to Operating
before depreciation
Total sales sales third parties income
and amortization
------------- ------------ ------------- -----------
-------------------
Packaging............... Ps. 1,291,167 Ps. (19,861) Ps. 1,271,306 Ps. 157,969
Ps. 183,361
Paper................... 2,354,763 (1,100,864) 1,253,899 117,576
202,823
Other................... 74,109 (11,629) 62,480 3,656
7,866
Eliminations............ (1,132,354) 1,132,354 -- (2,758)
(2,758)
------------- ------------- -----------
-----------
Consolidated Total.... Ps. 2,587,685 Ps. 2,587,685 Ps. 276,443
Ps. 391,292
============= ============= ===========
===========
52
As of December 31, 1998
-------------------------------------------------------------------------------
(in thousands of constant Pesos restated at
December 31, 2000)
Operating income
before
Intersegment Sales to third
Operating depreciation and
Total sales sales parties income
amortization
-------------- ------------ --------------
------------- -------------------
Packaging............... Ps. 4,329,600 Ps. (106,457) Ps. 4,223,143 Ps.
745,514 Ps. 871,983
Paper................... 2,727,960 (1,590,686) 1,137,274
292,648 459,313
Other................... 798,027 (124,187) 673,840
88,875 129,848
Eliminations............ (1,821,330) 1,821,330 --
-- --
-------------- --------------
------------- -------------
Consolidated Total.... Ps. 6,034,257 Ps. 6,034,257 Ps.
1,127,037 Ps. 1,461,144
============== ==============
============= =============
As of December 31, 1999
-------------------------------------------------------------------------------
(in thousands of constant Pesos restated at
December 31, 2000)
Operating income
Intersegment Sales to
Operating before depreciation
Total sales sales third parties income
and amortization
-------------- ------------ --------------
------------- -------------------
Packaging............... Ps. 4,160,028 Ps. (56,571) Ps. 4,103,457 Ps.
635,921 Ps. 744,096
Paper................... 7,444,728 (4,084,399) 3,360,329
623,096 943,464
Other................... 682,428 (57,646) 624,782
99,743 135,219
Eliminations............ (4,198,616) 4,198,616 --
(13,037) (13,037)
-------------- --------------
------------- -------------
Consolidated Total.... Ps. 8,088,568 Ps. 8,088,568 Ps.
1,345,723 Ps. 1,809,742
============== ==============
============= =============
As of December 31, 2000
-------------------------------------------------------------------------------
(in thousands of constant Pesos restated at
December 31, 2000)
Operating income
Intersegment Sales to
Operating before depreciation
Total sales sales third parties income
and amortization
-------------- ------------ --------------
------------- -------------------
Packaging............... Ps. 5,450,299 Ps. (84,177) Ps. 5,366,122 Ps.
680,677 Ps. 789,497
Paper................... 10,205,557 (4,471,462) 5,734,095
601,197 970,150
Other................... 556,072 (52,373) 503,699
43,900 74,694
Eliminations............ (4,608,012) 4,608,012 --
(1,855) (1,855)
-------------- --------------
------------- -------------
Consolidated Total.... Ps. 11,603,916 Ps. 11,603,916 Ps.
1,323,919 Ps. 1,832,486
============== ==============
============= =============
The following is our geographic segment sales information for the periods
indicated.
As of December 31, 2000
---------------------------------------------
1998 1999 2000
------------- -------------- --------------
(in thousands of constant Pesos restated
at December 31, 2000)
Mexico........................... Ps. 6,549,680 Ps. 10,502,541 Ps. 11,020,702
United States.................... 1,305,907 1,784,643 5,191,226
Eliminations..................... (1,821,330) (4,198,616) (4,608,012)
------------- -------------- --------------
Consolidated Total............. Ps. 6,034,257 Ps. 8,088,568 Ps. 11,603,916
============= ============== ==============
Condition and Results of Operations
Three Months Ended March 31, 2001 Compared to the Three Months Ended March
31, 2000
Net Sales
Net sales decreased 10.9% to Ps 2,587.7 million for the three months ended
March 31, 2001 from Ps 2.903.0 million for the three months ended March 31,
2000. This decrease was primarily due to a 13.6% decrease in shipments to
414.2 thousand short tons for the three months ended March 31, 2001 from 479.6
thousand short tons for the three months ended March 31, 2000. The decrease in
shipments was partially offset by a 3.2% increase in average unit paper prices
and average unit packaging prices for the period.
53
In the first three months of 2001 compared to the same period in 2000,
orders continued to slow down as a result of a weak economy in Mexico and the
United States. In addition, the strong Peso versus the U.S. dollar affected
domestic profitability and Mexico's export competitiveness. During the 2001
period, we took approximately 67,000 tons of market-related down time in our
paper and packaging segment to match customer orders and to reduce our
inventories. While average unit prices increased moderately during the period
due to an improved product mix, downward pressure on pricing continued.
Net sales from our paper segment decreased 12.2% to Ps 1,253.9 million for
the three months ended March 31, 2001 from Ps 1,427.7 million for the three
months ended March 31, 2000. This decrease was due to lower shipments, to
215.5 thousand short tons from 248.1 thousand short tons. Our lower shipments
were primarily due to a 16.9% decrease in our linerboard shipments partly as a
result of the market downturn in Mexico and in the United States, and a 29.5%
decrease in kraft paper shipments because of the temporary shut down of one of
Durango Paper Company's three paper machines scheduled for an upgrade. These
decreases were partially offset by a 1.1% increase in average unit paper
prices as a result of a shift in our product mix.
Net sales from our packaging segment decreased 5.5% to Ps 1,271.3 million
for the three months ended March 31, 2001 from Ps 1,344.9 million for the
three months ended March 31, 2000. This decrease was due to a 4.8% decrease in
shipments, primarily of corrugated containers, to 183.6 thousand short tons
from 192.9 thousand short tons. These decreases were mainly due to lower
demand from the Mexican export and maquiladora sectors, and the Peso
appreciation relative to the U.S. dollar. Average unit packaging prices
decreased 1%, in boxes, during the period, accounting for the remainder of the
change in net sales from this segment.
Net sales from our other segment decreased 52.1% to Ps 62.5 million for the
three months ended March 31, 2001 from Ps 130.5 million for the three months
ended March 31, 2000. This decrease was mainly due to a 61% decrease in
shipments to 15.1 thousand short tons from 38.7 thousand short tons. Our lower
shipments were mainly due to the slowdown of the international economy and the
construction industry as well as the subsequent reduction of the government
budget for the construction sector. We took advantage of this period of
reduced demand by temporarily shutting down one of our mills to upgrade the
mill to produce higher quality and higher priced products.
Cost of Sales
Cost of sales decreased 10.3% to Ps 2,141.6 million for the three months
ended March 31, 2001 from Ps 2,386.5 million for the three months ended March
31, 2000. This decrease was primarily due to lower shipments and lower costs
in raw materials. Average prices of OCC, which account for approximately 55%
of our raw material costs, decreased by 21% in nominal U.S. Dollar terms to
US$103 per ton from US$131 per ton, and average prices of ONP decreased by
17.4% in nominal U.S. Dollar terms to US$214 per ton from US$259 per ton.
Lower raw material prices were partially offset by increases in our energy and
labor costs. Our energy cost, which represents approximately 12% of our cost
of production, increased 10% primarily as a result of higher oil prices in
Mexico. Our labor cost, which represents approximately 13% of our cost of
production, increased 2% as a result of wages increasing at a faster rate than
inflation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 5.9% to Ps 169.7
million for the three months ended March 31, 2001 from Ps 180.2 million for
the three months ended March 31, 2000. This decrease was due to payment of
lower sales commissions as a result of lower sales during the 2001 period.
54
Operating Income
Operating income decreased 17.8% to Ps 276.4 million for the three months
ended March 31, 2001 from Ps 336.3 million for the three months ended March
31, 2000. This decrease was primarily due to lower sales during the period,
partially offset by operating efficiencies in our paper segment.
Operating income in our paper segment increased 2.4% to Ps 117.6 million
from Ps 114.8 million as a result of cost reductions mainly resulting from
improvements in the use of newsprint raw materials. This increase was also a
result of greater operating efficiencies at our other paper mills.
Operating income in our packaging segment decreased 17.8% to Ps 158.0
million from Ps 192.2 million, primarily as a result of lower sales of
corrugated containers.
Operating income in our other segment decreased 82.9% to Ps 3.7 million from
Ps 21.7 million, primarily as a result of increased imports of cheaper forest
products which had a dramatic negative impact on our forest product sales.
Operating income as a percentage of net sales decreased to 10.7% for the
three months ended March 31, 2001 from 11.6% for the three months ended March
31, 2000. This decline was a result of a decrease in shipments and higher
energy costs during the period, which were partially offset by a decrease in
OCC and ONP prices.
Other Income
Other income was Ps 3.7 million for the three months ended March 31, 2001
and Ps 1.3 million for the three months ended March 31, 2000. Other income in
both periods was a result of insurance recoveries for property damage.
Amortization of Negative Goodwill
The amortization of negative goodwill was Ps 251.8 million in the first
three months of 2001 and Ps 556.2 million in the first three months of 2000.
In the 2001 and 2000 periods, Ps 251.8 million and Ps 258.2 million,
respectively, was a result of the amortization of negative goodwill for the
acquisition of Durango Paper Company. As of March 31, 2001, the outstanding
amount of negative goodwill for our acquisition of Durango Paper Company was
Ps 167.6 million, which we expect to amortize over a remaining two-month
period. The remaining Ps 298.0 million amortization of negative goodwill in
the 2000 period was a result of our acquisition of 59% of GID.
Financing Cost
Financing cost was an expense of Ps 109.5 million for the three months ended
March 31, 2001 as compared to a gain of Ps 88.3 million for the same period in
2000. Interest expense increased to Ps 268.5 million for the three months
ended March 31, 2001 from Ps 241.4 million for the three months ended March
31, 2000. This increase resulted primarily from the higher interest rate on
our 13 1/8% notes due 2006 compared to the interest rates on the 12 3/4% notes
due 2001 GID repaid during the period. Interest income decreased to Ps 19.4
million for the three months ended March 31, 2001 from Ps 25.9 million for the
three months ended March 31, 2000. Interest income decreased because of lower
average cash balances during the period and lower interest rates.
Foreign exchange results were a gain of Ps 57.5 million for the three months
ended March 31, 2001 as compared to a gain of Ps 148.4 million for the three
months ended March 31, 2000. This foreign exchange difference resulted from
the lower appreciation of the Peso in the first three months of 2001 as
compared to that in the first three months of 2000. Gain from monetary
position decreased 47.2% to Ps 82.1 million for the three months ended March
31, 2001 from Ps 155.4 million for the three months ended March 31, 2000. This
decrease reflected a decline in the inflation rate between the first three
months of 2001 as compared to the same period in 2000.
55
Provisions for Employee Profit Sharing and Income and Asset Taxes,
Including Deferred Income Tax
Provisions for employee profit sharing and income and asset taxes, including
deferred income tax, decreased to Ps 44.9 million for the three months ended
March 31, 2001 from Ps 152.7 million for the three months ended March 31,
2000. This decrease resulted primarily from lower pre-tax income during the
2001 period as compared to the 2000 period. In addition, non-taxable permanent
differences, principally amortization of negative goodwill, were lower during
the 2001 period.
Net Income Before Minority Interest
Net income before minority interest decreased 54.5% to Ps 377.5 million for
the three months ended March 31, 2001 from Ps 829.4 million for the three
months ended March 31, 2000. This decrease was a result of the decrease in
operating income, the decrease in interest income, an increase in interest
expense and lower foreign exchange gains. In addition, this decrease was a
result of the decrease in gain from monetary position and the increase in
provisions for employee profit sharing and income and assets taxes net of tax
loss carry-forwards which offset the increase in the amortization of negative
goodwill.
Minority Interest
Minority interest decreased 37.1% to Ps 54.8 million for the three months
ended March 31, 2001 from Ps 87.1 million for the three months ended March 31,
2000. The change in minority interest is a result of lower GID net income at
subsidiaries with a minority interest during the 2001 period as compared to
GID's net income during the 2000 period.
Net Income
Net income decreased 56.5% to Ps 322.8 million for the three months ended
March 31, 2001 from Ps 742.2 million for the three months ended March 31,
2000. This decrease resulted from the factors described above.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Net Sales
Net sales increased 43.5% to Ps 11,603.9 million in 2000 from Ps 8,088.6
million in 1999. This increase was primarily due to a 31.4% increase in
shipments to 1,920.5 thousand short tons in December 31, 2000 from 1,461.3
thousand short tons in 1999, accounting for approximately 79% of the increase
in net sales for the period. In addition, average unit paper prices increased
11.1% and average unit packaging prices increased 11.2% accounting for the
remainder of the increase in net sales for the period.
Net sales from our paper segment increased 70.6% to Ps 5,734.1 million in
2000 from Ps 3,360.3 million for 1999. This increase was primarily due to a
55.6% increase in paper shipments to 993.0 thousand short tons for 2000 from
638.1 thousand short tons in 1999, accounting for approximately 86% of the
increase in net sales from our paper segment. This increase reflects the
acquisition of Durango Paper Company in December 1999, which added 345.8
thousand short tons of bleached board and kraft paper to our product mix
during 2000. Shipments from our existing operations to third parties increased
by 2.0% during the period. In addition, average unit paper prices increased
9.7%, accounting for the remainder of the increase in net sales from our paper
segment.
Net sales from our packaging segment increased 30.8% to Ps 5,366.1 million
in 2000 from Ps 4,103.5 million in 1999, primarily as a result of our
acquisition of Durango Paper Company. This increase mainly due to a 10.6%
increase in average unit packaging prices, and an 18.3% increase in shipments
to 769.0 thousand short tons in 2000 from 650.2 thousand short tons in 1999.
56
Net sales from our other segment decreased 19.3% to Ps 503.7 million in 2000
from Ps 624.8 million in 1999. The decrease was due to a decrease in the sales
prices, primarily of plywood, and an 8.4% decrease in shipments, to 158.4
thousand short tons in 2000 from 173.0 thousand short tons in 1999.
Cost of Sales
Cost of sales increased 56.4% to Ps 9,556.5 million in 2000 from Ps 6,109.8
million in 1999. This increase was primarily due to the acquisition of Durango
Paper Company, which has a substantially higher operating cost structure than
our existing paper segment. This increase was partially offset by a slight
decline in the cost of sales in our packaging segment. Our average OCC and ONP
prices remained relatively flat during the period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 14.3% to Ps 723.5
million in 2000 from Ps 633.1 million in 1999. This increase was due to the
integration of Durango Paper Company into our company. As a result of higher
marketing and freight expenses, Durango Paper Company has had historically
higher selling, general and administrative expenses as a percentage of net
sales relative to our existing operations.
Operating Income
Operating income decreased 1.6% to Ps 1,323.9 million in 2000 from Ps
1,345.7 million in 1999. This decrease was primarily due to a 3.5% decrease in
our paper segment operating income to Ps 601.2 million in 2000 from Ps 623.1
million in 1999 and a 56% decrease in our other segment operating income to Ps
43.9 million in 2000 from Ps 99.7 million in 1999, which more than offset a
7.0% increase in our packaging segment operating income to Ps 680.7 million in
2000 from Ps 635.9 million in 1999. This decline in operating income is a
result of the factors described above.
Operating income as a percentage of net sales decreased to 11.4% in 2000
from 16.6% in 1999. This decline was a result of the integration of Durango
Paper Company, which had substantially lower operating margins than our
existing operations, which resulted in a decline in the operating margins of
our paper segment. In addition, operating margins in the packaging segment
declined to 12.7% in 2000 from 15.5% in 1999 as a result of the integration of
Durango Paper Company and the conversion of divisions which had lower
operating margins than our existing operations.
Other Income (Expense)
Other expenses decreased 81.3% to Ps 15.2 million in 2000 from Ps 81.3
million in 1999. This decrease resulted from a decrease in amortization of
pre-operating expense of our paper mills.
Amortization of Negative Goodwill
In 2000, the amortization of negative goodwill was Ps 1,347.3 million as a
result of the acquisition of Durango Paper Company and the acquisition of 59%
of GID. In 1999, the amortization of negative goodwill was Ps 87.7 million as
a result of our acquisition of Grupo Pipsamex in December 1999.
Financing Cost
Financing cost was an expense of Ps 422.8 million in 2000 as compared to a
gain of Ps 237.4 million in 1999. Interest expense increased 10% to Ps 986.0
million in 2000 from Ps 896.7 million in 1999. This increase resulted
primarily from the impact of the additional debt incurred for the acquisition
of Durango Paper Company in December 1999. Interest income increased 5.2% to
Ps 111.5 million in 2000 from Ps 106.0 million in 1999. Interest income
increased because of higher average cash balances and higher interest rates in
2000. Foreign
57
exchange results were a loss of Ps 92.1 million in 2000 as compared to a gain
of Ps 301.2 million in 1999. This foreign exchange loss resulted from a 1.2%
depreciation of the Peso in 2000 as compared to a 4.0% appreciation of the
Peso in 1999. Gain from monetary position decreased 25.2% to Ps 543.8 million
in 2000 to Ps 726.8 million in 1999. This decrease reflected a decline in the
inflation rate between 1999 and 2000.
Provisions for Employee Profit Sharing and Income and Asset Taxes,
Including Tax Loss Carryforwards and Deferred Income Tax
Provisions for employee profit sharing and income and asset taxes, including
tax loss carryforwards and deferred income tax, increased to Ps 616.4 million
in 2000 from Ps 166.0 million in 1999. This increase resulted primarily from
provisions for deferred income taxes which were Ps 347.5 million in 2000 as
compared to no deferred income taxes in 1999. Provisions for deferred income
taxes resulted from our application of Bulletin D-4 issued by the Mexican
Institute of Public Accountants, which was adopted effective January 1, 2000
and requires the recognition of deferred taxes under the full liability method
that does not represent any cash charges whereas in the past, we used a
partial liability method. Consequently, our historical effective income tax
rates may not be indicative of future effective tax rates.
Net Income Before Minority Interest
Net income before minority interest increased 13.6% to Ps 1,616.7 million in
2000 from Ps 1,423.4 million in 1999. This increase was a result of the
increase in amortization of negative goodwill operating income and decrease in
financing costs which offset increases in the provisions for employee profit
sharing and income and asset taxes.
Minority Interest
Minority interest decreased to Ps 157.8 million in 2000 Ps 454.0 million in
1999. This decrease was a result of our acquisition of 59% of GID in 2000.
Net Income
Net income increased 50.5% to Ps 1,458.9 million in 2000 from Ps 969.5
million in 1999. This increase resulted from the factors described above.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Net Sales
Net sales increased 34.0% to Ps 8,088.6 million in 1999 from Ps 6,034.3
million in 1998. Shipments increased 37.3% to 1,461.3 thousand short tons in
1999 from 1,064.5 thousand short tons in 1998, accounting for almost all of
the increase in net sales for the period. While average unit paper prices
increased, average unit packaging prices decreased during the period.
Net sales from our paper segment increased 195.5% to Ps 3,360.3 million in
1999 from Ps 1,137.3 million in 1998. This increase was primarily due to a
130.7% increase in paper shipments to 638.1 thousand short tons in 1999 from
276.6 thousand short tons in 1998 accounting for approximately 85% of the
increase in net sales from our paper segment. This increase was primarily due
to the acquisition of Grupo Pipsamex in December 1998, which added 368.1
thousand short tons of newsprint and uncoated free sheet to our product mix.
Shipments from our existing operations to third parties decreased by 2.4%
during the period primarily as a result of increasing our shipments to our
packaging facilities, thus decreasing output available for third parties. In
addition, average unit paper prices increased 27.8% during the period
accounting for the remainder of the increase in net sales from the segment.
Net sales from our packaging segment decreased 2.8% to Ps 4,103.5 million in
1999 from Ps 4,223.1 million in 1998. This decrease was almost entirely due to
a 6.4% decrease in average unit packaging prices, which was
58
partially offset by a 3.9% increase in shipments to 650.2 thousand short tons
in 1999 from 626.0 thousand short tons in 1998.
Net sales from our other segment decreased 7.2% to Ps 624.8 million in 1999
from Ps 673.8 million in 1998. The decrease was primarily due to a decrease in
the sales prices, primarily of particleboard, despite the increase in
shipments by 6.9% from 173.0 thousand short tons in 1999 to 161.8 thousand
short tons in 1998.
Cost of Sales
Cost of sales increased 36.2% to Ps 6,109.8 million in 1999 from Ps 4,485.1
million in 1998. The increase was primarily due to the acquisition of Grupo
Pipsamex in December 1998, which substantially increased the cost of sales of
our paper segment. This increase was partially offset by a slight decline in
the cost of sales of our packaging segment. Our average OCC and ONP prices
remained relatively flat during the period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 50.0% to Ps 633.1
million in 1999 from Ps 422.2 million in 1998. This increase was due to the
integration of Grupo Pipsamex into our company. Grupo Pipsamex has
historically had a higher selling, general and administrative expense as a
percentage of net sales than our existing operations as a result of relatively
higher marketing and freight costs.
Operating Income
Operating income increased 19.4% to Ps 1,345.7 million in 1999 from Ps
1,127.0 million in 1998. This increase was due to a 112.9% increase in our
paper segment operating income to Ps 623.1 million in 1999 from Ps 292.6
million in 1998 and a 12% increase in our other segment operating income to Ps
99.7 million in 1999 from Ps 88.9 million in 1998, which offset a 14.7%
decline in our packaging segment operating income which decreased to Ps 635.9
million in 1999 from Ps 745.5 million in 1998.
Operating income as a percentage of net sales decreased to 16.6% in 1999
from 18.7% in 1998. This decline is a result of the integration of Grupo
Pipsamex, which had substantially lower operating margins than our existing
operations, which resulted in a decline in the operating margins of our paper
segment. In addition, operating margins in the packaging segment declined as a
decline in average unit packaging prices were only partially offset by a
slight decrease in packaging costs.
Other Income (Expense)
Other expense decreased 61.2% to Ps 81.3 million in 1999 from Ps 209.4
million in 1998. This decrease resulted from a decrease in amortization of
pre-operating expenses of our paper mills.
Amortization of Negative Goodwill
In 1999, the amortization of negative goodwill was Ps 87.7 million as a
result of our acquisition of Durango Paper Company in December 1999. In 1998,
the amortization of negative goodwill was Ps 3,386.4 million as a result of
our acquisition of Grupo Pipsamex in December 1998.
Financing Cost
Financing cost was a gain of Ps 237.4 million in 1999 as compared to an
expense of Ps 1,050.4 million in 1998. Interest expense increased 5.5% to Ps
896.7 million in 1999 from Ps 849.9 million in 1998. Interest expense
increased because we incurred additional debt as a result of our acquisition
of Grupo Pipsamex.
59
Interest income decreased 6.8% to Ps 106.0 million in 1999 from Ps 113.7
million in 1998. The decrease in interest income resulted from lower average
cash balances and interest rates in 1999 as compared to 1998. Foreign exchange
results were a gain of Ps 301.2 million in 1999 as compared to a loss of Ps
1,135.6 million in 1998. This increase reflected a 4% appreciation of the Peso
during 1999 as compared to the 22.7% depreciation of the Peso during 1998.
Gain from monetary position decreased 11.5% to Ps 726.8 million in 1999 from
Ps 821.4 million in 1998. The decrease in gain from monetary position
reflected the reduction in Mexican inflation for 1999 as compared to that for
1998.
Provisions for Employee Profit Sharing and Income and Asset Taxes,
Including Tax Loss Carryforwards
Provisions for employee profit sharing and income and asset taxes, including
tax loss carryforwards, increased to Ps 166.0 million in 1999 from Ps 20.2
million in 1998. Periods of higher devaluation result in lower provisions for
income and asset taxes. This increase was, therefore, primarily a result of
the real appreciation of the Peso in 1999 as compared to the devaluation of
the Peso in 1998. In addition, in 1999, we also had fewer tax loss carry
forwards to offset our taxable income.
Net Income Before Minority Interest
Net income before minority interest decreased 56.0% to Ps 1,423.4 million in
1999 from Ps 3,233.5 million in 1998. This decrease was a result of the
decrease in amortization of negative goodwill that in addition to the increase
in interest expense, the decrease in interest income, the decrease in gain
from monetary position and the increase in the provisions for employee profit
sharing and income and asset taxes net of tax loss carry forwards were larger
than the increase in operating income and the increase in foreign exchange
gain.
Minority Interest
Minority interest increased to Ps 454.0 million in 1999 from Ps 33.5 million
in 1998. This increase resulted from substantially higher net income of GID
for 1999 as compared to 1998.
Net Income
Net income decreased 69.7% to Ps 969.5 million in 1999 from Ps 3,199.9
million in 1998. This decrease is explained by the same reasons that explain
the decrease in net income before minority interest and the increase in
minority interest in 1999 as compared to 1998.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have historically consisted of net cash
generated by our operating activities, corporate borrowings under working
capital facilities, issuances of debt and equity securities and equity
contributions. Our management believes the funding available to it from these
and other sources will be sufficient to satisfy our working capital and debt
service requirements for the foreseeable future.
At March 31, 2001, we had cash and cash equivalents totaling Ps 488.9
million. We invest our cash balances primarily in short-term Peso-denominated
and in U.S. Dollar instruments issued by major Mexican banks.
Net resources generated from operating activities were Ps 1,263.2 million in
2000 and Ps 96.3 million for the three months ended March 31, 2001. We had a
decrease in inventories of Ps 111.6 million because our shipments were higher
than our production during the period, and a decrease in accounts receivable
of Ps 134.4 million because the rate of collections was higher than our sales
during the period. We had an increase in current assets of Ps 46.6 million and
decrease in accounts payable and accrued expenses of Ps 356.1 million. The
decrease in accounts payable and accrued expenses was mainly due to the
payment of Ps 243.5 million to
60
suppliers of raw materials and spare parts, as well as the interest payment on
the GID notes in February, which interest payments are made in February and
August of each year.
Net resources used in investing activities were Ps 3,074.3 million in 2000,
and Ps 331.3 million for the three months ended March 31, 2001, respectively.
For the year ended December 31, 2000 our investing activities were
attributable to capital expenditures and cluster rules expenditures of Ps
1,119.4 million and to the acquisition by us of our 59% interest in GID of Ps
1,954.9 million. For the three months ended March 31, 2001, our investing
activities were primarily attributable to our operating efficiencies projects
described in "--Capital Expenditures" below.
Net resources generated in financing activities were Ps 1,695.9 million in
2000 compared to net resources used by financing activities of Ps (11.5
million) for the three months ended March 31, 2001. For the year ended
December 31, 2000, the resources we generated in financing activities were
primarily used for the payment of capital of Ps 1,954.9 million used in
acquiring 59% of the ownership in GID.
Our interest expense has increased primarily due to an increase in our long-
term debt incurred to fund acquisitions. The overall interest rates on our
indebtedness were 11.9% in 1999, 11.9% in 2000 and 12.07% during the first
three months of 2001. In recent years, we have attempted to increase the
stability of our balance sheet by lengthening the maturity of our debt
obligations, in keeping with the long useful life of most of our fixed assets.
Because a large proportion of our sales are priced in U.S. Dollars, or
priced in a manner linked to the value of the U.S. Dollar, we generally do not
hedge our exposure to movement in foreign currency.
Indebtedness
At March 31, 2001 our total debt was Ps 7,625.5 million (US$803.3 million),
consisting of Ps 246.5 million (US$26.0 million) in short-term debt, including
the current portion of long term-debt and Ps 7,379.1 million (US$777.3
million) in long-term debt. As of March 31, 2001 after giving pro forma effect
to the exchange offer (assuming all GID notes are tendered) and the prepayment
of US$27.2 million of indebtedness in May 2001, our subsidiaries had Ps
3,284.7 million (US$346.0 million) of indebtedness, excluding intercompany
indebtedness.
The following table sets forth the maturity profile of our debt, including
the GID notes, as of March 31, 2001:
2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL
----- ----- ------- ------- ----- ------- ----- ----- ---- -------
Ps million.. 252.5 752.5 2,957.2 1,215.1 276.2 1,838.9 129.1 129.1 75.0 7,625.6
2001 2002 2003 2004 2005 2006 2007 2008 2009 TOTAL
----- ----- ------- ------- ----- ------- ----- ----- ---- -------
US$
million.... 26.6 79.1 311.5 128.0 29.1 193.7 13.6 13.6 7.9 803.3
Bank Debt
At March 31, 2001, we had Ps 3,139.1 million in bank debt.
Our subsidiary, GID, has Ps 892.4 million (US$94.0 million) of indebtedness
owed to Banamex which matures in 2005. The Banamex loans have interest rates
of LIBOR + 2.8%. As of March 31, 2001 GID had a Ps 398.7 million (US$42.0
million) loan from The Chase Manhattan Bank which matures in 2002 and that has
an interest rate of LIBOR + 1.5%. In addition, GID has bank loans with
California Commerce Bank of Ps 284.8 million (US$30.0 million) which mature in
2002, 2003 and 2004 and have average interest rates of LIBOR + 3.25%.
Our subsidiary, Durango Paper Company has Ps 489.9 million (US$51.6 million)
of indebtedness to Bank of America at March 31, 2001, as part of a US$36.6
million revolving and US$15 million term facility. This
61
facility matures in January 2004 and has an interest rate of LIBOR + 3.5%. The
Bank of America loan is secured by a pledge of substantially all of the
physical assets of the Durango Paper Company. In May 2001, we received US$27.2
million in net proceeds from the sale of two converting facilities of Durango
Paper Company which were used to prepay part of the Bank of America loan. In
the third quarter of 2001, we expect to generate an additional US$17.0 million
in proceeds from the sale of other non-strategic assets at Durango Paper
Company that will be used to prepay debt.
As of March 31, 2001 our subsidiary Pipsamex had two bank loans with
Bancomext in a principal aggregate amount of Ps 905.7 million (US$95.4
million) and with interest rates for both bank loans of LIBOR + 6%. Principal
on these loans are payable in installments starting in 2002. These loans
mature in 2009 and are secured by a first priority security interest in the
fixed assets of Pipsamex. In addition, Pipsamex had a Ps 28.4 million (US$3.0
million) loan with Bancomext and a Ps 28.7 million (US$3.01 million) loan with
Banca Mifel S.A.
Capital Expenditures
We have implemented a capital investment program to help our overall
operations and have implemented a series of measures to improve efficiency and
to increase capacity at our paper mills. In addition, we have had capital
expenditures to bring our plants into proper compliance with environmental
regulations and the latest technology.
The following table sets forth our capital expenditures for the periods
indicated and sets forth our capital expenditures and capital commitments for
environmental matters:
Three
Months
Ended
Year Ended December 31, March 31,
Year Ended December 31,
-------------------------------------------
-------------- -------------------------------
2001 2002
1998 1999 2000 2001
(Estimated) (Estimated)
-------------------------------------------
-------------- -------------- --------------
Capital Expenditures
(other than
environmental)......... US$ 95.6 US$15.9 US$ 63.1
US$23.3 US$36.0 US$38.0
Environmental........... 4.5 2.5 41.6
-- 2.0 2.0
------------- ------------- ---------------
-------------- -------------- --------------
Total................... US$100.1 US$18.4 US$104.7
US$23.3 US$38.0 US$40.0
============= ============= ===============
============== ============== ==============
Three
Months
Ended
Year Ended December 31, March 31,
Year Ended December 31,
-------------------------------------------
-------------- -------------------------------
2001 2002
1998 1999 2000 2001
(Estimated) (Estimated)
-------------------------------------------
-------------- -------------- --------------
(in millions of constant Pesos restated at (in
millions of constant Pesos restated at
December 31, 2000)
March 31, 2001)
Capital Expenditures
(other than
environmental)......... Ps 919.2 Ps 152.5 Ps 606.1 Ps
220.8 Ps 341.8 Ps 360.7
Environmental........... 43.2 24.2 400.2
-- 38.0 38.0
------------- ------------- ---------------
-------------- -------------- --------------
Total................... Ps 962.4 Ps 176.7 Ps 1,006.3 Ps
220.8 Ps 379.7 Ps 398.7
============= ============= ===============
============== ============== ==============
In 1998, our capital expenditures related primarily to the construction of a
pulp mill at GID (US$32.7 million), upgrades at the Titan packaging box plants
(US$12.4 million), upgrades at our packaging plants at McKinley to increase
capacity (US$11.9 million) and upgrades at our molded pulp packaging plants to
increase capacity (US$10.9 million).
In 1999, our capital expenditures related primarily to upgrades at the Titan
packaging box plants (US$7.9 million) and upgrades at our papermills (US$1.4
million) and in our particleboard plants (US$1.1 million).
In 2000, our capital expenditures related primarily to the environmental
"cluster rules" compliance (US$33.8 million). For a description of the
"cluster rules", see "Business--Environmental Matters." In addition,
62
we made an investment in the de-inking plant for our newsprint business
(US$18.8 million), upgraded our Centauro and Atenquique paper mills (US$13.8
million), acquired a packaging box plant (US$8.6 million) and made an energy
power upgrade at Durango Paper Company (US$5.0 million).
In complying with Mexican environmental regulations, we have capital
expenditure commitments in 2005 of US$8.5 million.
As of March 31, 2001, we have spent US$2.7 million on the acquisition of a
packaging box plant, US$2.9 million in de-inking technology for our newsprint
business, and US$5.5 million for upgrades at our Centauro and Atenquique paper
mills and acquire the Titan packaging box plants (US$8.3 million). We
anticipate that for the remainder of 2001, our capital expenditures will
concentrate on further upgrades of our paper mills and our packaging box
plants.
Related to our capital expenditures and as part of improving operating
efficiencies at Durango Paper Company, our divestiture program to sell three
converting facilities and a short line railroad owned by Durango Paper Company
continued in 2001. During May 2001, we received net proceeds from the sale of
our converting division--Sky and Eastman--facilities in the United States in
the amount of US$27.2 million. We used these proceeds to reduce the Bank of
America loan to Durango Paper Company.
In 2002, we will continue to concentrate on capacity expansion in paper and
at our converting plants, and to upgrade technology, particularly in
newsprint. We expect to finance our capital expenditure plan with internally
generated cash revenues and some supplier financing. No assurance can be given
that we will be able to meet our capital expenditure budget.
In terms of acquisitions, we have been involved in two major acquisitions
since 1998. The amount of the acquisitions have been Ps 100.9 million
(US$105.0 million) for Grupo Pipsamex and Ps 1,152.2 million (US$119.9
million) for Durango Paper Company.
Differences between Mexican GAAP and U.S. GAAP
Our combined and consolidated financial statements are prepared in
accordance with Mexican GAAP, which differ in respects from U.S. GAAP. The
principal differences between Mexican GAAP and U.S. GAAP as they relate to us
are negative goodwill, deferred income tax, employees' statutory profit
sharing, and effects fixed asset restatements. Each of these differences
affects both net income and stockholders' equity. Net (loss) income under U.S.
GAAP was Ps (117.7) million, Ps 1,299.8 million and Ps 14.5 million for the
years ended December 31, 1998, 1999 and 2000, respectively. See Note 21 to our
combined and consolidated financial statements for a further discussion of the
adjustments under U.S. GAAP.
Mexican GAAP financial statements recognize the effects of inflation,
whereas financial statements prepared under U.S. GAAP are presented on a
historical cost basis. We are not required to reverse many of the Mexican
inflation accounting adjustments when reconciling Mexican GAAP to U.S. GAAP,
as these adjustments provide a means of measuring the effects of price-level
changes in the inflationary Mexican economy. Accordingly, these inflation-
adjusted figures are considered a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purpose.
New Accounting Pronouncements under Mexican GAAP. Effective January 1, 2000,
we adopted the provisions of the revised Bulletin D-4, "Accounting Treatment
of Income Tax, Asset Tax and Employees Profit Sharing." The new Bulletin D-4
changes the accounting treatment from the partial liability method to the full
asset and liability method, requiring the recognition of the deferred tax
effects for the temporary differences between accounting and tax values of
assets and liabilities. In accordance with the new Bulletin D-4, the net
cumulative effect required the recognition of a net liability for deferred
income tax and employees' statutory profit sharing of approximately Ps 446.3
million and a charge to stockholder's equity in the same amount.
63
In August 2000, the Mexican Institute of Public Accountants ("MIPA") issued
Bulletin B-4, "Comprehensive Income," to become effective January 1, 2001.
This Bulletin sets forth new guidelines for reporting and disclosing
comprehensive income and its components. Based on this Bulletin, comprehensive
income will include net income of the year and other items which, in
accordance with other bulletins, are recorded directly in stockholders'
equity. They are not contributions, reductions, or distributions of capital.
Effective January 1, 2001, Bulletin C-2, "Financial Instruments", issued by
MIPA gives new rules for recording those instruments in the accounting. It
requires recording assets or liabilities in the balance sheet, valued at their
market value. In our opinion, the most significant effect derived from
adopting this pronouncement is concerned with recording the "Equity Swap
Share" contracts in the balance sheet, as described in Note 11 to the
consolidated financial statements.
New Accounting Pronouncements under U.S. GAAP. During June 1999, the
Financial Accounting Standards Board issued SFAS No. 137, "Deferral of the
Effective Date of SFAS No. 133," which defers the effective date of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," to fiscal
years beginning after June 15, 2000. SFAS 133 establishes a new model for the
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. Upon SFAS 133's initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS 133. Management does not believe
that the adoption of this statement will significantly affect the Company's
financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140 "Accounting for transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This Statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. The Company management does not expect the adoption of
this statement to have a material import on financial statements.
In December 1999, the SEC issued staff accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition in Financial Statement" providing guidance on the
recognition, presentation and disclosure of revenue in financial statements
consistent with the provisions of SAB 101 for all periods presented. There was
no significant effect with respect to the implementation of SAB 101.
Quantitative and Qualitative Disclosure about Market Risk
We periodically review our exposure to risks arising from fluctuations in
interest rates and foreign exchange and determine at the senior management
level how to manage these risks. We do not have a derivatives trading
portfolio. We have not entered into market risk sensitive instruments for
speculative purposes. See Note 10 to our audited combined and consolidated
financial statements.
Interest Rate Risk
We face primary market risk exposure mostly due to interest rate risk. Of
our long-term interest-bearing debt at December 31, 2000, 65.2% was fixed rate
and 34.8% was variable rate. Substantially all of the long-term debt is
denominated in U.S. Dollars. As a result, depreciation of the Peso will result
in increases in our interest expense in Peso terms. Variable rate long-term
debt denominated in U.S. Dollars bear interest at rates tied to the London
interbank offered rate, or "LIBOR", the rate that banks in the London
interbank market offer for U.S. Dollar deposits of varying maturities. We have
entered into a derivatives contract for the purpose of hedging interest rate
risk on this long-term debt although at December 31, 2000 we have no open
contracts.
64
The following table summarizes our debt obligations, which include capital
market bonds, bank loans and leasings, and derivative instruments held by us
at December 31, 2000. The table presents payment obligations in thousands of
Pesos by maturity date and the related weighted-average interest rates. U.S.
Dollar denominated liabilities and notional amounts have been converted to
Pesos based on the exchange rate at December 31, 2000, which was US$1.00 =Ps
9.6098.
Fair
2001 2002 2003 2004 2005 Thereafter
Total Value
---- ---- ---- ---- ---- ----------
----- -----
Liabilities (Millions of
Pesos)
Long-Term Debt
Fixed Rate:
$-denominated.......... -- 222.7 2,467.5 300.5 32.5 1,441.5
4,464.7 4,376.9
Weighted average
interest rate......... -- 12.59% 12.69% 12.17% 12.58% 12.62%
Variable Rate:
$-denominated.......... -- 466.5 365.6 842.2 247.1 469.5
2,390.9 2,664.3
Weighted average
interest rate......... -- 11.57% 11.85% 11.71% 10.89% 13.97%
Short-Term Debt
Fixed Rate:
$-denominated.......... -- -- -- -- -- --
--
Weighted average
interest rate......... -- -- -- -- --
--
Variable Rate:
$-denominated.......... 778.6 -- -- -- -- --
778.6 778.6
Weighted average
interest rate......... 11.50% -- -- -- -- --
11.50%
Total Debt (Millions of
Pesos)................. 778.6 689.2 2,833.1 1,142.7 279.6 1,911.0
7,634.2
Foreign Currency Exchange Rate Risk
Since substantially all of our long-term interest-bearing debt is
denominated in U.S. Dollars, the interest expense varies with exchange rate
movements between the Peso and the U.S. Dollar. We have not entered into any
derivative contracts to limit the exposure to exchange rate fluctuations.
Although prices for our products in Mexico are quoted in Pesos, prices are
linked to U.S. Dollars. We believe that this link mitigates in part the effect
of exchange rate fluctuations between the U.S. Dollar and the Peso.
The table set forth above summarizes our debt obligations which are
sensitive to foreign currency exchange rates at December 31, 2000. The table
presents principal payment obligations in thousands of Pesos by maturity date
for U.S. Dollar-denominated debt.
Equity Derivative Contract
During 1997, GID entered into an equity share swap transaction relating to
its American Depositary Shares (ADS) with a major U.S. bank at an average
price of $11.79 per ADS. GID pays a rate of LIBOR plus 2% semiannually on the
swap and recognizes gains or losses to the extent that the gain or loss in ADS
price is above or below the initial purchase price. As a result of the drop in
the per share price of GID's ADSs, during 2000, GID had a book loss of Ps 75.5
million on the equity swap. At May 31, 2001, GID had recognized a loss of
Ps 11.7 million due to the drop in the per share price of GID's ADSs, from
US$6.06 per ADS at December 31, 1999 to US$5.00 per ADS at May 31, 2001.
At December 31, 2000, the swap agreement had a notional amount of Ps 127
million, a weighted average price paid of US$11.79 per ADS and a weighted
average price received of US$11.875 per ADS.
65
INDUSTRY OVERVIEW
Paper and Packaging Industry Overview
Although data for 2000 will not be available until August, in 1999 global
paper and paperboard consumption totalled 316 million metric tons. Of this,
108 million metric tons was consumed in North America, with 95 million in the
U.S. and 5 million in Mexico. In that year, global consumption rose by 24.6%,
with U.S. and Mexican growth rates of 4.2% and 9.2%, respectively. These two
markets were the largest and 13th largest in the world. Moreover, the growth
rate for Mexico was exceeded only by Korea. Mexico and Korea are among the 15
largest paper and paperboard consuming nations worldwide. In fact, growth
rates for Mexico in recent years have been exceeded only by Korea, China and
Indonesia.
Within the industry, packaging paper and paperboard is the largest sector
with 162 million metric tons consumed in 1999 (51% of total global
consumption). This tonnage principally represents container board, which is
converted into corrugated boxes. This industry is relatively fragmented, as
the top 10 largest global producers account for less than 30% of supply. In
addition, since corrugated boxes are used to package consumer durable and non-
durable products, pricing fluctuates in tandem with changes in global economic
demand. Hence, U.S. and Mexican producers are challenged this year as
corrugated box shipments are 5.5% lower through May in the U.S. Pricing,
however, has been relatively flat. Most producers of containerboard are
forward-integrated, selling at least half of their production to their own
corrugated box plants.
The second largest market is communications paper, which includes newsprint
and coated and uncoated fine papers. Consumption of these grades totalled 133
million metric tons in 1999 (42% of total global paper and paperboard
consumption). Global consumption growth of these grades have been roughly 5%
to 6% per annum for the last decade. Growth in newsprint consumption has been
slower than growth in coated paper consumption. However, recent mergers of
newsprint companies have given producers market leverage over publishers that
is unrivalled in any other paper market and has made newsprint the most
profitable and attractive paper grade. Tissue and other sanitary paper, the
third major component of the paper and paperboard industry, represented about
20 million metric tons of consumption in 1999 (6% of total global
consumption). Tissue products are usually consumer brands and tend to behave
differently than other commodity paper and paperboard products due to their
stronger correlation to consumer buying power and population growth. We do not
manufacture tissue and other sanitary paper products.
66
Mexican Paper Industry
Volume. Based on installed capacity, Mexico's paper industry is the second
largest in Latin America. According to the 2001 preliminary annual report of
the Mexican National Chamber for the Pulp and Paper Industry, the total size
of Mexico's paper industry in 2000, based on "apparent demand", was 5.8
million short tons including temporary imports. Mexican production is
distributed among 64 plants. Apparent demand consists of domestic production,
as reported by manufacturers, plus imports, minus exports. Mexico's apparent
demand in 1999 was broken down as follows:
[CHART]
Sanitary Paper 13%
Specialty Paper 6%
Printing and Writing Paper 27%
Packaging Paper 54%
Apparent demand is a concept similar to consumption, but does not reflect
increases and reductions in inventories by customers. Apparent demand may not
match consumption in any given year; however, over a period of years, the two
measures should tend to approximate one another.
Over the past decade, levels of apparent demand for paper have fluctuated
according to changes in gross domestic product. Thus, as gross domestic
product increases, apparent demand also increases. Changes in Mexican paper
demand have historically amounted to 1-2 times the change in gross domestic
product for a given year.
Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons)
Aggregate Apparent % %
Year Production Imports Exports Demand Change GDP
Change
---- ---------- ------- ------- -------- ------
----------
1994..................... 3,152 1,169 148 4,172 11.0 % 4.5 %
1995..................... 3,358 710 426 3,641 (12.7)% (6.2)%
1996..................... 3,548 836 263 4,121 13.2 % 5.1 %
1997..................... 3,848 1,127 209 4,766 15.6 % 6.8 %
1998..................... 4,044 1,267 253 5,057 6.1 % 4.8 %
1999..................... 4,177 1,540 247 5,471 8.2 % 3.7 %
2000..................... 4,296 1,785 227 5,854 7.0 % 6.9 %
--------
Source: Preliminary 2001 Annual Report, Camara Nacional de las Industrias de
la Celulosa y del Papel
67
The decline of Mexican apparent demand for the paper industry from 1994 to
1995 was a product of macro-economic events, including, in particular, the
devaluation of the Peso, which caused an overall reduction in demand and
Mexican gross domestic product. From 1996 to 2000, apparent demand for the
paper industry has outpaced gross domestic product. The tables below show the
resulting individual levels of demand for packaging, newsprint and bond paper
from 1994 to 2000.
The dominant portion of the total market for paper products is the market
for packaging paper. The table below shows Mexican apparent demand from 1994
to 2000 for packaging paper in short tons. In 2000, packaging paper accounted
for 57.4% of Mexico's total paper production and 54.1% of apparent demand for
paper.
Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons)
Aggregate Apparent %
Year Production Imports Exports Demand Change
---- ---------- ------- ------- -------- ------
1994................................ 1,893 273 112 2,055 6.0 %
1995................................ 1,953 235 250 1,938 (5.7)%
1996................................ 2,083 346 131 2,298 18.6 %
1997................................ 2,154 494 72 2,576 12.1 %
1998................................ 2,307 583 65 2,825 9.7 %
1999................................ 2,389 691 91 2,989 5.8 %
2000................................ 2,464 790 67 3,187 6.6 %
--------
Source: Preliminary 2001 Annual Report, Camara Nacional de las Industrias de
la Celulosa y del Papel
Apparent demand for packaging paper declined between 1994 and 1995, but by
1996, had increased by 18.6%. This growth reflected the rebound of the economy
and increased demand in the U.S. border region due to growth in operations of
maquiladoras. Apparent demand for packaging paper increased by 12.1% in 1997,
9.7% in 1998, 5.8% in 1999 and 6.6% in 2000, reflecting continued economic
growth throughout North America.
The tables below show Mexican apparent demand in short tons from 1994 to
2000 for newsprint and bond paper which make up approximately 27.5% of total
apparent demand for paper in Mexico.
Mexican Apparent Demand for Newsprint
(all figures in thousands of short tons)
Aggregate Apparent %
Year Production Imports Exports Demand Change
---- ---------- ------- ------- -------- ------
1994................................ 240 252 0 492 12.5 %
1995................................ 292 89 62 319 (35.2)%
1996................................ 297 67 39 325 1.9 %
1997................................ 315 119 34 400 23.1 %
1998................................ 343 117 70 390 (2.5)%
1999................................ 272 190 33 429 10.0 %
2000................................ 281 193 28 446 4.0 %
--------
Source: Preliminary 2001 Annual Report, Camara Nacional de las Industrias de
la Celulosa y del Papel
Apparent demand for newsprint represents 28.3% of the total apparent demand
for printing and writing paper. Demand for newsprint declined sharply between
1994 and 1995. The slight increase of 1.9% in 1996 reflected the beginning of
a rebound in the overall Mexican economy, which continued with a 23% increase
in 1997. From 1997 to 2000, levels of apparent demand for newsprint remained
relatively constant.
68
Mexican Apparent Demand for Printing and Writing Paper
(all figures in thousands of short tons)
Aggregate Apparent %
Year Production Imports Exports Demand Change
---- ---------- ------- ------- -------- -------
1994................................ 480 394 1 873 16.5 %
1995................................ 561 186 55 691 (20.8)%
1996................................ 594 221 20 795 15.0 %
1997................................ 694 291 17 969 21.8 %
1998................................ 683 295 27 951 (1.8)%
1999................................ 770 327 27 1,070 12.5 %
2000................................ 759 393 19 1,132 5.7 %
--------
Source: Preliminary 2001 Annual Report, Camara Nacional de las Industrias de
la Celulosa y del Papel
Apparent demand for printing and writing paper is influenced by economic
growth. Demand for printing and writing paper declined sharply between 1994
and 1995. The increase in apparent demand of 15.0% in 1996 and 21.8% in 1997
reflected economic growth in Mexico as well as lower paper prices throughout
North America. In 1998, apparent demand remained relatively constant, but in
1999 and 2000, the printing and writing paper market experienced a 12.5% and a
5.7% increase in apparent demand, respectively, due to continued low prices
and growth in the Mexican economy.
Pricing. In the past three years, prices for Mexican paper and packaging
products have been influenced by a combination of factors, including:
. growth of the Mexican economy and 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-U.S. Dollar exchange rate.
Containerboard and industrial paper are commodities priced in relation to
international paper, recycled fiber and pulp prices. Because the paper
industry is highly capital intensive, prices may also be affected by industry
capacity utilization rates and by additions of new capacity.
The prices of corrugated containers and multi-wall sacks and bags in Mexico
are affected by prevailing prices of containerboard and industrial paper, as
well as the following factors:
. resistance specifications;
. quality control;
. customer service;
. printing and graphics specifications;
. volume of production runs; and
. proximity to customers and industrial centers (due to the transportation
cost of converted products).
Prices for newsprint also tend to follow trends in international markets,
and are affected by factors such as supply and demand. Prevailing
international prices for paper and packaging, as well as U.S. price levels,
declined sharply during late 1995 and remained weak until the first half of
1999. Since June 1999, international prices for paper products have recovered,
including U.S. price levels, the benefits of which have begun to be felt in
Mexico.
69
In 2000, international prices for paper products continued to improve,
although since the first quarter of 2001, prices have remained steady.
Over the last three years, Mexican corrugated container prices have tended
to be approximately 15% lower than U.S. prices, while prices for Mexican
containerboard and industrial paper have tended to be approximately 10-15%
lower than U.S. prices. We believe that these price differentials provide some
protection against competition from imports of these products. However, there
can be no assurance given as to any future price levels for our products or
future price differentials, if any, between Mexican and U.S. paper and
packaging products.
Under NAFTA, tariffs and other barriers will gradually disappear. Since
January 1, 1999, the tariff on news-print has been 0%. Mexico maintained a
protective tariff on corrugated containers of 5% through the end of 2000,
which has been eliminated for 2001. Multi-wall sacks and bags are protected by
a 3% tariff in 2000. This tariff is scheduled to decline 1% per year from 2000
to 0% in 2003. All tariffs are scheduled to be eliminated by the year 2003. As
a result, the elimination of tariffs has had the effect of shortening the lag
time between price changes in the U.S. and Mexican packaging and paper
industries.
For a description of the impact of prices on our results of operations, see
"Operating and Financial Review and Prospects."
North American Paper and Packaging Industry
Since mid-1995, the North American paper and packaging industry has
experienced a prolonged down cycle characterized by continued price pressures,
excess capacity and the inability of many industry participants to earn
satisfactory returns on capital. To maintain reasonable capacity utilization,
U.S. paper producers generally continued to maintain high export levels in
1999 and in 2000, including exports to Mexico. These exports have increased
supply in the Mexican market and kept pressure on Mexican paper prices during
the year.
More recently, the industry has begun to recover. Industry participants have
been shutting down non-competitive facilities, and an industry consolidation
seems to be underway, evidenced by the recently-announced business
combinations of Georgia Pacific Corporation with Fort James, Jefferson Smurfit
Group with Stone Container Corporation, Weyerhauser Company with MacMillan-
Bloedel Limited and International Paper with Champion International. In 2000
and 2001, the prices have not decreased or increased significantly.
Historically, price changes in Mexico have tended to lag price movements in
the U.S. by a few months.
70
In the following three figures, we show the evolution of U.S. consumption
and pricing for containerboard, corrugated boxes and newsprint from 1982 to
2000.
U.S. Containerboard Consumption and Price Schedule
[GRAPH]
Consumption Price per ton Price per ton
in 000's of Liner. of corr.
short tons in US$ Med. in US$
1982 17,344 270 240
1983 19,079 270 280
1984 20,498 320 310
1985 20,193 275 340
1986 21,796 300 300
1987 22,823 350 360
1988 23,496 400 400
1989 23,801 405 360
1990 24,431 380 320
1991 24,622 340 310
1992 25,804 345 310
1993 27,144 305 295
1994 28,822 380 360
1995 28,046 510 495
1996 29,819 350 305
1997 31,299 315 275
1998 31,290 360 325
1999 31,351 380 340
2000 29,828 450 410
Sources: American Paper and Forest Association, Fibre Box Association
and Bank of America
U.S. Corrugated and Solid Finer Box Shipments Volume and Prices
[GRAPH]
Corrugated shipments Price Per
in billion sq. ft. 000 Ft. in US$
1982 207 40
1983 222 39
1984 234 43
1985 234 43
1986 247 41
1987 258 47
1988 266 51
1989 269 52
1990 273 50
1991 277 48
1992 289 49
1993 306 47
1994 325 50
1995 320 63
1996 320 55
1997 329 49
1998 334 51
1999 339 54
2000 345 61
Source: Fibre Box Association and Bank of America.
71
U.S. Newsprint Consumption and Price Schedule
[GRAPH]
Consumption in Price per
000's metric Ton in US$
1982 10,221 496
1983 10,698 484
1984 11,873 518
1985 12,293 535
1986 12,615 517
1987 13,109 555
1988 12,817 604
1989 12,744 565
1990 13,001 553
1991 12,084 530
1992 12,187 424
1993 12,507 449
1994 12,671 470
1995 12,330 675
1996 11,881 610
1997 12,041 535
1998 12,318 575
1999 12,596 500
2000 12,796 550
Source: American Forest and Paper Association, Pulp and Paper Products Council
capacity and production, and Bank of America.
72
BUSINESS
General
We are a vertically integrated producer with an extensive distribution
network that links our strategically located facilities and customers. These
factors, as well as our easy access to raw materials as a result of being
Mexico's only producer of unbleached virgin kraft pulp and largest paper
recycler, allow us to be one of the industry's lowest cost producers. In 2000,
our total sales volume was 2 million short tons.
We produce and supply paper to our converting facilities which in turn
manufacture packaging products. Our products include:
. paper: containerboard (linerboard, corrugating medium and multi-wall
paper), kraft paper, newsprint, uncoated free sheet and coated bleached
board;
. packaging: corrugated containers, multi-wall sacks and bags, and molded
pulp products; and
. other business: such as plywood and particleboard.
In Mexico, we are the sole domestic producer of newsprint with a 70% market
share in 2000 and we are the leading producer of corrugated containers with an
estimated 40% market share, based on information published by the National
Chamber for the Pulp and Paper Industry.
We are a rapidly growing paper company supplying the maquiladora sector, as
well as the traditional Mexican export sector, both of which have grown at a
19% compounded annual growth rate since NAFTA took effect on January 1, 1994.
Our sales have grown at a 24.4% compound annual growth rate. We believe we are
the leading domestic producer of corrugated containers used by the traditional
Mexican export sector with an estimated 70% market share in 2000, which
sector's needs are substantially supplied by Mexican producers. We also
believe we are the leading producer of corrugated containers for the
maquiladora sector with an estimated 80% market share of domestic production
in 2000, which accounted for an estimated 30% of this sector's total packaging
requirements in 2000.
Our customers in Mexico and the United States include many of the largest
industrial, construction, consumer, agricultural, and media companies such as
Vitro, Nestle, Apasco, Cemex, Sony, Sara Lee, Mattel, Kimberly-Clark, Pizza
Hut, Paccess-Nike, Ampad, Quik-crete Concrete, and Chiquita. During 2000, none
of our customers accounted for a material amount of our revenues.
Our revenues were Ps 11,603.9 million in 2000 (US$1,207.5) and Ps 2,587.7
million (US$272.6) for three months ended March 31, 2001. For the three months
ended March 31, 2001, approximately 44% of our sales were made in U.S.
Dollars, with the balance primarily U.S. Dollar linked. Our adjusted EBITDA
was Ps 1,832.5 million in 2000 and Ps 399.9 million for the three months ended
March 31, 2001.
73
The following pie charts break down our revenue and adjusted EBITDA by
product:
[CHART] [CHART]
2000 Revenues 2000 Adjusted EBITDA
Packaging 46% Packaging 43%
Paper 50% Paper 53%
Other 4% Other 4%
Our Corporate Structure
We are the holding company for Grupo Industrial Durango, S.A. de C.V., Grupo
Pipsamex, S.A. de C.V., and Durango Paper Company.
We sell our products to a broad range of Mexican and United States
manufacturers of consumable and durable goods, who in turn serve the Mexican
and United States markets, the maquiladora sector and Mexico's major
exporters. In Mexico, we produce corrugated containers, containerboard and
kraft paper, molded pulp egg cartons and forest products, multi-wall sacks and
bags and newsprint. In the United States, we produce coated bleached board,
linerboard, bleached kraft paper, computer paper, kraft paper, and corrugated
containers. Our U.S. operations allow us to expand our geographic presence and
market reach to continue to increase our strategic position within the NAFTA
region. Our U.S. operations also fill a demand for higher quality products to
be supplied into Mexico.
We are comprised of various operating divisions which are distinguished by
product type as follows:
. paper: Pamex
Grupo Pipsamex
McKinley Paper Company
Durango Paper Company
. packaging: Titan
McKinley Container
Durango Georgia Converting Corporation
. other business: Ponderosa
Our operating divisions interact with each other to comprise a vertically
integrated unit. This integration enables us to limit purchases from external
suppliers and reduce costs. Our operating divisions are:
. Pamex. Our Pamex division is the largest containerboard manufacturer in
Latin America. In 2000, approximately 86% of the 608,000 short tons of
linerboard, corrugating medium and unbleached kraft paper produced by
Pamex was used to supply our Titan division. The remainder of its
production was sold to third party manufacturers in Mexico and the
United States.
. Titan. Our Titan division, including the McKinley Container operations,
is one of the largest integrated paper-based packaging manufacturers in
Latin America. Titan's 2000 production of 690,000 short tons consisted
of corrugated containers, multi-wall sacks and bags, and molded pulp egg
cartons. Pamex supplies approximately 96% of Titan's domestic
containerboard requirements, with the balance, higher grade
containerboard, supplied primarily by McKinley Paper Company and Durango
Paper Company. Waste material generated in production of corrugated
containers is sold back to Pamex for recycling and to produce pulp.
Titan's sales are primarily to Mexico and the maquiladora sector.
74
. Grupo Pipsamex. Grupo Pipsamex is Mexico's sole domestic newsprint
manufacturer and one of Mexico's leading bond paper manufacturers. In
2000, Grupo Pipsamex produced 281,000 short tons of newsprint and
103,000 short tons of uncoated free sheet. Grupo Pipsamex's sales are
predominantly to the Mexican market with the balance primarily sold to
the United States.
. Ponderosa. Ponderosa, Mexico's largest forest-based building products
manufacturer, markets its products throughout the NAFTA region. In 2000,
Ponderosa produced 111,000 short tons of particleboard and 25,000 short
tons of plywood. In 2000, Ponderosa supplied 80% of Pamex's wood
requirements for the production of virgin pulp.
. McKinley Paper Company. McKinley Paper Company is a state-of-the-art
recycled linerboard manufacturer strategically located in the
southwestern United States to supply our packaging operations in the
United States and northern Mexico and to serve the growing maquiladora
region. McKinley Paper Company is a significant collector of old
corrugated container, or OCC, material, which is processed to create
recycled fiber. In 2000, approximately 85% of the paper needs of our
packaging operations in Dallas and Houston, TX were supplied by McKinley
Paper Company.
. Durango Paper Company. In December 1999, as part of our strategy of
expansion in the NAFTA region, we acquired the Durango Paper Company, a
fully integrated paper producer operating through three subsidiaries in
the southeastern United States. In addition to operating six wood yards,
Durango Paper Company produces bleached kraft paper and coated bleached
board, as well as a wide range of products on three paper machines.
Durango Paper Company also manufactures multi-wall bags, as well as
computer forms.
Our operating divisions interact with each other through inter-company sales
as follows. Ponderosa sells wood chips and pine logs to Pamex for the
production of virgin pulp. Pamex sells containerboard to Titan for the
production of corrugated boxes and multi-wall sacks. McKinley Paper Company
sells OCC and ONP to Pamex for the production of recycled fiber and sells
containerboard to Titan for the production of corrugated containers. Titan
sells its waste to Pamex for the production of recycled fiber. Durango Paper
Company sells bleached pulp to Grupo Pipsamex for the production of uncoated
free sheet. Grupo Pipsamex purchases paper tubes and corrugated containers
from Pamex and Titan, respectively.
Our Competitive Strengths
We believe our competitive strengths are:
. We are a vertically integrated low cost producer. As the largest forest
management company and largest wastepaper collection company in Mexico,
we are able to supply the majority of our raw material requirements,
including 85% of our containerboard requirements, which allows us to
substantially reduce raw material costs and to mitigate the impact of
volatile pulp and commodity paper prices. In addition, our technological
expertise has enabled us to increase yields of recycled fiber per ton of
waste paper, use more recycled paper and less virgin types of pulp, each
of which possesses different pricing cycles, to produce the same quality
of products. Finally, we have recently expanded our collection of
domestic OCC material in order to reduce our purchases of higher priced
imported OCC material.
. We have dominant market positions in the rapidly growing markets we
serve. We are the largest paper producer in Mexico, whose rate of
economic growth in 2001 is estimated to be approximately 5% according to
the Mexican government. We also expect demand for paper products to grow
by 1.5 times domestic GDP through 2005. In Mexico, we are the sole
domestic producer of newsprint and the leading producer of corrugated
containers used by the Mexican export sector. We are also the leading
domestic supplier of corrugated containers to factories within the
Mexican-U.S. border region, which
75
is where most of the maquiladoras are located and one of the most
rapidly growing economic regions in the Americas with a projected annual
growth rate of 15% per year for five years, according to the Ministry of
Commerce and Industrial Development (Secretaria de Comercio y Fomento
Industrial, or SECOFI).
. We have an experienced management team with a proven turnaround
record. Our senior management has an average of over 20 years of
experience in the integrated paper industry, the majority of which is
with us. We have grown our business from a small paper manufacturer with
sales of US$2.0 million in 1980 to one of the leading integrated paper
producers in the NAFTA region with sales of US$1,207.5 million in 2000.
Our historical growth has been achieved internally through the expansion
and increased efficiency of existing facilities and externally through
selective acquisitions of complementary, but underperforming companies.
Our management team has a successful track record of turning around
these acquired companies, which is described below in "Strategic
Acquisitions."
. Substantially all of our revenues are U.S. Dollar denominated or
linked. For the three months ended March 31, 2001, approximately 44% of
our sales were made in U.S. Dollars, with the balance primarily U.S.
Dollar linked. In addition, the high percentage of U.S. Dollar
denominated or linked revenues acts as a natural hedge for our debt
which is 100% U.S. Dollar denominated.
. Our strategically located facilities and customers are linked by our
extensive distribution network. Our production facilities are
strategically located in close proximity to our suppliers and
customers. In creating our vertically integrated manufacturing process,
we have generally located our raw material supply, processing and
production assets near major industrial centers around Mexico to reduce
transportation costs and delivery time of our products. Our individual
facilities and customers are linked by our extensive distribution
system, which consists of approximately 3,500 trailer trucks. Our
distribution network is highly efficient and the proximity of our
assets to major centers enables our truck fleet to haul freight in both
directions, thus lowering transportation costs. The close proximity of
our facilities to the maquiladora sector makes our products attractive
to customers due to their low shipping costs.
. We have a diverse product portfolio which mitigates the impact of our
industry's cyclicality. Our production, distribution and sale of
different paper grades and paper products gives us the flexibility to
mitigate the impact of cyclicality occurring in the market such that
when one of our products is in a downward cycle, we can shift
production, distribution and sales to focus on other products, assuming
sufficient market demand. For example, in the case of Grupo Pipsamex, we
have recently switched some production capacity from newsprint to bond
paper due to recent increases in bond paper demand and prices which have
outpaced increases in newsprint demand and prices.
Our Business Strategy
Our business strategy is to strengthen our position as the leading
integrated paper and packaging company in Latin America, as well as to
continue our growth as a leading integrated paper producer in the NAFTA
region. To implement our strategy, we expect to:
. Increase our cash flow through enhanced efficiency and shifts to higher
margin products. We intend to continue to improve the efficiency and
productivity of our operations by either upgrading or replacing our
existing machinery, which we believe will result in a reduction of
bottlenecks. Through the use of improved technology, we intend to
increase the yield of pulp that can be produced from OCC material and
old newsprint, or ONP, and increase the percentage of recycled pulp that
can be used in the production of our finished products while maintaining
our existing level of quality. We also intend to continue expanding our
collection of domestic OCC material to further reduce our reliance on
more expensive imported OCC material. We will continue to shift our
marketing efforts toward high margin products such as bleached board,
niche paper and specialty packaging.
76
. Strengthen our leadership position in regional markets and increase our
market share in the United States. By maintaining high capacity
utilization and continuing to offer competitively priced, high quality
paper and packaging products, accompanied by outstanding customer
service, we believe we will solidify our role as a dominant producer in
Mexico and the maquiladora sector. In addition, we have experienced a
large increase in our sales to the U.S. since the adoption of NAFTA. Our
aggregate sales to the maquiladora and traditional Mexican export
sectors have grown at a 24.4% compound annual rate since 1994. Our
recent cross-border acquisitions have illustrated our strategy of
leveraging the trade opportunities opened by the adoption of NAFTA, and
we expect the continuing integration of our Mexican and U.S. operations
to provide us with operating efficiencies as well. We continue to
increase our U.S. market share as a result of our acquisitions. Our U.S.
operations will also allow us to supply higher quality products demanded
in Mexico.
. Optimize our capital structure and pursue fiscally sound financial
activities. In addition to our ongoing practice of maximizing internally
generated cash flows, we are currently restructuring our outstanding
debt in an effort to create a more efficient capital structure. We
intend to continue to seek to lower our cost of capital to ensure the
greatest possible return on our strategic investments. We believe that a
low cost of capital will facilitate both internal and external growth in
a cost-effective manner in the future.
. Continue to expand our core businesses through internal and external
growth. We expect to continue to grow internally by selectively
expanding current production facilities and installing additional
equipment in order to reduce bottlenecks and increase capacity. We
intend to grow externally by continuing to pursue, on a selective basis,
strategic acquisitions of paper and packaging assets in Mexico and the
United States. The key characteristics of our acquisition candidates
include companies which have a combination of the following factors:
. underperforming assets which can be easily turned around and
acquired for a compelling price;
. maintain sustained profitability and growth after the turnaround;
. add additional and/or complementary production capabilities;
. increase our geographic presence and/or penetration of existing
markets; or
. have synergies with our current businesses and can become part of
our vertical integration.
Strategic Acquisitions
The table below lists our principal recent acquisitions:
Year
Principal Acquisitions Acquired Principal Products
---------------------- -------- ------------------
Durango Paper Company... 1999 Bleached kraft paper, coated bleached board,
multi-wall
bags and continuous forms
Corrugated container
facilities located
in Houston, TX, Dallas,
TX and Nogales, AZ..... 1998 Corrugated containers
Grupo Pipsamex.......... 1998 Newsprint and uncoated free sheet
McKinley Paper Company.. 1997 Containerboard paper, recycled fiber
collection
operations
We have a successful track record of turning around the companies we
acquire. The following case studies highlight the impact that we have been
able to make on our recent acquisitions.
77
In October 1997, GID acquired McKinley Paper Company for Ps 720.7 million
(US$75.0 million). Immediately following the acquisition, we introduced a
client-oriented sales strategy to increase sales, reduced our workforce to
improve efficiency, marketed higher margin products to increase profitability,
and invested in new capacity. As a result, we increased linerboard sales by
17% from 163,000 short tons in 1998 to 191,000 short tons in 2000. We raised
revenues 70.0% from Ps 697.1 million in 1998 to Ps 1,186.1 million in 2000.
Our adjusted EBITDA increased from a Ps 84.1 million loss in 1998 to a Ps
165.0 million gain in 2000.
In December 1998, we acquired Grupo Pipsamex from the Mexican government for
US$105.0 million. Subsequent to the acquisition, we increased imports of raw
materials in order to produce a more diversified mix of higher margin
products, improved efficiency resulting in reduced operating costs, and
reduced total personnel by 41%. As a result, since the acquisition, we
increased revenues by 3% from Ps 2,337.3 million in 1998 to Ps 2,415.8 million
in 1999 and by 6% from 1999 to Ps 2,570.9 million in 2000. We increased our
adjusted EBITDA from Ps 86.1 million in 1998 to Ps 387.9 million in 1999 and
decreased to Ps 284.5 in 2000.
Our Products
General
Our main product groups are:
. Paper--containerboard (linerboard and corrugating medium), kraft paper
(bleached and unbleached), newsprint, uncoated free sheet (bond,
envelope, book stock, miscellaneous free sheet), and coated bleached
board (solid bleached sulfite, folding boxboard, blister pack, double
coated bleached board)
. Packaging--corrugated containers, multi-wall sacks and bags, and molded
pulp products
. Other business--plywood and particleboard
Our total capacity by product, number of mills and plants, and actual
production and shipments for the periods indicated, is as follows:
Production (in thousands of short tons)
Current Annual
Installed December 31, March
31,
--------------------- -----------------------
-----------
Product Type Capacity Mills/Plants 1998 1999 2000 2000
2001
------------ -------- ------------ ------- ------- ------- -----
-----
Paper
Containerboard.......... 800.0 6 748.0 797.0 809.4 204.1
194.5
Newsprint(1)............ 297.0 2 -- 272.0 276.8 66.9
74.5
Uncoated free sheet(1).. 143.0 1 -- 90.0 106.0 25.5
23.8
Kraft paper(2).......... 200.0 1 -- -- 105.6 20.8
15.7
Coated bleached
board(2)............... 220.0 1 -- -- 273.6 72.6
54.2
------- --- ------- ------- ------- -----
-----
Total Paper........... 1,660.0 11(3) 748.0 1,159.0 1,571.5 390.0
362.7
Packaging
Corrugated containers... 712.0 26 553.0 568.0 599.3 151.4
142.4
Multi-wall sacks and
bags................... 138.0 8 54.5 52.8 99.8 25.4
24.5
Molded pulp products and
others................. 40.0 4 32.0 33.0 35.7 8.9
9.2
------- --- ------- ------- ------- -----
-----
Total Packaging....... 890.0 38 639.5 653.8 734.8 185.7
176.1
------- --- ------- ------- ------- -----
-----
Other business.......... 204.0 4 169.0 174.0 203.2 50.9
21.3
------- --- ------- ------- ------- -----
-----
Total Production...... 2,754.0 53 1,556.5 1,986.8 2,509.5 626.6
560.1
======= === ======= ======= ======= =====
=====
--------
(1) We did not produce any newsprint or uncoated free sheet prior to acquiring
Grupo Pipsamex in December 1998.
(2) We did not produce any kraft paper for the periods indicated or coated
bleached board prior to acquiring Durango Paper Company in December 1999.
(3) The same plant produces both kraft paper and coated bleached board.
78
Shipments (in thousands of short tons)
December 31, March 31,
----------------------- -----------
Product Type 1998 1999 2000 2000 2001
------------ ------- ------- ------- ----- -----
Paper:
Containerboard.............................. 276.6 270.0 262.9 70.4 58.5
Newsprint(1)................................ -- 276.6 280.8 63.3 64.1
Uncoated free sheet(1)...................... -- 91.5 103.4 23.5 22.8
Kraft paper(2).............................. -- -- 96.6 20.2 14.2
Coated Bleached Board(2).................... -- -- 249.2 70.7 55.8
------- ------- ------- ----- -----
Total Paper............................... 276.6 638.1 993.0 248.1 215.5
------- ------- ------- ----- -----
Packaging:
Corrugated containers....................... 542.2 567.5 594.5 149.7 140.5
Multi-wall sacks and bags................... 51.8 50.7 101.4 25.4 24.1
Molded pulp products and others............. 32.0 32.0 73.1 17.7 19.0
------- ------- ------- ----- -----
Total Packaging........................... 626.0 650.2 769.0 192.9 183.6
------- ------- ------- ----- -----
Other businesses............................ 162.0 173.0 158.4 38.7 15.1
------- ------- ------- ----- -----
Total Shipments........................... 1,064.6 1,461.3 1,920.4 479.6 414.2
======= ======= ======= ===== =====
--------
(1) We did not ship any newsprint or uncoated free sheet prior to acquiring
Grupo Pipsamex in December 1998.
(2) We did not ship any kraft paper for the periods indicated or coated
bleached board prior to acquiring Durango Paper Company in December 1999.
Paper Products
Below is a description of our paper products and their usage.
Product Type Product Description and Usage
------------ -----------------------------
Containerboard......... We produce linerboard and corrugating medium, white-
top and mottled white linerboard and paper, high-
performance linerboard, multi-wall paper and
extensible paper. Our products are used by corrugated
container manufacturers in the production of a wide
variety of corrugated containers.
Kraft paper............ We produce bleached and unbleached kraft paper. Our
products are used by paper bag converters to produce
sacks, multi-wall sacks and bags, golden envelope
grades, wet strength paper, and fluro-carbon treated
board.
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, envelope, 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.
Coated bleached board.. We produce solid bleached sulfite, folding boxboard,
blister pack, and double coated bleached board. Our
products are used by packaging companies in specialty
packaging applications including cosmetics,
pharmaceuticals, blister pack for vacuum packaging,
specialty poster board and disposable cups and plates.
We are able to produce a wide variety of paper products, in terms of weight
and resistance, and we can use virgin and recycled fiber as raw material in
different proportions to achieve the characteristics required by our
79
customers. We sell our linerboard and kraft paper in rolls of varying widths
depending on the capacity of the converting machinery on which it will be
used.
Packaging Products
Below is a brief description of our packaging products and their usage.
Product Type Product Description and Usage
------------ -----------------------------
Corrugated containers...... We produce corrugated containers manufactured from
containerboard in converting plants. Our
products are used by consumer, industrial and
agricultural goods producers to ship products
including home appliances, electronics, spare
parts, grocery products, produce, books, tobacco and
furniture.
Multi-wall sacks and bags.. We produce flat, expandable, glued, sewn and
laminated bags. Our products are used by cement,
powdered foods and chemicals manufacturers for
delivery of cement, flour, powdered food, chemical
products, gypsum and lime producers.
Molded pulp products....... We produce molded pulp products from recycled
newsprint and other similar papers dyed in different
colors and printed at our facilities. Our products
are used by egg packaging companies and in the
electronics industry.
We produce a wide range of corrugated containers depending on the product to
be shipped, its size and weight and the distance the product is to be shipped.
Our multi-wall sacks and bags are high-resistance containers that are designed
to be used reliably in adverse conditions of filling, handling,
transportation, warehousing and distribution. The bags we manufacture are made
from paper produced from virgin pulp which gives our bags their superior
strength.
Other products
Below is a description of our forest products and their usage.
Product Type Product Description and Usage
------------ -----------------------------
Plywood.................... We produce ponderosa pine plywood, hardwood
plywood and medium density overlay, and specialty
plywood. Our products are used in the construction
industry in Mexico and the United States. Other
uses are signs, doors, concrete pouring, and toys.
Particleboard.............. We produce thermalfused melamine panels. Our
products are used in the construction and furniture
industry for raw particle, shelving, and stepping.
Demand in the Mexican forest products industry is driven primarily by the
Mexican construction and furniture industries. Following a decline in
construction activity after the December 1994 devaluation of the Peso, as well
as continuing budget austerity in the public sector, demand for our forest
products declined sharply in 1995 and has subsequently remained essentially
flat.
80
Customers
We primarily sell our products in Mexico and the United States. In 2000, 61%
of our total sales were made in Mexico and 39% were made in and into the
United States.
Our major customers in Mexico and the United States include:
Forest & Building
Paper Packaging Products
----- --------- -----------------
Mexico Mexico Mexico
El Universal Vitro Grupo GEA
Excelsior Cementos Apasco Grupo Cambel
Grupo Multimedios Nestle Durart
Novedades Kimberly Clark Grupo Frid
Sara Lee
Gamesa and Sabritas (PepsiCo.)
Chiquita
United States United States United States
Corru-Kraft Quik-crete Concrete Sol Building
Paccess-Nike CKS Packaging Tech. Products
Stuart Entertainment Diamond Pet Foods
In 2000, sales to our 10 largest customers accounted for approximately 16%
of our net sales. However, none of our customers accounted for a material
amount of our revenues. We do not believe that the loss of any single customer
would have a material adverse effect on our business.
Sales and Marketing
Our sales and marketing staff are responsible for identifying and developing
markets as well as notifying our research and development staff of customer
product requirements. We sell our products through our direct sales force at
our Mexican offices located in Mexico City, Guadalajara and Monterrey, Mexico,
and our U.S. offices located in Albuquerque, NM, Houston and Dallas, TX, and
St. Marys, GA. At December 31, 2000, we had approximately 67 employees
involved in direct sales.
We make substantially all of our sales directly to our clients. We only use
brokers in limited circumstances.
Our sales strategy involves targeting niche markets, such as the maquiladora
sector, Mexican export markets and lightweight markets. To date, the limited
competition in Mexico and our competitive pricing policy has resulted in
pricing not becoming a dominant factor while customer service and product
differentiation become the primary elements of our sales effort. A core
element of our sales strategy is to establish long-term customer relationships
by ensuring that we satisfy our customers' specific requirements. The
customized service we provide and the strategic relationships we have
developed ensure we retain our existing customers while attracting new ones.
To support our direct sales efforts and to actively promote our products, we
engage in a variety of marketing activities. These activities include regular
meetings with our entire sales force and educational seminars and social
outings with clients.
Customer service is an important factor in maintaining and gaining market
share and clients. We deliver products to our customers in a manner that
addresses individual technical specifications, delivery methods, timing
constraints and other customer specific requirements. Our sales force has
established customer complaint procedures and undergoes customer retention
reviews to ensure that the level of our service is maintained and constantly
improved. Our advertising and promotional campaigns are carried out in
specialized industry publications and industry shows.
81
With respect to corrugated containers, by engaging in sales on both sides of
the Mexican-U.S. border, we continuously evaluate the pricing levels for our
products in both the U.S. and Mexican markets. While pricing is generally
negotiated on a yearly basis, our contracts normally include price adjustment
provisions to compensate for market movements as published in reputable trade
publications.
Raw Materials
We believe we have a flexible raw material mix. The principal raw materials
used in our production processes are recycled fiber and virgin pulp. Recycled
fiber is obtained by processing OCC material, ONP material, magazines and
office waste paper material. We also use virgin pulp, which is made by
processing wood chips, in the production of 100% virgin kraft paper and we mix
virgin pulp with recycled fiber to produce a variety of semi-recycled grades
of other packaging and paper products. In the case of newsprint and printing
grades, we produce a high quality product with a high content of post-consumed
recycled fiber.
Recycled Fiber
Our business is affected by trends in international and domestic prices of
OCC and ONP material. The price differential between domestic and imported OCC
material fluctuates in Peso terms, due to demand and currency fluctuations,
and at any given time we may supply ourselves from either market, depending on
the then current price differential. We have progressively reduced our use of
imported OCC material for papermaking, from over 47% in 1995 to approximately
30% in 2000, due to a greater availability of domestic OCC material, an
increase in our collection efforts and because yields from recycled fiber have
increased. We believe that we are the largest collector of recycled fiber in
Mexico.
In the United States, 45% of our fiber requirements are provided by our
recycling centers in Albuquerque and Phoenix. We obtain the balance of our
requirements in the open market. As part of our strategy in Mexico, we have
been increasing the capacity of our collection centers for OCC and ONP
material in order to reduce the imports of these two important raw materials,
and consequently, to reduce costs. Our initiatives to shift our supply sources
for recycled fiber and strengthen our domestic collection efforts will help to
achieve our goal of maintaining low raw material costs.
Pulp
We are Mexico's sole producer of unbleached kraft pulp and we are currently
able to produce 220,000 short tons of unbleached pulp per year, which is more
than sufficient to supply our internal requirements for virgin kraft pulp. We
are also able to produce 79,000 short tons per year of chemical thermo
mechanical pulp, 79,000 short tons per year of thermo mechanical pulp, 79,000
short tons per year of sugar cane bagasse pulp, 319,000 short tons per year of
deinked pulp, and 400,000 short tons per year of bleached soft and hardwood
pulp in the United States.
In Mexico, we buy our wood, the raw material from which we produce virgin
kraft pulp, from small property owners and ejidos, which are small plots of
land granted by the Mexican government to small groups of land workers,
located in the states of Durango, Jalisco, Oaxaca and Michoacan. In total we
have access to approximately 600,000 hectares of forestry land. Recently, the
Mexican government has made significant changes to the ejido system in order
to increase productivity. The changes have restructured the ejido system to
allow large private investors to co-invest with small owners or to lease
properties on a long-term basis. We have traditionally managed our supply of
forest resources through direct negotiations with landowners. In general, we
believe that our existing wood supply arrangements are sufficient to provide
for our currently anticipated rates of consumption for the foreseeable future.
We have a strong presence in the Mexican forestry sector that allows us to
effectively source our wood supply. In the United States, we buy our wood
chips from a single supplier, Gilman Building Products, based on a long term
supply contract that expires in December 2004.
82
Water
Other than at our Atenquique, Mexpape and Fapatux pulp and paper mills,
which use treated river water, we obtain our water requirements for both our
Mexican and U.S. operations from wells located at our production facilities.
We believe that our water supply is sufficient for all existing and
contemplated activities.
Our McKinley mill is one of only three "zero-effluent" paper mills in the
world. Water is initially obtained from wells, and after using it in the
papermaking process, it is then treated and recycled through the plant.
Accordingly, the ongoing water supply requirements at our McKinley mill are
significantly less than for conventional paper mills.
Energy
Our Atenquique mill has the ability to generate its own power from on-site
power plants and does so depending on prices. Three of our Titan mills
generate their own power from on-site power plants, while the other Titan
mills purchase all of their power from the Mexican state-owned electric
company. Some of our mills generate a portion of the power needed in our pulp
mills: the Mexpape mill generates 90% of its power, Centauro paper mill
generates about 40% of its power and Pronal mill 30% of its power, while the
balance is purchased from the Comision Federal de Electricidad, the Mexican
state-owned electric company. Our other Mexican plants purchase all their
power from the Mexican state-owned electric company. The contracts for power
supply signed with the Mexican state-owned electric company are the standard
contracts used for all Mexican companies and there is no specific termination
date for the contracts.
In the United States, our McKinley mill is supplied by a rural electric
cooperative at formula prices under a long-term contract. The Durango Georgia
Paper Company is supplied by its own generators and a regional electric
utility at favorable rates. Our U.S. converting facilities purchase power from
local utilities.
Distribution and Supply of our Products
Our distribution network is one of the most extensive and most efficient
delivery systems within the Mexican paper and packaging industry. Our
production facilities are strategically located in close proximity to our
suppliers and customers. In creating our vertically integrated manufacturing
process, we have generally located our raw material supply, processing and
production assets near major industrial centers around Mexico to reduce
transportation costs and delivery time for our products. We distribute and
deliver our products from our plants as well as from several warehouses
strategically located throughout Mexico. In the United States, we deliver our
products from our plants located in Prewitt, New Mexico, St. Marys, Georgia
and Dallas and Houston, Texas, and from ware-houses located throughout the
United States, including in Los Angeles, Philadelphia, Baltimore, Cleveland,
Las Vegas and New Jersey. We consider that an effective delivery time ranges
from 1 to 5 days from the date of the purchase order to the delivery of the
product to our customer. We are able to adjust deliveries of our products
through the use of a just-in-time system, offering same day deliveries, at the
request of our customers.
We currently own approximately 500 trailer trucks and have relationships
with independent operators of approximately 3,000 additional trucks. We use
our trucks to transport wood from our forests to our production facilities. We
also use our trucks and trucks operated by independent operators to ship
finished products to our customers in Mexico and in the United States. Our
location near city centers allows these independent operators to benefit by
hauling our freight both to and from destinations. This also reduces our
shipping costs.
We also use railroads for the transportation of raw material to our
productions facilities and finished products to our customers.
Among our products, containerboard, industrial paper, newsprint and printing
grades, which are transported in large rolls, can be economically shipped over
long distances. Corrugated containers and bags have a much
83
smaller economic shipping radius because their low density results in a
relatively high transport cost per ton compared to paper. Consequently, our
broad network of container and bag plants, located near major industrial
centers around Mexico, is an important factor in the timely and economic
delivery of our packaging products to both local and national customers.
We rely heavily on our distribution and supply system to obtain raw
materials for our strategically located network of production facilities and
to deliver our products to customers. We believe that the reach and efficiency
of our distribution and supply system are important to our customers, and we
believe customer loyalty depends as much on service and quality as on price.
We also use railroads for the transportation of raw materials to our
production facilities and finished products to our customers. We operate a
short line railroad in St. Marys, Georgia, used as a secondary railway line to
connect to the primary rail network, that hauls approximately 12,000 carloads
of freight per year. Its rolling stocks include three engines and 60 lumber
flatcars. We leased 153 railcars in connection with our acquisition of Durango
Paper Company. Inbound raw material shipments of 40 and more cars carry wood
chips, pulpwood, processing chemical and coal into our plant every day.
Facilities and Capacity
The table below sets forth information regarding the identity, location,
products and capacity of our production facilities:
short tons per year
-------------------
Paper:...................................................... 1,660,000
Containerboard..............................................
Centauro Mill, (Durango).................................... 264,000
Atenquique Mill (Jalisco)................................... 132,000
McKinley Mill, (New Mexico, U.S.)........................... 200,000
Monterrey Mill (Nuevo Leon)................................. 137,000
Guadalajara Mill (Jalisco).................................. 40,000
Texcoco Mill (Edo. de Mexico)............................... 27,000
---------
Total..................................................... 800,000
Newsprint...................................................
Pronal Mill (San Luis Potosi)............................... 160,000
Tuxtepec Mill (Oaxaca)...................................... 137,000
---------
Total..................................................... 297,000
Uncoated Free Sheet.........................................
Mexpape Mill (Veracruz)..................................... 143,000
---------
Total..................................................... 143,000
Coated Bleached Board.......................................
St. Marys Mill (Georgia, U.S.).............................. 220,000
---------
Total..................................................... 220,000
Kraft Paper Board...........................................
St. Marys Mill (Georgia, U.S.).............................. 200,000
---------
Total..................................................... 200,000
=========
Pulp:....................................................... 1,176,000
Bleached Soft & Hardwood Pulp
St. Marys Mill (Georgia, U.S.).............................. 400,000
---------
Total..................................................... 400,000
84
short tons per year
-------------------
Unbleached Soft Wood Pulp...................................
Centauro Mill, (Durango).................................... 110,000
Atenquique Mill (Jalisco)................................... 110,000
Total..................................................... 220,000
Bleached Chemical Themomecanical Pulp
Fidusa Pulp Mill (Durango).................................. 79,000
Total..................................................... 79,000
Thermomecanical Pulp (TMP)
Tuxtepec Pulp Mill (Oaxaca)................................. 79,000
Total..................................................... 79,000
Bleached Bagasse Pulp
Mexpape Pulp Mill (Veracruz)................................ 79,000
Total..................................................... 79,000
Bleached Deinking Pulp
Pronal DIP Mill (San Luis Potosi)........................... 154,000
Tuxtepec DIP Mill (Oaxaca).................................. 79,000
Mexpape DIP DIGHB Mill (Veracruz)........................... 86,000
-------
Total..................................................... 319,000
=======
Packaging: 890,000
Corrugated containers
Mexicali Plant (Baja California Norte)...................... 26,000
Chihuahua Plant (Chihuahua)................................. 29,000
Monterrey Centro Plant (Nuevo Leon)......................... 33,000
CartonPack (Nuevo Leon)..................................... 44,000
Monterrey Plant (Nuevo Leon)................................ 44,000
Culiacan Plant (Sinaloa).................................... 22,000
Guadalajara Plant (Jalisco)................................. 50,000
Guadalajara Ceosa Plant (Jalisco)........................... 20,000
Guadalajara San Sebastian Plant (Jalisco)................... 22,000
Queretaro Plant (Queretaro)................................. 33,000
Atempack Juarez Plant (DF).................................. 33,000
Atempack Tultitlan Plant (Edo. de Mexico)................... 55,000
Titan Tlalnepantla Plant (Edo. De Mexico)................... 55,000
Eyemsa Izcalli Plant (Edo. de Mexico)....................... 40,000
Eyemsa Tlalnepantla Plant (Edo. De Mexico).................. 33,000
Eyemsa Tapachula Plant (Chiapas)............................ 44,000
Eyemsa Tepatitlan Plant (Jalisco)........................... 50,000
McKinley Dallas Plant (Texas, U.S.)......................... 46,000
McKinley Houston Plant (Texas, U.S.)........................ 33,000
-------
Total..................................................... 712,000
Multi-wall Sacks & Bags
Cd. Guzman Plant (Jalisco).................................. 22,000
Tula Plant (Hidalgo)........................................ 22,000
Apasco Plant (Edo. de Mexico)............................... 33,000
Gilman Eastman Plant (Georgia, U.S.)........................ 55,000
Gilman McDowell (Tennessee, U.S.)........................... 6,000
-------
Total..................................................... 138,000
85
short tons per year
-------------------
Molded Pulp Packaging
Titan Apodaca Mill (Nuevo Leon.)............................ 21,500
Titan Guadalajara Mill (Jalisco)............................ 7,500
Titan Hermosillo Mill (Sonora).............................. 7,500
Titan Monterrey Mill (Nuevo Leon.).......................... 3,500
-------
Total..................................................... 40,000
Other:
Particleboard Chihuahua Mill (Chihuahua).................... 132,000
Particleboard Durango Mill (Durango)........................ 17,000
Plywood Anahuac Mill (Chihuahua)............................ 26,000
Plywood Durango Mill (Durango).............................. 29,000
-------
Total..................................................... 204,000
=======
Our Competition
In Mexico we compete with a number of Mexican paper producers and small
packaging companies and with major foreign integrated paper producers, who are
primarily importers from the United States. In addition, as an integrated
paper producer, we compete not only with other integrated paper producers but
also with companies that produce only paper or converted products. Many of our
foreign competitors have greater financial resources than we do. In the United
States, we compete with major international integrated paper producers. We
compete primarily on customer service, product quality differentiation and
price.
Constant review and benchmarking of competitive factors is necessary to
remain competitive in our industry. We monitor the paper industry through
market publications, and through our participation in many industry-related
events. While pricing is normally negotiated on an annual basis for the
majority of our products, our contracts normally include price adjustment
provisions to compensate for market movements as published in reputable trade
publications.
We serve approximately 40% of the containerboard market, 70% of the
newsprint market, and 13% of the uncoated free sheet market in Mexico,
according to the National Chamber for the Pulp and Paper Industry. In
addition, we believe we also serve 40% of the packaging market and 35% of the
woods product market.
We produce, distribute and sell different paper grades and paper products,
which we believe gives us, unlike our Mexican competitors, the flexibility to
avoid the impact of cyclicality occurring in the market. We can increase paper
production for export opportunities, as conditions warrant, such as changes in
raw material prices, without interrupting a steady supply of paper to our
internal converting operations and our existing customers. While the phased
reduction in Mexican tariffs under NAFTA may increase our competition from
U.S. producers of containerboard and industrial paper, we are not aware of any
plans by domestic or foreign producers to construct additional production
capacity in Mexico.
Environmental Matters
Our Mexican operations are subject to the Mexican General Law of Ecological
Stabilization and Environment Protection and the rules and regulations
published under this law. Under this law, companies engaged in industrial
activities are subject to the regulatory jurisdiction of the Ministry of the
Environment and Natural Resources.
In 1988, we agreed with Mexican environmental regulatory authorities on what
would constitute compliance and we proceeded to implement a compliance plan.
Today, our paper mills are in compliance with general standards established by
law and with specific standards promulgated by the Mexican regulatory
authorities. In 1995, we purchased approximately 26% of Planta Ecologica
Industrial, S.A. de C.V., a joint venture of industrial
86
water users in Monterrey, Nuevo Leon. The venture processes and recycles water
used by plants in the industrial park where our Titan paper mill is located.
Our paper mills are subject to periodic environmental audits by the Ministry
of the Environment and Natural Resources. We have frequently been recognized
for our environmental record and our role in implementing modern forest
management techniques. However, there can be no assurance that relevant
authorities will continue to find our environmental procedures adequate, or
that more stringent environmental laws will not be enacted by Mexico in the
future. Were enforcement of existing laws to increase, or new environmental
laws to be enacted, we could incur material compliance costs.
Our U.S. operations are subject to federal, state, and local provisions
regulating the discharge of materials into the environment and otherwise
related to the protection of the environment. Compliance with these
provisions, primarily the Federal Clean Air Act, Clean Water Act,
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986
("CERCLA"), and Resource Conservation and Recovery Act ("RCRA"), has required
us to invest substantial funds to modify facilities to assure compliance with
applicable environmental regulations. Capital expenditures directly related to
environmental compliance totaled approximately US$33.8 million during 2000.
This amount does not include capital expenditures for environmental control
facilities made as part of major mill modernizations and expansions or capital
expenditures made for any other purpose that may have an indirect benefit on
environmental compliance.
We are committed to protecting the health and welfare of our employees, the
public, and the environment and strive to maintain compliance with all state
and federal environmental regulations in a manner that is also cost effective.
In any construction of new facilities and the modernization of existing
facilities, we intend to use state-of-the-art technology for our air and water
emissions. These forward-looking programs will minimize the impact that
changing regulations have on capital expenditures for environmental
compliance.
Future expenditures for environmental control facilities will depend on new
laws and regulations and other changes in legal requirements and agency
interpretations, as well as technological advances. We expect the trend toward
more stringent environmental regulation to continue for the foreseeable
future. The trend in interpretation and application of existing regulations by
regulatory authorities also appears to be toward increasing stringency,
particularly under RCRA with respect to solid wastes generated at kraft paper
mills. Given these uncertainties, we currently estimate that capital
expenditures for environmental purposes at our U.S. operations during the year
2001 will be approximately US$2.0 million.
On April 15, 1998, the U.S. Environmental Protection Agency issued extensive
regulations governing air and water emissions from the pulp and paper
industry, known as the Cluster Rules. Compliance with various phases of the
Cluster Rules will be required at intervals over the next few years. According
to the EPA, the technology standards in the Cluster Rules will cut the
industry's toxic air pollutant emissions by almost 60% from current levels and
virtually eliminate all dioxin discharged from pulp, paper, and paperboard
mills into rivers and other surface waters. The rule also provides incentives
for individual mills to adopt technologies that will lead to further
reductions in toxic pollutant discharges. The estimated capital expenditures
disclosed above consist primarily of expenditures needed to comply with the
Cluster Rules. Based upon our interpretation of the Cluster Rules as issued,
compliance with the rule will require modifications at the Durango Paper
Company Mill in St. Marys, Georgia. Some of these modifications can be
included in modernization projects that will provide us with economic
benefits. Excluding these investments, we incurred approximately US$33.8
million toward Cluster Rules compliance. At present, we are in compliance with
the Cluster Rules, excluding expenditures related to discontinued operations.
For the secondary compliance deadline of April 15, 2005, we expect
expenditures between US$6.2 million and US$11.6 million.
New effluent (water) quality standards for unbleached paper mills were not
included in the Phase I Cluster Rule as promulgated. These standards are
expected to be promulgated between 2001 and 2002. Also not included in the
Phase I Cluster Rule was the proposed Maximum Achievable Control Technology
("MACT") II Standard for the control of hazardous air pollutant emissions from
pulp and paper mill combustion sources. The timeline
87
for final promulgation of the MACT II Standard for the control of hazardous
air pollutant emissions is uncertain at this time pending resolution of
substantive issues raised during the public comment period and as subsequently
addressed by industry stakeholder groups. Because of the uncertainty as to
when the rules will be finalized and what the rules will require, it is not
possible to estimate future expenditures at this time.
In addition to these capital expenditures, we incur significant ongoing
maintenance costs to maintain compliance with environmental regulation. We do
not believe that these capital expenditures or maintenance costs will have a
material adverse effect on our earnings. In addition, expenditures for
environmental compliance should not have a material impact on our competitive
position, because other companies are also subject to these regulations.
Insurance
We carry "all risk" insurance policies for each of our facilities. These
policies cover our property, plant, equipment, raw materials, finished
products and inventory at levels customary with market practice.
Our Employees
At December 31, 2000, we had approximately 11,659 employees (9,875 in Mexico
and 1,784 in the United States) and approximately 69% of our work force was
unionized. We have not experienced any work stoppages in our facilities or
those of our subsidiaries, other than a strike at our Atenqique mill which
lasted nine days in July 1998 and which was resolved by contract
renegotiations. We currently have good relations with our employees at all our
facilities.
On April 26, 2001, we temporarily shut down one of the Pamex mills in
Atenquique. The plant represented 0.7% of our third party sales and 1% of our
operating income in 2000. We took this step in order to modify the plant's
expensive and non-productive labor contract which has caused us to have twice
the labor cost per ton at that plant than at our other similar linerboard
mills in Mexico. Based on our current negotiations with the labor union, we
expect the mill will be reopened by the third quarter of 2001.
The table below shows the number of employees in Mexico and the United
States at the end of each of the past three years:
Year Ended December
31,
--------------------
1998 1999 2000
------ ------ ------
Mexico.............................................. 10,747 9,654 9,875
United States....................................... 366 1,969 1,784
------ ------ ------
Total............................................... 11,113 11,623 11,659
====== ====== ======
Temporary Employees................................. 1,414 1,308 1,106
Legal Proceedings
We are party to various legal proceedings in the ordinary course of our
business. We do not expect any proceeding, if determined adversely against us,
individually or in the aggregate, to have a material adverse effect on the
results of our operations or our financial condition.
88
Description of Property
In addition to our facilities described above, our headquarters are located
in Durango, Mexico, approximately 900 kilometers (560 miles) north of Mexico
City. We maintain sales offices in Mexico City, Guadalajara, Jalisco and
Monterrey, Nuevo Leon and representative offices in Albuquerque, New Mexico,
and in Dallas, Houston and Rio Grande, Texas, and St. Marys, Georgia. Our
various production facilities in Mexico are located in the states of Durango,
Nuevo Leon, Jalisco, Baja California, Sonora, Estado de Mexico, Hidalgo,
Queretaro, Sinaloa, Chihuahua and Chiapas, as well as in Mexico City. In the
United States, we operate facilities in the states of New Mexico, Texas,
Arizona, Georgia, Pennsylvania, and Tennessee.
Significant Changes
No significant change has occurred since the date of the annual audited
financial statements included in this prospectus and consent solicitation.
Material Contracts
In December 1999, we acquired the Gilman Pulp and Paper Group for Ps 1,152.2
million (US$119.9 million) from HG Estate LLC pursuant to a stock purchase
agreement, among HG Estate LLC, St. Marys Railroad Corporation, W.O.
Corporation, and Durango Paper Company.
On April 27, 2001, one of Durango Paper Company's subsidiaries, Durango
Georgia Converting LLC, sold substantially all of the assets of its Sky
Division to TST Impreso, Inc. pursuant to an asset purchase agreement, dated
April 5, 2001. Pursuant to the asset purchase agreement, TST paid Durango
Converting approximately $11.6 million in cash, subject to a purchase price
adjustment, and issued an unsecured promissory note to Durango Converting in
the principal amount of $300,000 and a secured promissory note to Durango
Converting in the principal amount of $640,578. As part of the transaction,
Durango Converting and TST also entered into a five year supply agreement
under which Durango Converting or its affiliates will supply paper and boxes
to TST.
On June 1, 2001, Durango Converting sold substantially all of the assets of
its Eastman Division to Stone Container Corporation pursuant to an asset
purchase agreement, dated May 16, 2001. Pursuant to the asset purchase
agreement, Stone Corporation paid Durango Converting $15.6 million, subject to
a purchase price adjustment, as consideration for the assets of the Eastman
Division. As part of the transaction, Durango Converting and Stone Corporation
also entered into a transition services agreement and a three year paper
supply agreement under which Durango Paper Company will supply paper to Stone.
Copies of each of these contracts have been filed as an exhibit to the
registration statement and are on file with the Securities and Exchange
Commission.
Exchange Controls
The Mexican government does not currently restrict the ability of Mexican or
foreign persons or entities to convert Pesos into U.S. Dollars or other
currencies, and vice versa. However, prior to 1991 some forms of exchange
control were in effect, and there can be no assurance that the Mexican
government will not reinstate a restrictive exchange control policy in the
future. The imposition of such a policy in the future might impair our ability
to obtain or transfer U.S. Dollars in respect of any interest and principal
payments due on our indebtedness, and it could also have a material adverse
effect on our business and financial condition.
89
MANAGEMENT
Board of Directors
Our board of directors is responsible for the management of our business.
Our by-laws (estatutos sociales) provide that the board of directors will
consist of the number of directors and alternate directors elected by our
stockholders at the annual ordinary general meeting, each of whom is elected
for a term of one year.
Pursuant to our by-laws, alternate directors are appointed by our
stockholders to serve on the board of directors in place of directors who are
unable to attend meetings. If a member of our board is absent from a meeting,
one of our alternate directors is called to serve as a director for such
meeting in the order provided by the stockholders. If the stockholders do not
provide an order, the alternate director is chosen indistinctly by the board.
Even when alternate directors are not substituting a director, they are
invited to attend all board meetings.
Our board of directors includes 10 directors, of whom four are independent
directors, and 10 alternate directors.
Our executive officers are appointed by the board of directors and serve
until their successors have been appointed and take office.
The table below sets forth the members of our board of directors and our
executive officers:
Name Current Title Since
---- ------------- -----
Miguel Rincon........... Chairman of the Board and Chief Executive Officer 1991
Jose Antonio Rincon..... Vice-Chairman and Chief Operating Officer 1991
Mayela Rincon de
Velasco................ Vice-President and Chief Financial Officer 1993
Jesus Rincon............ Director 1998
Wilfrido Rincon......... Director 1999
Ignacio Rincon.......... Director 1999
Angel Del Palacio*...... Director 2001
Alfonso Fernandez De
Castro*................ Director 2001
Buenaventura G.
Saravia*............... Director 2001
Roberto Isaac
Hernandez*............. Director 2001
Alternate Directors:
Prudencio Calderon...... Alternate Director 2001
and U.S. Managing Director 1997
Jesus Romo Carrasco..... Alternate Director 2001
and Controller 1988
Martin Rincon
Arredondo.............. Alternate Director 2001
Commercial Manager-Grupo Pipsamex 1999
Arturo Diaz Medina...... Alternate Director 2001
and Financial Manager 1998
Gustavo Peyro Medina.... Alternate Director 2001
and Audit and Systems Manager 1996
Raul Catano A........... Alternate Director 2001
and General Manager-Titan Central Division 1993
Victor Manuel Sanchez... Alternate Director 2001
and Financial Manager-Titan Group 1993
Juan Montufar C......... Alternate Director 2001
General Manager-Industrias Centauro 1995
Javier Bermea G......... Alternate Director 2001
General Manager-Titan North Division 1993
Ignacio Parra Rivera.... Alternate Director 2001
General Manager-Titan West Division 2001
--------
* Independent Directors
90
Executive Officers:
Gustavo Peyro Medina.............. Audit and Systems Manager 1996
Arturo Diaz Medina................ Financial Manager 1998
Jesus Romo Carrasco............... Controller 1988
Gabriel Villegas.................. Secretary of the Board and Legal Counsel 1987
Miguel Rincon, Jose A. Rincon, Jesus Rincon, Ignacio Rincon, Wilfrido
Rincon, Mayela R. de Velasco and Martin Rincon are siblings.
Miguel Rincon has been Chairman of the Board and Chief Executive Officer of
our company since 1991 and of GID since 1982. He has been an active member of
a number of organizations in Mexico related to our industry, such as the
National Chamber for the Pulp and Paper Industry, the Por Mexico Group, an
association of business leaders from all sectors, and the National Commission
on Commercial Agriculture (Comision Nacional Agropecuaria y Comercial). He
currently serves on a number of corporate boards in the United States and
Mexico, including Banamex, one of the largest Mexican banks, and The Chase
Manhattan Bank de Mexico, S.A. de C.V.
Jose Antonio Rincon has been Vice-Chairman and Chief Operating Officer of
our company since 1991 and of GID since 1982. Since 1988, he has been a member
of the National Chamber for the Pulp and Paper Industry. From 1990 to 1998, he
served as director of Banco Santander, S.A. de C.V.
Mayela Rincon de Velasco has been Vice-President and Chief Financial Officer
of our company since 1991 and of GID since 1986. From 1987 to 1994, she worked
as a professor of international finance in the Durango State University
(Universidad Juarez del Estado de Durango). She is a member of the Association
of Public Accountants (Colegio de Contadores Publicos). She is also a member
of the philanthropic board of the General Hospital of Durango (Hospital
General de Durango).
Jesus Rincon has been a director of our company since 1998. Since 1997, he
has worked as the general manager of Porteadores de Durango as well as the
general manager of Ponderosa. From 1995 to 1997, he served as the development
manager of GID. He is an active member of the National Association of
Particleboard Manufacturers and the Forest Industry Association.
Wilfrido Rincon has been a director of our company since 1999. Since 1998,
he has been the general manager of the paper division of Pamex. From 1997 to
1998, he served as general manager of Ponderosa. From 1994 to 1996 he worked
as development manager of GID. He also serves as president of the National
Chamber of the Forestry Industry and vice-president of National Chamber for
the Pulp and Paper Industry. He is an active member of the National Council
for Forestry (Consejo Consultivo Forestal Nacional).
Ignacio Rincon has been a director of our company since 1999. Since 1998, he
has been the general manager of Empresas Titan. From 1998 to 1999, he worked
as the marketing manager of Empresas Titan. From 1994 to 1997, he worked as
the planning manager of GID. He is currently an active member of the
Association of Technicians in Pulp and Paper (Asociacion de Tecnicos de la
Celulosa y del Papel).
Gustavo Peyro Medina was Manager of the Controller and Audit Department of
our company and GID from 1992 to 1999. He has also been Audit and IT manager
of our company since 1996. From 1985 to 1989 he was professor at Durango State
University (Universidad Juarez del Estado de Durango). Since 1983 he has been
an active member of the Mexican Institute of Public Acountants (Instituto
Mexicano de Contadores Publicos) and also of the Association of Public
Accountants (Colegio de Contadores Publicos). He is an active member of the
Institute of Internal Auditors, Inc.
91
Arturo Diaz Medina has been the Finance and Planning Managing Director of
our company since 1998. He had been involved in other finance and operation
positions from 1994 to 1998 in two of our paper mills. Prior to joining our
company he was head of the finance and commercial areas of an autoparts
company based in Durango, Mexico. Since 1990 he has been an active member of
the Association of Public Accountants (Colegio de Contadores Publicos).
Jesus Romo has been the Controller of our company since 1994, and of GID
since 1988. He is a professor of accounting and statistics at Durango State
University (Universidad Juarez del Estado de Durango). Since 1978 he has been
an active member of the Association of Public Accountants (Colegio de
Contadores Publicos).
Gabriel Villegas has been Secretary of the Board and Legal Counsel of our
company since 1991 and of GID since 1987. As Legal Counsel he was involved in
corporate and labor matters of our company. In 1993 he was appointed General
Counsel and has participated in every share or asset acquisition made by us,
in the issuance of shares and debt both in Mexico and in the United States,
and, in the preparation and execution of financial and other material
agreements. He served as member of the Legal Committee of the National Chamber
for the Pulp and Paper Industry.
Independent Members of the Board
Alfonso Fernandez de Castro Mr. Fernandez de Castro is one of the most
experienced entrepreneurs in the Mexican Forest Industry. He is the founder
and General Manager of Grupo Forestal Alfa, one of the main companies in the
Mexican forest industry.
Buenaventura G. Saravia Mr. Saravia is a cattle breed entrepreneur and the
General Manager of Empresas la Punta, one of the principal exporters of cattle
from Mexico to the United States. He has a bachelors degree in business from
the Monterrey Institute of Technology (ITESM).
Angel Del Palacio E. Mr. Del Palalcio is a services sector entrepreneur and
the General Manager of several automobile dealers in the north of Mexico. He
has a bachelors degree in business and an MBA from the Monterrey Institute of
Technology (ITESM).
Roberto Isaac Hernandez Mr. Isaac Hernandez is a services sector
entrepreneur and the General Manager of a chain of gas stations and
supermarkets in the north of Mexico. He has a bachelors degree in economics
from the Monterrey Institute of Technology (ITESM) and an MBA from the Notre
Dame University in France.
Statutory Auditor
Under our by-laws in accordance with Mexican law, our annual stockholders'
meeting has to elect at least one statutory auditor (comisario) and a
corresponding alternate statutory auditor. The primary role of a statutory
auditor is to report to our stockholders at the annual ordinary general
meeting of stockholders regarding the accuracy of the financial information
presented to our stockholders by our board of directors. Subject to terms and
conditions, a statutory auditor is also authorized (i) to call ordinary or
extraordinary general meetings, (ii) to place items on the agenda for meetings
of stockholders or our board of directors, (iii) to attend meetings of
stockholders and of our board of directors and (iv) generally to inspect the
affairs of the company. Since 2000, the statutory auditor is Raul Guerra
Rodriguez and the alternate statutory auditor is Carlos Orozco Renteria.
Compensation of Directors and Officers
Directors receive no compensation in their capacity as directors and there
are no service contracts providing for benefits upon termination of employment
of any of our directors. The aggregate amount of compensation
92
paid by us to our officers during 2000 was Ps 17.4 million. In 2001, we expect
that the aggregate amount of compensation paid to this group will total
approximately Ps 19.14 million.
Each subsidiary, other than GID and ACM, pays performance-based cash bonuses
to its management. The amount of the bonus is determined by a formula which
weighs various factors, including the performance of the operating subsidiary
measured in terms of earnings, market share and sales volume targets and the
individual performance of the employee. The bonus varies for each employee
depending on the above factors.
We have established a bonus plan for the key management of GID and its
subsidiaries. For this purpose, a trust controlled by members of the Rincon
family was established in 1994 to purchase 100,000 GID Series A shares,
representing approximately 0.2% of the total number of GID Series A shares
outstanding. From 1995 to 1996, some individuals received a share-based bonus
of Series A shares of GID pursuant to this plan. After five years, each
individual can elect to retain the shares or can exercise the option to sell
the shares in the open market. The holders of our 1995 assignment of shares
under this plan will make their election this year. The exercise price will be
the higher of the book value of the shares or the market price of the shares
at the time the options are exercised. The other terms of the options will be
established by the controlling committee of the trust at the time the options
are exercised.
Audit Committee
The audit committee recommends to the board of directors the external
auditors of the company, suggests the terms and conditions of such auditors
service, supervises the auditors work, acts as intermediate between the board
of directors and the external auditors, and guaranties the independence of
said auditors, reviews the working plan, communications and audit reports and
informs its results to the board of directors, submits to the board of
directors the financial information basis, reviews such financial information
and its issuance process, contributes in the determination of the general
outline of the internal control system and evaluates its effectiveness,
supports the board of directors in the evaluation and coordination of the
annual internal audit programs, coordinates the internal, external and
statutory auditing works, and verifies the compliance of such statutes and
regulations applicable to the company.
The audit committee acts and adopts any resolution by majority vote. In case
of conflict of interest the members involved do not participate. The committee
has such powers specifically granted by the shareholders and participates in
such studies, advisement, and additional matters submitted by the board of
directors.
The audit committee informs the board of directors of its activities at
least twice a year or at any other time when any committee deems appropriate
or becomes aware of any material acts or facts to the company.
The audit committee does not delegate any of its powers to anyone, but may
request advice from experts to resolve adequately such matters submitted to
the mentioned committee and, additionally, the president of each committee may
invite such experts and officers involved with the particular committee's
activities.
As of May 31, 2001, the audit committee members were as follows: Alfonso
Fernandez de Castro, Roberto Isaac H. and Mayela R. Velasco.
Remuneration Committee
The remuneration committee recommends designations of director general and
main officers of the company, suggests evaluation criteria in accordance with
the general outlines of the board of directors and analyzes and submits to the
Board of Directors the structures and remuneration of the main officers.
The remuneration committee acts and adopts any resolution by majority vote.
In case of conflict of interest the members involved do not participate. The
committee has such powers specifically granted by the shareholders and
participates in such studies, advisement, and additional matters submitted by
the board of directors.
93
The remuneration committee informs the board of directors of its activities
at least twice a year or at any other time when any committee deems
appropriate or becomes aware of any material acts or facts to the company.
The remuneration committee does not delegate any of its powers to anyone,
but may request advice from experts to resolve adequately such matters
submitted to the mentioned committees and, additionally, the President of each
committee may invite such experts and officers involved with the particular
committee's activities.
As of May 31, 2001, the remuneration committee members were as follows:
Angel del Palacio E., Buenaventura G. Saravia and Mayela R. Velasco.
94
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Our total authorized and issued share capital as of March 31, 2001 consisted
of Ps 1,901.8 million. Currently we have authorized and issued 9,128,689
Series A-I shares, 20,018,465 Series B-I shares, and 19,233,426 Series B-II
shares, each with no par value and having one vote per share.
The following table sets forth current information with respect to the
beneficial ownership of our common stock by:
. each person known by us to beneficially own more than five percent, in
the aggregate, of the outstanding shares of our common stock; and
. all board members and executive officers as a group.
Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of
---------------- -------------------- -------
Miguel Rincon.................................... 16,933,149 35.0%
Jose Antonio Rincon.............................. 9,676,679 20.0%
Jesus Rincon..................................... 9,675,461 20.0%
Wilfrido Rincon.................................. 4,354,252 9.0%
Ignacio Rincon................................... 4,354,252 9.0%
Martin Rincon.................................... 3,386,787 7.0%
Total of members of board of directors and
executive officers as a group................... 48,380,580 100.0%
There has been no significant change in percentage ownership by any major
shareholder in the last three years.
From time to time, we enter into arm's length transactions with Lineas
Aereas Ejecutivas de Durango, S.A. de C.V. and Administradora Corporativa y
Mercantil S.A. de C.V., both owned and controlled by the Rincon family, which
are not considered as material transactions.
95
DESCRIPTION OF OUR EXCHANGE NOTES
General
The 2006 notes will be issued under an indenture that our company has
entered into with The Chase Manhattan Bank, as trustee, dated as of February
5, 2001. The 2008 notes will be issued under an indenture to be entered into
with The Chase Manhattan Bank, as trustee. The terms of each type of exchange
notes include those stated in the applicable indenture and those made part of
that indenture by reference to the Trust Indenture Act of 1939. The exchange
notes will have substantially identical terms, except for their interest rate,
maturity and optional redemption provisions.
The following is an accurate summary of the material terms of each indenture
and the pledge agreements but does not restate the indentures or the pledge
agreements in their entirety. You can find the definitions of capitalized
terms used in the following summary under the subheading "--Definitions." We
urge you to read the applicable indenture because it, and not this summary,
defines your rights as a holder of the relevant type of exchange notes. We
also urge you to read the applicable pledge agreement, the form of which is
attached as an exhibit to the applicable indenture. We will send you a copy of
any indenture, including the form of the pledge agreement related thereto upon
request. In the following summary, the term "our company" or "Corporacion
Durango" refers to us, excluding our subsidiaries.
2006 Notes:
Brief description of the 2006 notes
The 2006 notes:
. are part of the same class of notes as the $180.0 million aggregate
principal amount of 2006 notes we issued in February 2001 under the same
indenture;
. will be secured until the Pledge Release Date by an unsubordinated
promissory note issued by GID to our company, which is referred to as
the GID 2006 unsubordinated promissory note;
. will be unsecured, unsubordinated obligations of our company, subsequent
to the Pledge Release Date;
. will mature on August 1, 2006;
. will bear interest at 13 1/8% per annum from August 1, 2001 or from the
most recent Interest Payment Date.
. will be issued only in fully registered form, without coupons, in
denominations of US$1,000 of principal amount and multiples of US$1,000;
and
. will be listed on the New York Stock Exchange under the symbol "CDGO
06."
We will issue up to a maximum of US$51.5 million aggregate principal amount of
2006 notes in this exchange offer. Assuming we issue the maximum amount, there
will be US$231.5 million in aggregate principal amount of 2006 notes
outstanding.
Interest payments
Interest on the 2006 notes is payable semiannually on February 1 and August
1 of each year. Interest will be paid to holders of record at the close of
business on the January 15 or July 15 immediately preceding the interest
payment date. Interest is computed on the basis of a 360-day year of twelve
30-day months.
96
Optional Redemption
In addition to our ability to redeem the exchange notes as a result of
changes in Mexican Withholding taxes, the following optional redemption
provisions described below apply to the 2006 notes.
We may redeem the 2006 notes by paying you the "Make-Whole Price"
We may buy back the 2006 notes, in whole or in part, at any time by paying
you a "Make-Whole Price" equal to the greater of:
. 100% of the principal amount; or
. the sum of the present values of the Remaining Scheduled Payments,
discounted to the redemption date on a semiannual basis, at the Adjusted
Treasury Rate, as determined by an independent investment banker.
In addition, our company will also pay any accrued and unpaid interest to
the redemption date.
For purposes of these provisions, the following terms have the following
meanings:
"Adjusted Treasury Rate" means, with respect to any redemption date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue,
expressed as a percentage of its principal amount, equal to the Comparable
Treasury Price for the redemption date, plus 0.50%.
"Comparable Treasury Issue" means the United States Treasury Security
selected by an Independent Investment Banker as having a maturity comparable
to the remaining term of the exchange notes being redeemed that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the exchange notes.
"Comparable Treasury Price" means, with respect to any redemption date,
(1) the average of the bid and asked prices for the Comparable Treasury
Issue, expressed in each case as a percentage of its principal amount,
on the third business day preceding the redemption date, as set forth
in the daily statistical release or any successor release published by
the Federal Reserve Bank of New York and designated "Composite 3:30
p.m. Quotations for U.S. Government Securities" or
(2) if the release or any successor release is not published or does not
contain such prices on such business day,
(A) the Reference Treasury Dealer Quotations for such redemption date,
after excluding the highest and lowest of such Reference Treasury
Dealer Quotations, or
(B) if the trustee obtains fewer than three such Reference Treasury
Dealer Quotations, the average of all such Quotations.
"Independent Investment Banker" means any Reference Treasury Dealer
appointed by the trustee after consultation with our company.
"Reference Treasury Dealer" means Morgan Stanley & Co. Incorporated and
Chase Securities Inc., and their respective successors; provided, however,
that if any of the foregoing shall cease to be a primary U.S. government
securities dealer in New York City (a "Primary Treasury Dealer"), our company
shall substitute another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any redemption date, the average as determined by the
trustee, of the bid and asked prices of the Comparable
97
Treasury Issue, expressed in each case as a percentage of its principal
amount, quoted in writing to the trustee by such Reference Treasury Dealer at
5:00 p.m. on the third business day preceding such redemption date.
"Remaining Scheduled Payments" means, with respect to each note to be
redeemed, the remaining scheduled payments of the principal and interest that
would be due after the related redemption date but for such redemption;
provided, however, that if such redemption date is not an interest payment
date with respect to such note, the amount of the next succeeding scheduled
interest payment thereon will be reduced by the amount of interest accrued and
unpaid thereon to such redemption date.
We may redeem some of the exchange notes with the net proceeds of sales of
capital stock
At any time prior to February 5, 2004, our company may buy back up to 35% of
the principal amount of the 2006 notes with the proceeds of one or more sales
of our company's stock at a redemption price equal to 113.125%, expressed as a
percentage of principal amount, plus accrued interest to the redemption date.
Our company may only buy back 2006 notes if:
. at least 65% of the aggregate principal amount of the exchange notes
remains outstanding after any redemption; and
. notice of a redemption is mailed within 120 days of the sale of our
stock.
2008 Notes:
Brief description of the 2008 notes
The 2008 notes:
. will be secured until the Pledge Release Date by an unsubordinated
promissory note, which is referred to as the GID 2008 unsubordinated
promissory note;
. will be unsecured, unsubordinated obligations of our company, subsequent
to the Pledge Release Date;
. will mature on August 1, 2008;
. will bear interest at 13 1/2% per annum from August 1, 2001 or from the
most recent Interest Payment Date to which interest has been paid;
. will be issued only in fully registered form, without coupons, in
denominations of US$1,000 of principal amount and multiples of US$1,000;
and
. will be listed on the New York Stock Exchange under the symbol "CDGO
08."
We will issue up to a maximum of US$212.0 million aggregate principal amount
of 2008 notes in this exchange offer.
Interest payments
Interest on the exchange notes will be payable semiannually on February 1
and August 1 of each year, commencing February 1, 2002. Interest will be paid
to holders of record at the close of business on the January 15 or July 15
immediately preceding the interest payment date. Interest is computed on the
basis of a 360-day year of twelve 30-day months.
Optional Redemption
In addition to our ability to redeem the 2006 notes as a result of changes
in Mexican withholding taxes, the following optional redemption provisions
described below will apply to the 2008 notes.
98
We may redeem our 2008 notes after 2005 at the redemption prices set forth
below.
On or after August 1, 2005, we may buy back the 2008 notes, in whole or in
part, at the following redemption prices, expressed as a percentage of
principal amount, plus accrued and unpaid interest, if any, to the applicable
redemption date, if redeemed during the 12-month period beginning on August 1
of the years indicated below:
Year Percentage
2005.............................................................. 106.750%
2006.............................................................. 103.375%
2007.............................................................. 100.000%
We may redeem some of the 2008 notes with the net proceeds of sales of
capital stock
At any time prior to February 5, 2005, our company may buy back up to 35% of
the principal amount of the 2008 notes with the proceeds of one or more sales
of our company's stock at a redemption price equal to 113.50%, expressed as a
percentage of principal amount, plus accrued interest to the redemption date.
Our company may only buy back 2008 notes if:
. at least 65% of the aggregate principal amount of the 2008 notes remains
outstanding after any redemption; and
. notice of a redemption is mailed within 120 days of the sale of our
stock.
Common Terms of the Exchange Notes:
Transfers of exchange notes and payments under exchange notes
The exchange notes may be exchanged or transferred at the office or agency
of our company in the Borough of Manhattan, the City of New York. Initially,
the corporate trust office of the trustee at 450 West 33rd Street, New York,
New York 10001, Attn: Institutional Trust Services will serve as the office
for the exchange notes. No service charge will be made for any registration of
transfer or exchange of exchange notes, but our company may require payment of
a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection therewith.
If you give us wire transfer instructions, our company will pay all
principal, premium and interest on your exchange notes in accordance with your
instructions. If you do not give us wire transfer instructions, payments of
principal, premium and interest will be made at the office or agency of the
paying agent which will initially be the trustee, unless our company elects to
make interest payments by check mailed to the holders.
Issuance of additional exchange notes
Our company may issue additional exchange notes under each indenture,
subject to the covenants described below and applicable law. The 2006 notes
issued in February 2006, the 2006 notes offered by this prospectus and consent
solicitation and any additional 2006 notes would be treated as a single class
for all purposes under the indenture. The 2008 notes offered by this
prospectus and consent solicitation and any additional 2008 notes would be
treated as a single class for all purposes under the indenture.
Ranking
Our exchange notes will rank senior in right of payment to all of our
company's subordinated indebtedness.
In addition, each type of exchange notes will be separately secured by a
pledge of a GID unsubordinated promissory note as described below in "--Pledge
Agreements and Collateral--Collateral" until the relevant Pledge Release Date.
The GID unsubordinated promissory notes will rank equal in right of payment to
all other existing and future unsecured, unsubordinated indebtedness of GID.
99
If the trustee, acting on behalf of the holders of the relevant exchange
notes, enforces its rights under the applicable pledge agreement and,
thereafter, under the relevant GID unsubordinated promissory note, then claims
by holders of the relevant exchange notes under the that GID unsubordinated
promissory note will rank equal in right of payment to all other existing and
future unsecured, unsubordinated indebtedness of GID.
Subsequent to the Pledge Release Date, the exchange notes will rank junior
to all of our secured indebtedness and the indebtedness of all of our
subsidiaries. In addition, our company and our subsidiaries will be able to
incur secured and unsecured indebtedness as permitted by the covenants
described below.
Pledge Agreement and Collateral
Pledge Agreement
Our company will enter into a pledge agreement with the trustee whereby we
will pledge the GID 2008 unsubordinated promissory note. We will also amend
and restate the pledge agreement with the trustee that we entered into on
February 5, 2001 in order to confirm the security interest created in the GID
2006 unsubordinated promissory note, as amended and restated on the settlement
date.
Each pledge agreement will create a first priority security interest in the
Collateral securing each type of exchange notes. The Collateral will be the
GID 2006 unsubordinated promissory note, in the case of the 2006 notes, and
the GID 2008 unsubordinated promissory note, in the case of the 2008 notes.
The principal amount of each GID unsubordinated promissory note will be at
least equal to the amount of the corresponding exchange notes secured by such
GID unsubordinated promissory note. The security interest created by each of
the pledge agreements in the relevant Collateral will be for the benefit of
the holders of the exchange notes secured by that GID unsubordinated
promissory note and that security interest will be acknowledged and agreed to
by GID. In addition, each of the pledge agreements will provide that the
security interest in the Collateral will be terminated on the Pledge Release
Date. The Pledge Release Date will be a date subsequent to the date that the
trustee receives the Pledge Release Instruction stating that the Refinancing
Condition has occurred.
Collateral
The Collateral securing the 2008 notes will be an unsubordinated promissory
note issued by GID to our company in an initial principal amount equal to the
principal amount of the 2008 notes issued by us in this exchange offer. The
Collateral securing the 2006 notes is the GID 2006 unsubordinated promissory
note originally issued by GID to our company in February 2001. The principal
amount of the GID 2006 unsubordinated promissory note is currently US$180.0
million. However, the GID 2006 unsubordinated promissory note will be amended
and restated to increase the principal amount outstanding in order to cover
the additional principal amount of 2006 notes we are issuing as part of this
exchange offer as required by the indenture governing the 2006 notes.
The interest rate and principal amount of each of the GID unsubordinated
promissory notes will be no less than the interest rate and principal amount
of the outstanding class of exchange notes it secures, and interest will be
payable on the interest payment dates for the corresponding class of exchange
notes. Prior to the Pledge Release Date, the terms of each of the
unsubordinated promissory notes will allow the indebtedness to be accelerated
by the creditor if:
(a) an event of default specified in clauses (a), (b), (g) or (h) of the
"Events of Default" summary occurs and our exchange notes are
accelerated;
(b) GID defaults in the payment of principal or interest on the
unsubordinated promissory note when the same becomes due and payable;
(c) there is an event of default under any other indebtedness of GID
having an outstanding principal amount of US$25.0 million or more and
that indebtedness is accelerated and such acceleration shall not have
been waived or extended within 30 consecutive days of the
acceleration; or
100
(d) GID fails to make a principal payment at the final maturity of any
loan having an outstanding principal amount of US$25.0 million or more
and that defaulted payment is not waived or extended within 30
consecutive days of the payment default.
In the event that the trustee forecloses on a GID unsubordinated promissory
note, payments of interest by GID to you under that note will be subject to
withholding tax. However, GID will agree to gross up for any withholding taxes
that are required by law to be withheld under the terms of each of the GID
unsubordinated promissory notes.
Optional Redemption
We may redeem all, but not less than all, of the exchange notes as a result
of changes in Mexican Withholding Taxes
Our company may buy back all, but not less than all, of each type of
exchange notes at a redemption price equal to 100% of the unpaid principal
amount plus any accrued and unpaid interest, to the redemption date if our
company has become or would become obligated to pay any Additional Amounts on
the next date on which any payment is due under the exchange notes in excess
of those attributable to Mexican Withholding Taxes imposed at a rate of 10%,
as a result of:
. any change in the laws, treaties, rules or regulations of Mexico, or any
Mexican political subdivision or taxing authority or other
instrumentality;
. any change in the interpretations relating to those laws, treaties,
rules or regulations made by any legislative body, governmental or
regulatory agency or authority of Mexico or any political subdivision or
taxing authority or other instrumentality, including the enactment of
any legislation and the publication of any regulatory determination; or
. any official interpretation, application or pronouncement by any
legislative body or governmental or regulatory agency or authority that
provides for a position with respect to those laws, treaties, rules or
regulations that differs from the generally accepted position, which
change is enacted, promulgated, issued or announced or which
interpretation, application or pronouncement is issued or announced, in
each case, after the date of this prospectus and consent solicitation.
The following are additional conditions for a redemption for changes in
Mexican Withholding Taxes:
. our company may not issue a notice of redemption earlier than 90 days
prior to the earliest date on which our company would be obligated to
pay such Additional Amounts were a payment on the exchange notes then
due; and
. at the time our company issues a notice of redemption, the obligation to
pay the Additional Amounts triggering the redemption right remains in
effect.
Any notice of redemption delivered to the trustee as a result of changes in
Mexican Withholding Taxes will be irrevocable, unless our company no longer
continues to be obligated to pay those Additional Amounts.
Procedures for optional redemption
Our company will give at least 30 days notice of any redemption. However,
our company may not give more than 60 days notice of any redemption.
If our company redeems less than all of any type of exchange notes, the
trustee will select the exchange notes that will be redeemed. The selection
will be made:
. in compliance with the requirements of the principal national securities
exchange on which the exchange notes are listed; or
101
. if those exchange notes are not listed on a national securities
exchange, by lot or by another method that the trustee deems fair and
appropriate.
If any exchange note is to be redeemed in part only, the notice of
redemption relating to the note will state the portion of the principal amount
to be redeemed. Our company will issue an exchange note in principal amount
equal to the unredeemed portion upon cancellation of the original exchange
note. Our company will not redeem in part any exchange note having a principal
amount of US$1,000.
Additional procedures for a redemption resulting from changes in Mexican
Withholding Taxes
Prior to publication of any notice of redemption for changes in Mexican
Withholding Taxes, our company will deliver to the trustee:
. a certificate signed by a duly authorized officer of our company stating
that our company is entitled to redeem the exchange notes and setting
forth a statement of facts showing that the conditions precedent that
must be met for a redemption for changes in Mexican Withholding Taxes
have occurred and
. an opinion of Mexican counsel or from independent public accountants, in
both cases of recognized standing, selected by our company and
reasonably acceptable to the trustee to the effect that our company has
or will become obligated to pay the Additional Amounts triggering the
redemption right as a result of the relevant change, amendment, official
interpretation, application or pronouncement.
Sinking Fund
There will be no sinking fund payments for the exchange notes.
Covenants
Summary of covenants
Our company will agree to covenants that limit our and our Restricted
Subsidiaries' ability to:
. incur additional debt;
. pay dividends, acquire shares of stock, make payments on subordinated
debt or make investments;
. place limitations on distributions from Restricted Subsidiaries;
. issue or sell capital stock of Restricted Subsidiaries;
. issue guarantees;
. sell or exchange assets;
. enter into transactions with shareholders and affiliates;
. create liens; and
. effect mergers.
In addition, if a Change of Control occurs, each holder of exchange notes
will have the right to require our company to repurchase all or a part of the
holder's exchange notes at a price equal to 101% of their principal amount,
plus any accrued and unpaid interest to the date of repurchase.
Limitation on Indebtedness
Brief Summary
Our company and our Restricted Subsidiaries will not be able to incur
additional indebtedness unless the Interest Coverage Ratio is 2.0:1 or
greater. However, this restriction is subject to several important exceptions
102
which will allow our company and our Restricted Subsidiaries to incur
additional indebtedness even though the Interest Coverage Ratio may be less
than 2.0:1. For specific information regarding this covenant see the detailed
summary below.
Detailed Summary
(a) Our company will not, and will not permit any of our Restricted
Subsidiaries to, incur any Indebtedness other than the exchange notes and
Indebtedness existing on the closing date. However, our company may incur
Indebtedness if, after giving effect to the incurrence of the Indebtedness and
the receipt and application of the proceeds, the Interest Coverage Ratio would
be no less than 2.0:1.
Notwithstanding the foregoing, our company and any Restricted Subsidiary may
incur each and all of the following, unless otherwise specified:
(1) Indebtedness of our company or a Restricted Subsidiary if, after
giving effect to the incurrence of the Indebtedness and the receipt
and application of the proceeds:
(A) the Interest Coverage Ratio would be no less than 2.0:1 and
(B) the Consolidated Senior Indebtedness Interest Coverage Ratio would
be no less than 4.0:1.
However, no Indebtedness may be incurred under this clause (a)(1)
unless the Refinancing Condition has occurred or occurs simultaneously
with the incurrence of any Indebtedness under this clause (a)(1).
Furthermore, any Indebtedness incurred under this paragraph (a)(1) may
only be incurred to finance Asset Acquisitions.
(2) Indebtedness of our company or a Restricted Subsidiary not to exceed
the greater of
(A) US$150.0 million or
(B) 7.5% of Adjusted Consolidated Net Tangible Assets.
However, our Restricted Subsidiaries may not incur in the aggregate
more than US$100.0 million of Indebtedness under this clause (a)(2).
Furthermore, indebtedness incurred or assumed under this clause (a)(2)
may not be incurred or assumed in connection with the ACM Merger.
(3) Indebtedness owed:
(A) to our company by a Restricted Subsidiary which is evidenced by an
unsubordinated promissory note,
(B) to a Restricted Subsidiary by our company, or
(C) to a Restricted Subsidiary by a Restricted Subsidiary,
provided that:
(x) any event which results in a Restricted Subsidiary ceasing to
be a Restricted Subsidiary or any subsequent transfer of
Indebtedness incurred under this clause (a)(3) to a person
other than to our company or another Restricted Subsidiary
shall be deemed, in each case, to constitute an incurrence of
Indebtedness not permitted by this clause (a)(3) and
(y) if our company is the obligor on Indebtedness incurred under
this clause (a)(3), the Indebtedness must be expressly
subordinated in right of payment to the exchange notes, once
they have become due and payable, whether at Stated Maturity,
by acceleration or otherwise.
(4) Indebtedness issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness, other than
Indebtedness outstanding under clause (a)(3), and any
103
refinancings in an amount not to exceed the amount so refinanced or
refunded plus premiums, accrued interest, fees and expenses, provided
that:
(A) Indebtedness the proceeds of which are used to refinance or refund
the exchange notes or Indebtedness that is equal in right of
payment with, or subordinated in right of payment to, the exchange
notes, shall only be permitted under this clause (a)(4) if:
(x) in case the exchange notes are refinanced in part or the
Indebtedness to be refinanced is equal in right of payment with
the exchange notes, any new Indebtedness, by its terms or by
the terms of any agreement or instrument under which this new
Indebtedness is outstanding, is expressly made equal in right
of payment with, or subordinate in right of payment to, the
remaining exchange notes, or
(y) in case the Indebtedness to be refinanced is subordinated in
right of payment to the exchange notes, the new Indebtedness,
by its terms or by the terms of any agreement or instrument
under which this new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment
to the exchange notes at least to the extent that the
Indebtedness to be refinanced is subordinated to the exchange
notes,
(B) any new Indebtedness, determined as of the date of incurrence of
this new Indebtedness, does not have a Stated Maturity earlier than
the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of the new Indebtedness is at least
equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded, and
(C) any new Indebtedness is incurred by our company or by the
Restricted Subsidiary who is the obligor on the Indebtedness to be
refinanced or refunded.
However, our company may not refinance its Indebtedness by means of any
Indebtedness of any Restricted Subsidiary under this clause (a)(4).
(5) Indebtedness:
(A) in respect of bid, reimbursement, performance, surety or appeal
bonds or obligations provided in the ordinary course of business,
including Guarantees and letters of credit functioning or
supporting these bonds or obligations, in each case other than for
an obligation for money borrowed,
(B) under Currency Agreements, Commodity Agreements and Interest Rate
Agreements, provided that these agreements:
(x) are designed solely to protect our company or our Restricted
Subsidiaries against fluctuations in foreign currency exchange
rates, commodity prices or interest rates and
(y) do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in foreign
currency exchange rates, interest rates or commodity prices or
by reason of fees, indemnities and compensation payable under
those agreements, and
(C) arising from agreements providing for indemnification, adjustment
of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any
obligations of our company or any of our Restricted Subsidiaries
under these agreements, in any case incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of our
company, other than Guarantees of Indebtedness incurred by any
person acquiring all or any portion of such business, assets or
Restricted Subsidiary of our company for the purpose of financing
the acquisition, in a principal amount not to exceed the gross
proceeds actually received by our company or any Restricted
Subsidiary in connection with the disposition.
(6) Indebtedness of our company, to the extent the net proceeds of which
are promptly:
(A) used to purchase exchange notes tendered in an offer to purchase
made as a result of a Change in Control or
104
(B) deposited to defease the exchange notes as described under
"Defeasance."
(7) Guarantees of the exchange notes and Guarantees of Indebtedness of our
company or any Restricted Subsidiary by any Restricted Subsidiary
provided the Guarantee of the Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by
Restricted Subsidiaries" covenant described below.
(8) Guarantees by our company of Indebtedness of any Restricted Subsidiary
permitted under the "Limitation on Indebtedness" covenant.
(b) The maximum amount of Indebtedness that may be incurred under the
"Limitation on Indebtedness" covenant will not be deemed to be exceeded with
respect to any outstanding Indebtedness due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant:
(1) Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of
such particular amount shall not be included and
(2) any Liens granted because of the application of the equal and ratable
provisions referred to in the "Limitation on Liens" covenant shall not
be treated as Indebtedness.
(d) Irrespective of whether or not our company could incur additional
indebtedness under clause (a) of this detailed summary of the "Limitation on
Indebtedness" covenant, our company will not, and will not permit any of our
Restricted Subsidiaries to, incur or assume any Indebtedness in connection
with the ACM Merger prior to the occurrence of the Refinancing Condition.
Subsequent to the Refinancing Condition, our company may incur or assume
additional Indebtedness with respect to the ACM Merger if:
(1) the incurrence of that Indebtedness is permitted under clause (a) of
this detailed summary of the "Limitation on Indebtedness" covenant and
(2) that Indebtedness is subordinated or made subordinated in right of
payment to the exchange notes and the subordination provisions are
substantially similar to those attached as an exhibit to the
indenture.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, our company shall classify, and from time to time may
reclassify, an item of Indebtedness in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described
above.
Limitation on Restricted Payments
Brief Summary
Our company and our Restricted Subsidiaries will not be permitted to make
Restricted Payments unless our company meets several conditions, including
being able to incur additional indebtedness under paragraph (a) of the
detailed summary of the "Limitation on Indebtedness" covenant. In addition,
the amount of Restricted Payments permitted by the "Limitation on Restricted
Payments" covenant is limited.
In general, Restricted Payments include dividends, redemptions of stock of
our company or a Restricted Subsidiary, prepayments of subordinated
indebtedness, and some kinds of investments. However, this restriction is
subject to several important exceptions which will allow our company to make
Restricted Payments from time to time. For specific information regarding this
covenant see the detailed summary below.
105
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock other than
(x) dividends or distributions payable solely in shares of its Capital
Stock, other than Disqualified Stock, or in options, warrants or
other rights to acquire shares of that Capital Stock,
(y) dividends or distributions payable to our company or a Restricted
Subsidiary, and
(z) pro rata dividends or distributions on Capital Stock of Restricted
Subsidiaries held by minority stockholders. However, dividends paid
under this subclause (z) will not in the aggregate exceed the
minority stockholders' pro rata share of the Restricted
Subsidiaries' net income from the first day of the fiscal quarter
beginning immediately following the closing date held by persons
other than our company or any of our Restricted Subsidiaries;
(2) purchase, call for redemption or redeem, retire or otherwise acquire
for value any shares of Capital Stock of:
(A) our company, including options, warrants or other rights to acquire
such shares of Capital Stock, held by any person or
(B) a Restricted Subsidiary, including options, warrants or other
rights to acquire such shares of Capital Stock, held by any of our
Affiliates other than a Wholly Owned Restricted Subsidiary or any
holder, or any Affiliate of such holder, of 5% or more of the
Capital Stock of our company,
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of our company that is
subordinated in right of payment to the exchange notes prior to the
Stated Maturity of that Indebtedness, or
(4) make any Investment, other than a Permitted Investment, in any person
(such payments or any other actions described in clauses (1) through
(4) above being collectively "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) our company could not incur at least US$1.00 of Indebtedness under
the first paragraph of clause (a) of the detailed summary of the
"Limitation on Indebtedness" covenant or
(C) the aggregate amount of all Restricted Payments made after the
closing date shall exceed the sum of
(w) 50% of the aggregate amount of the Adjusted Consolidated Net
Income or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss, determined by excluding
income resulting from transfers of assets by our company or a
Restricted Subsidiary to an Unrestricted Subsidiary, accrued on
a cumulative basis during the period, taken as one accounting
period, beginning on the first day of the fiscal quarter
immediately following the closing date and ending on the last
day of the last fiscal quarter preceding the Transaction Date,
plus
(x) the aggregate Net Cash Proceeds received by our company after
the closing date as a capital contribution or from the issuance
and sale permitted by the indenture of our Capital Stock, other
than Disqualified Stock, to a person who is not a Restricted
Subsidiary of our company, including an issuance or sale
permitted by the indenture of Indebtedness of our company for
cash subsequent to the closing date upon the conversion of that
Indebtedness into our Capital Stock, other than Disqualified
Stock, or from the issuance to a person who is not a Restricted
Subsidiary of our company of any options, warrants or other
rights to acquire our Capital
106
Stock, in each case, excluding any Disqualified Stock or any
options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to
the Stated Maturity of the exchange notes, plus
(y) an amount equal to the net reduction in Investments, other than
reductions in Permitted Investments, in any person resulting
from
(a) payments of interest on Indebtedness, dividends, repayments
of loans or advances, or other transfers of assets, in each
case to our company or any Restricted Subsidiary or
(b) from the Net Cash Proceeds from the sale or redemption of
any such Investment, except, in each case, to the extent any
payment or proceeds are included in the calculation of
Adjusted Consolidated Net Income, or
(c) from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries, valued in each case as provided in
the definition of "Investments", not to exceed, in each
case, the amount of Investments (and treated as a Restricted
Payment) previously made by our company or any Restricted
Subsidiary in that person or Unrestricted Subsidiary, plus
(z) US$20.0 million.
The following Restricted Payments may be made so long as no Default or Event
of Default has occurred and is continuing or occurs as a consequence of the
actions or payments set forth below, however, the Restricted Payments
described under clauses (A) and (D) below may be made regardless of any
Default or Event of Default:
(A) The payment of any dividend or redemption of any Capital Stock within
60 days after the related date of declaration or call for redemption
if, at the date of declaration or call for redemption, the payment or
redemption would comply with the prior paragraph.
(B) The redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the exchange notes, including premium, if any, and accrued
interest, with the proceeds of, or in exchange for, Indebtedness
incurred under clause (4) of paragraph (a) of the detailed summary of
the "Limitation on Indebtedness" covenant.
(C) The making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness
which is subordinated in right of payment to the exchange notes in
exchange for, or out of the proceeds of, a substantially concurrent
offering of shares of our Capital Stock, other than Disqualified
Stock, or options, warrants or other rights to acquire such Capital
Stock, provided that those options, warrants or other rights are not
redeemable prior to the Stated Maturity of the exchange notes,
(D) The repurchase, redemption or other acquisition of our Capital Stock
or options, warrants or other rights to acquire Capital Stock in
exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of our Capital Stock, other than Disqualified
Stock, or options, warrants or other rights to acquire such Capital
Stock, provided that those options, warrants or other rights are not
redeemable prior to the Stated Maturity of the exchange notes.
(E) The repurchase, redemption or other acquisition of shares of Capital
Stock of our company or any Restricted Subsidiary from employees,
directors, former directors or transferees under the terms of
agreements, including employment agreements, or plans approved by the
board of directors of our company or the relevant Restricted
Subsidiary, provided that the aggregate amount of these repurchases,
redemptions or other acquisitions shall not exceed US$2.5 million in
any year and US$5.0 million prior to the Stated Maturity of the
exchange notes.
(F) Payments or distributions to dissenting stockholders under applicable
law or constituent documents as in effect on the closing date or, in
the case of the constituent documents of any Restricted Subsidiary
acquired after the closing date, on the date of the acquisition, or in
connection with a consolidation,
107
merger or transfer of assets that complies with the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of our company.
(G) Investments acquired as a capital contribution or in exchange for, or
out of the proceeds of, a substantially concurrent offering of our
Capital Stock, other than Disqualified Stock.
Each Restricted Payment
(1) permitted under the preceding paragraph, other than:
(a) the Restricted Payment referred to in clause (B),
(b) an exchange of Capital Stock for Capital Stock or Indebtedness
referred to in clause (C) or (D), and
(c) an Investment acquired as a capital contribution or in exchange for
Capital Stock referred to in clause (G), and
(2) the Net Cash Proceeds from any issuance of Capital Stock referred to
in clause (C) or (D), shall be included in calculating whether the
conditions of clause (4)(C) of the first paragraph of the detailed
summary of the "Limitation on Restricted Payments" covenant have been
met with respect to any subsequent Restricted Payments. In the event
the proceeds of an issuance of our Capital Stock are used for the
redemption, repurchase or other acquisition of the exchange notes, or
Indebtedness that is equal in right of payment with the exchange
notes, then the Net Cash Proceeds of such issuance shall be included
in clause (4)(C) of the first paragraph of the detailed summary of
this "Limitation on Restricted Payments" covenant only to the extent
the proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
For purposes of determining compliance with the "Limitation on Restricted
Payments" covenant:
(x) the amount, if other than in cash, of any Restricted Payment shall be
determined in good faith by the board of directors, whose
determination shall be conclusive and evidenced by a board resolution
and
(y) in the event that a Restricted Payment meets the criteria of more than
one of the types of Restricted Payments described in the above
clauses, our company may order and classify, and from time to time may
reclassify, an item designated as a Restricted Payment if that
classification would have been permitted at the time the Restricted
Payment was made and at the time of the reclassification.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
Brief Summary
Our Restricted Subsidiaries will not be permitted to restrict their ability
to make (1) dividend payments, (2) debt repayments, (3) transfers of assets or
(4) loans, to our company or another Restricted Subsidiary. However, this
restriction is subject to several important exceptions. For specific
information regarding this covenant see the detailed summary below.
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to:
(1) pay dividends or make any other distributions permitted by applicable
law on any Capital Stock of that Restricted Subsidiary owned by our
company or any other Restricted Subsidiary,
(2) pay any Indebtedness owed to our company or any other Restricted
Subsidiary,
108
(3) make loans or advances to our company or any other Restricted
Subsidiary, or
(4) transfer any of its property or assets to our company or any other
Restricted Subsidiary.
The provisions in the preceding paragraph will not restrict any encumbrances
or restrictions:
(a) existing on the closing date in the indenture or any other agreements
in effect on the closing date, and any extensions, refinancings,
renewals or replacements of those agreements, provided that the
encumbrances and restrictions in any extensions, refinancings,
renewals or replacements taken as a whole are no less favorable in any
material respect to the holders than those encumbrances or
restrictions that are then in effect and that are being extended,
refinanced, renewed or replaced,
(b) existing under or by reason of applicable law;
(c) existing with respect to any person or the property or assets of such
person acquired by our company or any Restricted Subsidiary, existing
at the time of the acquisition and not incurred in contemplation of
the acquisition, which encumbrances or restrictions are not applicable
to any person or the property or assets of any person other than the
person or the property or assets of the person so acquired,
(d) in the case of clause (4) of the first paragraph of this detailed
summary of the "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant:
(1) that restrict in a customary manner the subletting, assignment or
transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset,
(2) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or
assets of our company or any Restricted Subsidiary not otherwise
prohibited by the indenture, or
(3) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness,
(e) with respect to a Restricted Subsidiary and imposed under an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of,
that Restricted Subsidiary,
(f) contained in the terms of
(1) any Indebtedness incurred by any Restricted Subsidiary for the
purpose of an Asset Acquisition if the incurrence of that
Indebtedness otherwise complies with clause (a)(1) of the detailed
summary of the "Limitation on Indebtedness" covenant or
(2) any Indebtedness incurred by any Restricted Subsidiary as allowed
under clause (a)(2) of the detailed summary of the "Limitation on
Indebtedness" covenant,
and any extensions, refinancings, renewals or replacements of those
agreements, provided that the encumbrances and restrictions in any
extensions, refinancings, renewals or replacements taken as a whole are
no less favorable in any material respect to the holders than those
encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced,
(g) contained in the terms of any Indebtedness or any agreement under
which that Indebtedness was issued if:
(1) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in that Indebtedness or agreement;
(2) the encumbrance or restriction is not materially more
disadvantageous to the holders of the exchange notes than is
customary in comparable financings, as determined by our company
in good faith, and
(3) our company determines that any encumbrance or restriction will
not materially affect our company's ability to make principal or
interest payments on the exchange notes, or
109
(h) contained in Standard Securitization Undertakings made in connection
with Qualified Receivables Transactions.
Nothing contained in the "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant prevents our company
or any Restricted Subsidiary from:
(1) creating, incurring, assuming or suffering to exist any Liens otherwise
permitted under the "Limitation on Liens" covenant or
(2) restricting the sale or other disposition of property or assets of our
company or any of its Restricted Subsidiaries that secure Indebtedness
of our company or any of our Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Brief Summary
Our company will not be permitted to sell stock of our Restricted
Subsidiaries. In addition, our Restricted Subsidiaries may not issue or sell
their own stock or that of another Restricted Subsidiary. However, these sales
will be permitted in some cases as more fully described in the detailed
summary below.
Detailed Summary
Our company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary, including options, warrants or other rights to purchase
shares of such Capital Stock, except:
. to our company or a Wholly Owned Restricted Subsidiary,
. issuances of director's qualifying shares or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law,
. if, immediately after giving effect to the issuance or sale, the
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in that person remaining after giving effect to the
issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of the
issuance or sale,
. issuances of Common Stock in connection with dividends or distributions
payable by a Restricted Subsidiary solely in shares of Common Stock of
that Restricted Subsidiary, provided that subsequent to the dividend or
distribution our company's direct or indirect equity interest in that
Restricted Subsidiary is at least equal to our company's direct or
indirect equity interest in that Restricted Subsidiary prior to the
dividend or distribution, or
. sales of Common Stock, including options, warrants or other rights to
purchase shares of such Common Stock, of a Restricted Subsidiary by our
company or a Restricted Subsidiary, provided that our company or such
Restricted Subsidiary applies the Net Cash Proceeds of any such sale in
accordance with the "Limitation on Asset Sales" covenant.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Brief Summary
Our Restricted Subsidiaries will not be permitted to guarantee any debt of
our company or a Restricted Subsidiary which is equal or subordinate in right
of payment to the exchange notes. However, this restriction is subject to
several exceptions as more fully described in the detailed summary below.
110
Detailed Summary
Our company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of our company or any other
Restricted Subsidiary which is equal with or subordinate in right of payment
to the exchange notes ("Guaranteed Indebtedness"). However, Guaranteed
Indebtedness will not be restricted if:
. the Restricted Subsidiary issuing the Guarantee simultaneously executes
and delivers a supplemental indenture to the indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the exchange notes by
such Restricted Subsidiary and
. the Restricted Subsidiary waives and will not in any manner claim or
take the benefit or advantage of, any rights of reimbursement, indemnity
or subrogation or any other rights against our company or any other
Restricted Subsidiary as a result of any payment by the Restricted
Subsidiary under its Subsidiary Guarantee until the exchange notes have
been paid in full, in U.S. Dollars.
The restrictions described in the preceding paragraph will not apply to any
Guarantee by any Restricted Subsidiary that existed at the time it became a
Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, it becoming a Restricted Subsidiary. If the Guaranteed
Indebtedness is:
. equal in right of payment with the exchange notes, then the Guarantee of
such Guaranteed Indebtedness shall be equal in right of payment with, or
subordinated to, the Subsidiary Guarantee or
. subordinated to the exchange notes, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary
Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the exchange notes.
Notwithstanding the foregoing:
(1) our company may permit any of our Restricted Subsidiaries to issue
Guarantees otherwise restricted by the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described in this
detailed summary to secure Indebtedness incurred for the purpose of
acquiring any person or asset engaged in the Pulp and Paper Business
if the incurrence of that Indebtedness otherwise complies with clause
(a)(1) of the detailed summary of the "Limitation on Indebtedness"
covenant, and
(2) any Subsidiary Guarantee by a Restricted Subsidiary may provide by its
terms that it shall be automatically and unconditionally released and
discharged upon:
(A) any sale, exchange or transfer, to any person not an Affiliate of
our company, of all of our company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all the
assets of, that Restricted Subsidiary (which sale, exchange or
transfer is not prohibited by the indenture) or
(B) the release or discharge of the Guarantee which resulted in the
creation of the Subsidiary Guarantee, except a discharge or
release by or as a result of payment under the Guarantee.
Limitation on Transactions with Shareholders and Affiliates
Brief Summary
Our company and our Restricted Subsidiaries will only be permitted to enter
into transactions with shareholders owning 5% or more of the stock of our
company or with our Affiliates or those of our Restricted Subsidiaries after
compliance with various conditions. However, this restriction is subject to
several important exceptions. For specific information regarding this covenant
and these conditions and exceptions see the detailed summary below.
111
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction, including
the purchase, sale, lease or exchange of property or assets, or the rendering
of any service with any holder, or any Affiliate of that holder, of 5% or more
of any class of our Capital Stock or with any Affiliate of our company or any
Restricted Subsidiary, other than our company or a Restricted Subsidiary,
except
(a) upon terms no less favorable to us or that Subsidiary than could be
obtained in a comparable arm's-length transaction with a person that
is not such a holder or Affiliate,
provided that, with respect to a transaction or series of related
transactions involving aggregate payments by our company or a Subsidiary
having a fair market value equal to or in excess of:
. US$5.0 million but less than US$15.0 million, the board of directors of
our company approves such transaction, or series of transactions, and,
in its good faith judgment, believes that the transaction or series of
transactions complies with clause (a) of this paragraph as evidenced by
a board resolution and
. US$15.0 million,
(A) our company receives the written opinion of an investment banking
firm nationally recognized in the United States that the
transaction or series of transactions is fair, from a financial
point of view, to our company or such Restricted Subsidiary and
(B) the board of directors of our company approves the transaction or
series of transactions and, in its good faith judgment, believes
that such transaction or series of transactions complies with
clause (a) of this paragraph, as evidenced by a board resolution.
The restriction described in the preceding paragraph does not limit, and
shall not apply to:
(1) any transaction solely between our company and any of our Restricted
Subsidiaries or solely among Restricted Subsidiaries,
(2) any transaction between our company or any Restricted Subsidiary and any
person that is an Affiliate of our company or of any Restricted
Subsidiary, if:
. that person is engaged in the Pulp and Paper Business,
. the transaction is in the ordinary course of business of our company or
the Restricted Subsidiary, as the case may be, and that person,
. the transaction is on fair and reasonable terms no less favorable to
our company or the Restricted Subsidiary than could be obtained in a
comparable arm's-length transaction with a person that is not an
Affiliate,
. the transaction is in the best interests of our company or such
Restricted Subsidiary, and
. that person is an Affiliate solely by virtue of being directly or
indirectly controlled by our company or a Restricted Subsidiary.
(3) the payment of reasonable and customary regular fees to our directors and
officers and indemnification arrangements entered into by our company in
the ordinary course of business and consistent with our past practices,
(4) loans or advances by our company or any Restricted Subsidiary to employees
in the ordinary course of business in an aggregate amount to all employees
not to exceed US$2.5 million per year and US$5.0 million prior to the
Stated Maturity of the exchange notes,
112
(5) any payments or other transactions under any tax-sharing agreement between
our company and any Subsidiary with which our company files a consolidated
tax return or with which our company is part of a consolidated group for
tax purposes,
(6) any sale of shares of our Capital Stock, other than Disqualified Stock,
(7) any merger or consolidation with an Affiliate, including the ACM Merger,
which is permitted under the "Consolidation, Merger and Sale of Assets"
covenant,
(8) Qualified Receivables Transactions,
(9) contributions in cash to the common equity of our company by the Existing
Shareholders,
(10) any Permitted Investments or any Restricted Payments not prohibited by
the "Limitation on Restricted Payments" covenant,
(11) any issuance of securities or other payments, awards or grants in cash,
securities or otherwise under, or for the funding of, employment
compensation plans, stock option plans or other similar incentive plans
approved by our board of directors, provided that all distributions under
this clause (11) shall not exceed US$2.5 million per year and US$5.0
million prior to the Stated Maturity of the exchange notes, and
(12) any payment to ACM, provided that any payments made under this clause
(12) will be treated as a Restricted Payment under the "Limitation on
Restricted Payments" covenant and may only be made in accordance with the
"Limitation on Restricted Payments" covenant.
Limitation on Liens
Brief Summary
Our company and our Restricted Subsidiaries will not be permitted to create
any Liens. This restriction is subject to several important exceptions as more
fully described in the detailed summary below.
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
exchange notes and all other amounts due under the indenture to be directly
secured equally and ratably with or, if the obligation or liability to be
secured by such Lien is subordinated in right of payment to the exchange
notes, prior to, the obligation or liability secured by such Lien.
This limitation does not apply to:
(a) Liens existing on the closing date,
(b) the Liens securing the Collateral,
(c) Liens securing Indebtedness of our company issued in connection with
the GID Refinancing, provided that:
(1) the assets allowed to be secured under this clause (c) can only be
unsubordinated promissory exchange notes issued by GID to our
company that are equal in right of payment to all other existing
and future unsecured, unsubordinated indebtedness of GID, and
(2) the Liens created on the assets described in clause (1) will be
created under a pledge agreement that is substantially similar to
the form of pledge agreement attached as an exhibit to the
indenture.
Any Liens created under this clause (c) must be terminated on the Pledge
Release Date.
113
(d) Liens granted after the closing date on any assets or Capital Stock of
our company or our Restricted Subsidiaries created in favor of the
holders of the exchange notes,
(e) Liens with respect to the assets of a Restricted Subsidiary granted by
the Restricted Subsidiary to our company or a Restricted Subsidiary to
secure Indebtedness owing to our company or that other Restricted
Subsidiary,
(f) Liens securing Indebtedness which is incurred to refinance secured
Indebtedness which is permitted to be incurred under clause a(4) of the
detailed summary of the "Limitation on Indebtedness" covenant, provided
that those Liens do not extend to, or cover any, property or assets of
our company or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced,
(g) Liens incurred under clause a(1) of the detailed summary of the
"Limitation on Indebtedness" covenant, or
(h) Permitted Liens.
Limitation on Sale-Leaseback Transactions
Brief Summary
Our company and our Restricted Subsidiaries will not be permitted to enter
into any sale-leaseback transactions. This restriction is subject to several
important exceptions as more fully described in the detailed summary below.
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any assets or properties
whether now owned or hereafter acquired, whereby our company or a Restricted
Subsidiary sells or transfers such assets or properties or leases such assets
or properties or any part thereof or any other assets or properties which we
or such Restricted Subsidiary, as the case may be, intends to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
. the lease is for a period, including renewal rights, of not in excess of
three years,
. the transaction is solely between our company and any Wholly Owned
Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries, or
. our company or a Restricted Subsidiary, within 12 months after the sale
or transfer of any assets or properties is completed, applies an amount
not less than the net proceeds received from the sale in accordance with
the "Limitation on Asset Sales" covenant summarized below.
Limitation on Asset Sales
Brief Summary
Our company and our Restricted Subsidiaries will not be permitted to sell
any assets unless the sale price is at least equal to the fair market value of
the assets sold and at least 75% of the sale price is in cash or Temporary
Cash Investments. The proceeds from any sale of assets must be applied as
provided for in the indenture and as summarized below.
Detailed Summary
Our company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless:
. the consideration received by our company or such Restricted Subsidiary
is at least equal to the fair market value of the assets sold or
disposed of and
114
. at least 75% of the consideration received, including any amount of
Released Indebtedness, consists of cash or Temporary Cash Investments.
In the event and to the extent that the Net Cash Proceeds received by our
company or any of our Restricted Subsidiaries from one or more Asset Sales
occurring on or after the closing date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets, determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of our company and our Subsidiaries has been filed
with the SEC or provided to the trustee, then our company will or will cause
the relevant Restricted Subsidiary to:
(1) within twelve months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets,
(A) apply an amount equal to the excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of our company or
Indebtedness of any other Restricted Subsidiary, in each case
owing to a person other than our company or any of our Restricted
Subsidiaries, or
(B) invest an equal amount, or the amount not so applied under
subclause (A) above, or enter into a definitive agreement
committing to so invest within 12 months after the date of that
agreement, in Replacement Assets, and
(2) apply, no later than the end of the 12-month period referred to in
clause (1) above, the excess Net Cash Proceeds to the extent not
applied pursuant to clause (1) as provided in the following paragraphs
of this detailed summary of the "Limitation on Asset Sales" covenant.
The amount of the excess Net Cash Proceeds required to be applied or to be
committed to be applied during such 12-month period as set forth in clause (1)
above and not applied as so required by the end of the period will constitute
"Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not subject to an offer to purchase under this "Limitation on
Asset Sales" covenant totals at least US$5.0 million, our company must
commence, not later than the fifteenth business day of such month, and
consummate an offer to purchase from the holders and, if required by the terms
of any Indebtedness that is equal in right of payment with the exchange notes
("Pari Passu Indebtedness"), from the holders of the Pari Passu Indebtedness,
on a pro rata basis an aggregate principal amount of exchange notes and Pari
Passu Indebtedness equal to the Excess Proceeds on such date, at a purchase
price equal to 100% of their principal amount, plus, in each case, accrued
interest, if any, to the payment date.
Requirements with Respect to the Collateral
Prior to the Pledge Release Date our company shall:
(1) maintain the priority and perfection of the liens on the Collateral
created by the pledge agreement,
(2) not assign, sell, transfer or otherwise dispose of any right, title or
interest in the Collateral to another person, and
(3) at our expense, execute and deliver to the collateral agent all
documents, instruments and agreements and do all other acts as may be
required to enable the trustee to exercise and enforce its rights in
respect of the Collateral.
Until the exchange notes are repaid in full, our company shall cause the
principal amount and interest rate of the GID unsubordinated promissory note
to be no less than the principal amount and interest rate of the outstanding
exchange notes.
115
Repurchase of Notes upon a Change of Control
Our company must commence and consummate an offer to purchase all exchange
notes then outstanding, at a purchase price equal to 101% of their principal
amount, plus accrued interest (if any) to the payment date within 30 days of
the occurrence of a Change of Control.
We will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations to the extent those laws and regulations are
applicable, in the event that our company is required to repurchase exchange
notes pursuant to an offer to purchase. If the provisions of the securities
laws conflict with the agreement described in this section or the "Limitation
on Asset Sales" covenant, we will comply with the securities laws and will not
be deemed to have breached our obligations under the indenture because of that
compliance.
Our company cannot assure you that we will have sufficient funds available
at the time of any Change of Control to make any debt payment, including
repurchases of exchange notes, required by the agreement described in this
section as well as may be contained in other securities of our company which
might be outstanding at the time. The "Repurchase of Notes upon a Change of
Control" covenant will, unless consents are obtained, require our company to
repay all indebtedness then outstanding which by its terms would prohibit the
repurchase of exchange notes, either prior to or concurrently with the
repurchase of the exchange notes.
SEC Reports and Reports to Holders
Whether or not our company is required to file reports with the SEC, our
company will file with the SEC all reports and other information as it would
be required to file with the SEC under Section 13(a) or 15(d) under the
Securities Exchange Act if we were subject to those regulations. In addition
to annual reports on Form 20-F, our company will also be required to file on
Form 6-K interim consolidated reports, including consolidated financial
statements, as soon as they are available, but in no event no later than 60
days after the end of each interim period, prepared in accordance with Mexican
GAAP. We will file these interim consolidated reports with the SEC whether or
not we are subject to corporate reporting requirements under Mexican law.
If the SEC does not permit the filings described above, our company will
provide annual and interim reports and other information to the trustee within
the same time periods that would be applicable if our company were required
and permitted to file those reports with the SEC. We will also instruct the
trustee to mail those reports and other information to holders at their
addresses set forth on the security register.
Events of Default
The following events will be defined as "Events of Default" in the
indentures:
(a) default in the payment of principal or of premium, if any, on any note
when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise,
(b) default in the payment of interest on any note when the same becomes
due and payable, and that default continues for a period of 30 days,
(c) default in the performance or breach of the provisions of the
indenture applicable to mergers, consoli-dations and transfers of all
or substantially all of the assets of our company or the failure by
our com-pany to make or consummate an offer to purchase in accordance
with the "Limitation on Asset Sales" or "Repurchase of Notes upon a
Change of Control" covenants;
(d) our company defaults in the performance of or breaches any other
covenant or agreement in the inden-ture, the pledge agreement or under
the exchange notes, other than a default specified in clauses (a), (b)
or (c) above, and that default or breach continues for a period of 30
consecutive days after written notice by the trustee or the holders of
25% or more in aggregate principal amount of the exchange notes,
116
(e) there occurs with respect to any issue or issues of Indebtedness of
our company or any Significant Subsidiary having an outstanding
principal amount of US$25.0 million or more in the aggregate for all
such issues of all such persons, whether such Indebtedness now exists
or shall hereafter be created,
(A) an event of default that has caused the holder of such
Indebtedness to declare the Indebtedness to be due and payable
prior to its Stated Maturity and this Indebtedness has not been
discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or
(B) the failure to make a principal payment at the final, but not any
interim, fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of the payment
default,
(f) any final judgment or order not covered by insurance for the payment
of money in excess of US$25.0 million in the aggregate for all final
judgments or orders against all such persons, treating any
deductibles, self-insurance or retention as not so covered, shall be
rendered against our company or any Significant Subsidiary and is not
paid or discharged, and there shall be any period of 60 consecutive
days following entry of the final judgment or order that causes the
aggregate amount for all final judgments or orders outstanding and not
paid or discharged against all such persons to exceed US$25.0 million
during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect.
(g) a court having jurisdiction in the premises enters a decree or order
for:
(A) relief in respect of our company or any Significant Subsidiary in
an involuntary case under any applicable bankruptcy, concurso
mercantil, insolvency or other similar law in effect at any time,
(B) appointment of a receiver, liquidator, assignee, sindico,
conciliador, custodian, trustee, sequestrator or similar official
of our company or any Significant Subsidiary or for all or
substantially all of the property and assets of our company or any
Significant Subsidiary or
(C) the winding up or liquidation of the affairs of our company or any
Significant Subsidiary and, in each case, the decree or order
remains unstayed and in effect for a period of 60 consecutive
days, or
(h) our company or any Significant Subsidiary:
(A) commences a voluntary case under any applicable bankruptcy,
concurso mercantil, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law,
(B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, sindico, conciliador, custodian, trustee,
sequestrator or similar official of our company or any Significant
Subsidiary or for all or substantially all of the property and
assets of our company or any Significant Subsidiary or
(C) effects any general assignment for the benefit of creditors.
(i) the pledge agreement shall for any reason (other than under its terms)
cease to create a valid and perfected first priority lien on, and
security interest in, the Collateral.
If an Event of Default, other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to us, occurs and is continuing
under the indenture, the trustee or the holders of at least 25% in aggregate
principal amount of the exchange notes then outstanding, by written notice to
us and to the trustee if the notice is given by the holders, may, and the
trustee at the request of such holders shall, declare the principal of,
premium, if any, and accrued interest on those exchange notes to be
immediately due and payable. Upon a declaration of acceleration, such
principal of, premium, if any, and accrued interest shall be immediately due
and payable.
117
In the event of a declaration of acceleration because an Event of Default
under clause (e) above has occurred and is continuing, the declaration of
acceleration will be automatically rescinded and annulled if the event
triggering the Event of Default under clause (e) is remedied or cured by our
company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration
with respect thereto.
If an Event of Default specified in clause (g) or (h) above occurs with
respect to our company, the principal of, premium, if any, and accrued
interest on the exchange notes then outstanding will automatically become
immediately due and payable without any declaration or other act on the part
of the trustee or any holder.
The holders of at least a majority in principal amount of the outstanding
exchange notes may waive all past defaults and rescind and annul a declaration
of acceleration and its consequences by written notice to us and to the
trustee if:
(x) all existing Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the exchange notes that
have become due solely by the declaration of acceleration, have been
cured or waived and
(y) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction.
For information as to the waiver of defaults, see "--Modification and
Waiver."
The holders of at least a majority in aggregate principal amount of the
outstanding exchange notes may direct the time, method and place of conducting
any proceeding for any remedy available to the trustee or exercising any trust
or power conferred on the trustee. However, the trustee may refuse to follow
any direction that conflicts with law or the indenture, that may involve the
trustee in personal liability, or that the trustee determines in good faith
may be unduly prejudicial to the rights of holders of exchange notes not
joining in the giving of such direction and may take any other action it deems
proper that is not inconsistent with any such direction received from holders
of exchange notes. A holder may not pursue any remedy with respect to the
indenture or the exchange notes unless:
. the holder gives the trustee written notice of a continuing Event of
Default,
. the holders of at least 25% in aggregate principal amount of outstanding
exchange notes make a written request to the trustee to pursue the
remedy,
. the holder or holders offer the trustee indemnity satisfactory to the
trustee against any costs, liability or expense,
. the trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity, and
. during the 60-day period, the holders of a majority in aggregate
principal amount of the outstanding exchange notes do not give the
trustee a direction that is inconsistent with the request.
However, these limitations do not apply to the right of any holder to
receive payment of the principal of, premium, if any, or interest on, their
exchange notes or to bring suit for the enforcement of any payment, on or
after the due date expressed in the exchange notes, which right will not be
impaired or affected without the consent of the holder.
The indenture requires our officers to certify, on or before a date not more
than 90 days after the end of each fiscal year, that a review has been
conducted of the activities of our company and our Restricted Subsidiaries and
our company's and our Restricted Subsidiaries' performance under the indenture
and that our company has fulfilled all obligations under the indenture. If
there has been a default in the fulfillment of any obligation under the
indenture, our officers must specify each default and the nature and status of
the default. We will also be obligated to notify the trustee of any default or
defaults in the performance of any covenants or agreements under the
indenture.
118
Consolidation, Merger and Sale of Assets
Our company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of our
property and assets as an entirety or substantially an entirety, in one
transaction or a series of related transactions, to any person or permit any
person to merge with or into our company unless:
(1) our company shall be the continuing person, or the person, if not our
company, formed by such consolidation or into which our company is
merged or that acquired or leased such property and assets of it shall
be a corporation organized and validly existing under the laws of
Mexico, the United States of America or any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and
delivered to the trustee, all of our company's obligations under the
indenture and the exchange notes,
(2) immediately after giving effect to the transaction, no Default or
Event of Default shall have occurred and be continuing,
(3) immediately after giving effect to the transaction on a pro forma
basis, our company or any person becoming the successor obligor of the
exchange notes, as the case may be, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of our
company immediately prior to the transaction,
(4) immediately after giving effect to the transaction on a pro forma
basis, our company or any person becoming the successor obligor of the
exchange notes, as the case may be, could incur at least US$1.00 of
Indebtedness under the first paragraph of the detailed summary of the
"Limitation on Indebtedness" covenant, provided that this clause (4)
will not apply to a consolidation or merger with, or into a Wholly
Owned Subsidiary with a positive net worth and provided further that,
in connection with any such merger or consolidation, no consideration,
other than Common Stock in the surviving person or our company, shall
be issued or distributed to our stockholders, and
(5) we deliver to the trustee an officers' certificate having the
arithmetic computations to demonstrate compliance with clauses (3) and
(4) attached and an opinion of U.S. counsel, in each case stating that
the consolidation, merger or transfer and the supplemental indenture
complies with this provision and that all conditions precedent
provided for in the indenture relating to the transaction have been
complied with.
However, clauses (3) and (4) above will not apply if, in the good faith
determination of our board of directors, whose determination shall be
evidenced by a board resolution, the principal purpose of the transaction is
to change the jurisdiction of incorporation of our company or to incorporate
our company in the United States. In addition, any Restricted Subsidiary may
consolidate with, merge into or transfer all or part of its properties and
assets to our company.
Until the Refinancing Condition has occurred, our company or any of our
Restricted Subsidiaries will not be permitted to consummate the ACM Merger.
Once the Refinancing Condition has occurred, the ACM Merger may be
consummated, so long as the company complies with clause (d) of the detailed
summary of the "Limitation on Indebtedness" covenant and so long as ACM's
Indebtedness at the time of the merger does not exceed ACM's total
Indebtedness on the closing date.
Defeasance
Defeasance and Discharge. Our company will be deemed to have paid and will
be discharged from all obligations under the 2006 notes or 2008 notes, as the
case may be, and the applicable indenture will no longer be in effect with
respect to those exchange notes, except for:
. obligations to register the transfer or exchange of the exchange notes;
. to replace stolen, lost or mutilated exchange notes;
119
. to maintain paying agencies; and
. to hold monies for payment in trust;
if:
(A) our company deposits with the trustee, in trust, money and/or
Government Securities that through the payment of interest and
principal in respect of such money and/or Government Securities will
provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the 2006 notes or 2008 notes,
as the case may be, on the Stated Maturity of such payments in
accordance with the terms of the applicable indenture and those
exchange notes,
(B) our company has delivered to the trustee:
(1) either:
(x) an opinion of U.S. counsel to the effect that holders will not
recognize income, gain or loss for U.S. federal income tax
purposes as a result of our company's exercise of our option
under this "Defeasance" provision and will be subject to U.S.
federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which
opinion of U.S. counsel must be based upon, and accompanied by
a copy of, a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal
income tax law after the closing date so that a ruling is no
longer required, or
(y) a ruling directed to the trustee received from the Internal
Revenue Service to the same effect as the opinion of U.S.
counsel described above,
(2) either:
(x) an opinion of Mexican counsel to the effect that, based upon
Mexican law then in effect, holders will not recognize income,
gain or loss for Mexican tax purposes, including withholding
tax except for withholding tax then payable on interest
payments due, as a result of our company's exercise of our
option under this "Defeasance" provision and will be subject to
Mexican tax, including withholding tax except for withholding
tax then payable on interest payments due, on the same amount
and in the same manner and at the same time as would have been
the case if such deposit, defeasance and discharge had not
occurred, or
(y) a ruling directed to the trustee received from the Mexican tax
authorities to the same effect as the opinion of Mexican
counsel described above, and
(3) an opinion of U.S. counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of
1940 and the trust fund will not be subject to the effect of
Section 547 of the United States Bankruptcy Code or Section 15 of
the New York Debtor and Creditor Law,
(C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse
of time or both would become an Event of Default, shall have occurred
and be continuing on the date of the deposit or during the period
ending on the 271st day after the date of the deposit, and such
deposit will not result in a breach or violation of, or constitute a
default under, any other material agreement or instrument to which we
or any of our Restricted Subsidiaries is a party or by which we or any
of our Restricted Subsidiaries is bound, and
(D) if at any time the applicable exchange notes are listed on a national
securities exchange, our company has delivered to the trustee an
opinion of U.S. counsel to the effect that those exchange notes will
not be delisted as a result of the deposit, defeasance and discharge.
120
Defeasance of Covenants and Events of Default. The provisions of the
applicable indenture will no longer be in effect with respect to:
. clauses (3) and (4) under "Consolidation, Merger and Sale of Assets" and
all the covenants summarized under "Covenants,"
. clause (c) under "Events of Default" with respect to clauses (3) and (4)
under "Consolidation, Merger and Sale of Assets,"
. clause (d) under "Events of Default" with respect to all of the
covenants summarized under "Covenants," and
. clauses (e) and (f) and, with respect to a Significant Subsidiary,
clause (g) under "Events of Default",
upon:
(1) the deposit with the trustee, in trust, of money and/or Government
Securities that through the payment of interest and principal in
respect of such money and/or Government Securities will provide money
in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the applicable exchange notes on the Stated
Maturity of such payments in accordance with the terms of the relevant
indenture and the applicable exchange notes,
(2) the satisfaction of the provisions described in clauses (B)(3), (C)
and (D) under "Defeasance and Discharge" above, and
(3) the delivery to the trustee of an opinion of U.S. counsel to the
effect that:
(a) the holders will not recognize income, gain or loss for federal
income tax purposes as a result of the deposit and defeasance of
the covenants and Events of Default and
(b) will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case
if the deposit and defeasance had not occurred.
Defeasance and Other Events of Default. If we exercise our option to omit
compliance with covenants and provisions of the applicable indenture with
respect to the relevant exchange notes as described in "Defeasance of
Covenants and Events of Default" above and those exchange notes are declared
due and payable because of the occurrence of an Event of Default that remains
applicable, the amount of money and/or Government Securities on deposit with
the trustee will be sufficient to pay amounts due on those exchange notes at
the time of their Stated Maturity but may not be sufficient to pay amounts due
on those exchange notes at the time of the acceleration resulting from such
Event of Default. However, our company will remain liable for such payments.
Satisfaction and Discharge
The applicable indenture will cease to be of further effect, except as to
matters expressly provided for in that indenture, as to the relevant exchange
notes when:
(1) either:
(a) all such exchange notes, except lost, stolen or destroyed exchange
notes which have been replaced or paid, have been delivered to the
trustee for cancellation and our company has paid all sums payable
by us under those exchange notes or
(b) all such exchange notes not delivered to the trustee for
cancellation have become due and payable or will become due and
payable at their Stated Maturity within one year or will be called
for redemption within one year and our company has irrevocably
deposited or caused to be deposited with the trustee funds in an
amount sufficient to pay and discharge the entire Indebtedness on
the exchange notes not delivered to such trustee for cancellation,
for principal of, premium, if any, and interest to the date of
deposit in the case of exchange notes which have become due and
121
payable or to the date such exchange notes will become due and
payable or to the date of redemption, as the case may be in the case
of exchange notes which will become due and payable at their Stated
Maturity within one year or which will be called for redemption
within one year,
(2) our company has paid all other sums payable under the applicable
indenture, and
(3) our company has delivered to the trustee an officers' certificate and
an opinion of U.S. counsel each stating that:
(A) all conditions precedent under the applicable indenture relating to
the satisfaction and discharge of that indenture have been complied
with and
(B) the satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the applicable
indenture or any other material agreement or instrument which, in
the case of the opinion of U.S. counsel, would be any other
material agreement or instrument identified to such counsel by our
company, to which we or any of our Subsidiaries is a party or by
which it is bound.
Modification and Waiver
The indentures may be amended, without the consent of any holder, to:
. cure any ambiguity, defect or inconsistency in the indenture;
. comply with the provisions summarized under "Consolidation, Merger and
Sale of Assets" or "Limitation on Issuances of Guarantees by Restricted
Subsidiaries";
. comply with any requirements of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act;
. evidence and provide for the acceptance of appointment by a successor
trustee; or
. make any change that, in the good faith opinion of our board of
directors, does not materially and adversely affect the rights of any
holder.
Modifications and amendments of an indenture may be made by our company and
the trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding 2006 notes or 2008 notes, as the
case may be. However, no modification or amendment may be made, without the
consent of each affected holder affected, to:
. change the Stated Maturity of the principal of, or any installment of
interest on, any exchange note;
. reduce the principal amount of, or premium, if any, or interest on, any
exchange note;
. change the optional redemption dates or optional redemption prices of
the relevant class of exchange note from that stated under the caption
"Optional Redemption";
. change the place or currency of payment of principal of, or premium, if
any, or interest on, any note;
. impair the right to institute suit for the enforcement of any payment on
or after the Stated Maturity or, in the case of a redemption, on or
after the redemption date, of any exchange note;
. reduce the above stated percentage of outstanding exchange notes the
consent of whose holders is necessary to modify or amend the applicable
indenture;
. waive a default in the payment of principal of, premium, if any, or
interest on the relevant class of exchange notes;
. reduce the percentage or aggregate principal amount of outstanding 2006
notes or 2008 notes, as the case may be, the consent of whose holders is
necessary for waiver of compliance with provisions of the applicable
indenture or for waiver of default provisions; or
122
. following the mailing of an offer to purchase, modify the provisions of
the applicable indenture with respect to the offer to purchase in a
manner adverse to such holder.
Additional Amounts
Our company will make any and all payments to holders under or with respect
to the exchange notes, free and clear of, and without withholding or deduction
for or on account of, Mexican Withholding Taxes. However, if withholding or
deduction of Mexican Withholding Taxes is required by law, we will make the
required withholding or deduction and we will:
. pay any additional amounts ("Additional Amounts") as may be necessary so
that after making all required deductions or withholdings, including
those applicable to additional sums payable under this provision, the
net amount received by holders or other beneficial owners of the
exchange notes will not be less than the amounts as would have been
received by them had no such withholding or deduction been required,
. deduct or withhold such Mexican Withholding Taxes and
. remit the full amount deducted or withheld to the relevant taxing or
other authority.
Notwithstanding the foregoing, no such Additional Amounts shall be payable
for or on account of:
(a) any Mexican Withholding Taxes which would not have been imposed or
levied on a holder but for the existence of any present or former
connection between the holder or beneficial owner of the note and
Mexico, including, without limitation:
(1) being or having been a citizen or resident of Mexico,
(2) maintaining or having maintained an office, permanent
establishment, fixed base or branch in Mexico, or
(3) being or having been present or engaged in trade or business of
Mexico, except for a connection solely arising from the mere
ownership of, or receipt of payment under, the note or the
exercise of rights under the note or the indenture, either
personally or through the trustee,
(b) any estate, inheritance, gift, or similar tax, assessment or other
governmental charge,
(c) any Mexican Withholding Taxes that are imposed or levied by reason of
the failure by the holder or beneficial owner of the note to comply
with any certification, identification, information, documentation,
declaration or other reporting requirement which is required or
imposed by a statute, treaty, regulation, general rule or
administrative practice as a precondition to exemption from, or
reduction in the rate of, the imposition, withholding or deduction of
any Mexican Withholding Taxes, provided that at least 60 days prior
to:
(1) the first payment date with respect to which our company applies
this clause (c) and
(2) in the event of a change in the certification, identification,
information, documentation, declaration or other reporting
requirements, the first payment date after that change,
(3) our company shall have notified the trustee, in writing, that the
holders or beneficial owners of the exchange notes will be
required to provide the certification, identification, information
or documentation, declaration or other reporting documentation;
(d) any Mexican Withholding Taxes that are imposed or levied by reason of
the failure by the holder or beneficial owners of the note to timely
comply, subject to the conditions described below, with a written
request by or on behalf of our company, to provide information,
documentation or other evidence concerning the (i) nationality,
residence, identity, eligibility for benefits under a treaty for
avoidance of double taxation to which Mexico is a party which is in
effect, (ii) a present or former connection with Mexico or any
political subdivision or territory or possession of Mexico or area
subject to its
123
jurisdiction; or of the holder or beneficial owner of the note that is
necessary from time to time to determine the appropriate rate of
deduction or withholding of Mexican Withholding Taxes applicable to that
holder or beneficial owner, provided that at least 60 days prior to the
first payment date with respect to which our company shall apply this
clause (d), our company shall have notified the trustee, in writing,
that the holders or beneficial owners of the exchange notes will be
required to provide that information, documentation or other evidence;
(e) the presentation of the note, when required, for payment on a date more
than 30 days after the date on which the payment became due and payable
or the date on which payment is duly provided for, whichever occurs
later, except to the extent that the holder or the beneficial owner of
the note would have been entitled to Additional Amounts in respect of
those Mexican Withholding Taxes on presenting the note for payment on
any date during the 30-day period; or
(f) any combination of item (a), (b), (c), (d) or (e) above.
Notwithstanding the foregoing, the limitations on our company's obligation
to pay Additional Amounts set forth in clauses (c) and (d) above shall not
apply if the provision of the certification, identification, information,
documentation, declaration or other evidence described in such clauses (c) and
(d) would be materially more onerous, in form, in procedure or in the
substance of information disclosed, to a holder or beneficial owner of an
note, after taking into account any relevant differences between United States
and Mexican law, regulation or administrative practice, than comparable
information or other applicable reporting requirements imposed or provided for
under United States federal income tax law, including the United States-Mexico
Income Tax Treaty, including proposed regulations, and administrative
practice, for example IRS Forms W-8, W-8BEN, W-9 and 6166. In addition, the
limitations on our company's obligation to pay Additional Amounts set forth in
clauses (c) and (d) above shall not apply if Section VI of Article 154 of the
Mexican Income Tax Law is in effect, unless:
. the provision of the certification, identification, information,
documentation, declaration or other evidence described in clauses (c)
and (d) is expressly required by statute, regulation, general rules or
administrative practice in order to apply Section VI of Article 154 of
the Mexican Income Tax Law, our company cannot obtain the certification,
identification, information, or satisfy any other reporting requirements
on its own through reasonable diligence and our company otherwise would
meet the requirements for application of Section VI of Article 154 of
the Mexican Income Tax Law or
. in the case of a holder or beneficial owner of a note that is a pension
fund or other tax-exempt organization, that holder or beneficial owner
would be subject to Mexican Withholding Taxes at a rate that is lower
than the rate resulting from the application of Section VI of Article
154 of the Mexican Income Tax Law, if the information, documentation or
other evidence required under clauses (c) and (d) above were provided.
In addition, clauses (c) and (d) above shall not be construed to require a
non-Mexican pension or retirement fund, a non-Mexican tax-exempt organization,
a non-Mexican financial institution or any other holder or beneficial owner of
a note to obtain registration with the Ministry of Finance and Public Credit
for the purpose of establishing eligibility for an exemption from or reduction
of Mexican Withholding Taxes.
Upon the trustee's receipt of notification from our company that the holders
will be required to provide information or documentation as described in
clauses (c) and (d) above, the trustee will provide notification to holders.
Our company will, upon written request, provide the trustee, the holders and
the paying agent with a duly certified or authenticated copy of an original
receipt of the payment of Mexican Withholding Taxes which we have withheld or
deducted in respect of any payments made under or with respect to the exchange
notes. The trustee will, for a period of five years following the due date for
each payment, maintain in its files each such certified copy received from our
company.
If our company is obligated to pay Additional Amounts with respect to any
payment under or with respect to the exchange notes other than Additional
Amounts payable on the date of the indenture, our company will,
124
upon written request, deliver to the trustee an officers' certificate stating
the fact that Additional Amounts are payable and the amounts so payable.
In the event that our company has become or would become required to pay any
Additional Amounts in excess of those attributable to Mexican Withholding
Taxes that are imposed, deducted or withheld at a rate of 10%, as a result of
material changes affecting Mexican tax laws, our company may redeem all, but
not less than all, of the exchange notes, at any time at 100% of the principal
amount, together with accrued and unpaid interest thereon, if any, to the
redemption date. See "--Optional Redemption--We may redeem all, but not less
than all, of the exchange notes as a result of changes in Mexican Withholding
Taxes."
In addition, our company will pay any stamp, issue, registration,
documentary or other similar taxes and other duties (including interest and
penalties with respect thereto) imposed or levied by Mexico (or any political
subdivision or taxing authority thereof or therein) in respect of the
creation, issue and offering of the exchange notes.
Currency Indemnity
Our company will pay all sums payable under or in connection with the
exchange notes, including damages, solely in U.S. dollars. Any amount that you
receive or recover in a currency other than U.S. Dollars in respect of any sum
expressed to be due to you from our company will only constitute a discharge
to us to the extent of the dollar amount which you are able to purchase with
the amount received or recovered in that other currency on the date of the
receipt or recovery or, if it is not practicable to make the purchase on that
date, on the first date on which you are able to do so. If the dollar amount
is less than the dollar amount expressed to be due to you under any note, our
company will indemnify you against any loss you sustain as a result. In any
event, our company will indemnify you against the cost of making any purchase
of U.S. Dollars. For the purposes of this paragraph, it will be sufficient for
you to certify in a satisfactory manner that you would have suffered a loss
had an actual purchase of U.S. Dollars been made with the amount received in
that other currency on the date of receipt or recovery or, if it was not
practicable to make the purchase on that date, on the first date on which you
were able to do so. In addition, you will also be required to certify in a
satisfactory manner the need for a change of the purchase date.
The indemnities described above:
. constitute a separate and independent obligation from our other
obligations;
. will give rise to a separate and independent cause of action;
. will apply irrespective of any indulgence granted by any holder; and
. will continue in full force and effect despite any other judgment,
order, claim or proof for a liquidated amount in respect of any sum due
under any note.
No Personal Liability of Incorporators, Stockholders, Officers, Directors
or Employees
You will have no recourse against any incorporator, stockholder, officer,
director, employee or controlling person of our company or of any successor
person:
. for the payment of the principal of, premium, if any, or interest on any
of the exchange notes or for any claim based on the exchange notes or
otherwise in respect of the exchange notes; and
. under or upon any obligation, covenant or agreement of our company in
the indenture, or in any of the exchange notes or because of the
creation of any Indebtedness represented by the indenture or the
exchange notes.
By accepting the exchange notes, you waive and release all of the
liabilities described above. Your waiver and release are part of the
consideration you give for the exchange notes. Your waiver may not be
effective to waive liabilities under the federal securities laws.
125
Concerning the Trustee
Except during the continuance of an Event of Default, the trustee will not
be liable, except for the performance of the duties specifically set forth in
the indentures. If an Event of Default has occurred and is continuing, the
trustee will use the same degree of care and skill in its exercise of the
rights and powers vested in it under the indenture as a prudent person would
exercise under the circumstances in the conduct of that person's own affairs.
The indentures and the provisions of the Trust Indenture Act of 1939 that
are incorporated by reference in the indentures contain limitations on the
rights of the trustee, if it becomes a creditor of our company, to obtain
payment of claims in certain cases or to realize on property received by it in
respect of those claims, as security or otherwise. The trustee is permitted to
engage in other transactions, provided, however, that if it acquires any
conflicting interest, it must eliminate the conflict or resign.
Governing Law and Submission to Jurisdiction
The exchange notes and the indentures are or will be governed by the laws of
the State of New York. Our company will submit to the jurisdiction of the U.S.
federal and New York state courts located in the Borough of Manhattan, City
and State of New York for purposes of all legal actions and proceedings
instituted in connection with the exchange notes and the indenture. Our
company has appointed our subsidiary, Durango Paper Company, 1000 Osborne
Street, St. Marys, Georgia 31558, as our authorized agent upon which process
may be served in any action.
Book-Entry Notes
The exchange notes will be issued only in fully registered form, without
coupons, in denominations of U.S.$1,000 and any integral multiples thereof.
The exchange notes will initially be represented by one or more registered
global exchange notes which will be deposited with the trustee as custodian
for, and registered in the name of a nominee of, The Depositary Trust Company.
Ownership of beneficial interests in a global note will be limited to
persons, known as "participants," who have accounts with DTC or persons who
hold interests through participants. Ownership of beneficial interests in a
global note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee, with respect
to interests of participants, and the records of participants, with respect to
interests of persons other than participants.
So long as DTC, or its nominee, is the registered owner or holder of a
global note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the exchange notes represented by the global note for
all purposes under the indenture and the exchange notes. No beneficial owner
of an interest in a global note will be able to transfer that interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the indenture.
Payments of the principal of, and interest on, a global note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof.
Neither our company, the trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a global note or
for maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
Our company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a global note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the global note as shown on the records
of DTC or its nominee. Our company also expects that payments by participants
to owners of beneficial interests in a global note held through such
participants will be governed by standing instructions and customary
practices, as is now
126
the case with securities held for the accounts of customers registered in the
names of nominees for such customers. Those payments will be the
responsibility of the participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
Our company expects that DTC will take any action permitted to be taken by a
holder of exchange notes, including the presentation of exchange notes for
exchange as described below, only at the direction of one or more participants
to whose account the DTC interests in a global note is credited and only in
respect of such portion of the aggregate principal amount of exchange notes as
to which that participant or participants has or have given such direction.
However, if there is an Event of Default under the exchange notes, DTC will
exchange the applicable global note for certificated exchange notes, which it
will distribute to its participants.
Our company understands that DTC is:
. a limited purpose trust company organized under the laws of the State of
New York,
. a "banking organization" within the meaning of New York Banking Law,
. a member of the Federal Reserve System,
. a "clearing corporation" within the meaning of the Uniform Commercial
Code and
. a "Clearing Agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Indirect access to
the DTC system is available to others, for example banks, brokers, dealers and
trust companies and other organizations that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a global note among its participants, DTC
is under no obligation to perform or continue to perform these procedures, and
these procedures may be discontinued at any time. Neither our company nor the
trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under
the rules and procedures governing DTC's operations.
Definitions
The following are material terms defined in the indenture. You should review
the indenture to see full disclosure of all terms that are defined in the
indenture.
"ACM" means Administradora Corporativa y Mercantil S.A. de C.V., a Mexican
corporation wholly owned by the Existing Shareholders, whose only asset is its
28% equity interest in Grupo Industrial Durango, S.A. de C.V.
"ACM Merger" means the merger of ACM with and into our company, with our
company as the surviving corporation.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not incurred in connection
with, or in anticipation of, such person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Additional Amounts" has the meaning set forth in the first bullet under the
subheading "--Additional Amounts."
127
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of our company and our Restricted Subsidiaries for such
period determined in conformity with Mexican GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):
(1) the net income or loss of any person that is not a Restricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to us or any of our Subsidiaries or all or
substantially all of the property and assets of such person are
acquired by our company or any of our Restricted Subsidiaries;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made under clause (4)(C) of the first paragraph
of detailed summary of the "Limitation on Restricted Payments"
covenant, and, in such case, except to the extent includable under
clause (1) above, the net income or loss of any person accrued prior
to the date it becomes a Restricted Subsidiary or is merged into or
consolidated with our company or any of our Subsidiaries or all or
substantially all of the property and assets of such person are
acquired by our company or any of our Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted
by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary, except to the
extent of the amount of dividends or other distributions actually paid
by us or any of our Restricted Subsidiaries;
(4) any gains or losses, on an after-tax basis, attributable to sales of
assets outside the ordinary course of business of our company and our
Restricted Subsidiaries; and
(5) all extraordinary gains and extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of our company and our Restricted Subsidiaries, less applicable depreciation,
amortization and other valuation reserves, after deducting therefrom:
(1) all current liabilities of our company and our Restricted
Subsidiaries, excluding intercompany items, and
(2) all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles,
all as set forth on the most recent quarterly or annual consolidated balance
sheet of our company and our Restricted Subsidiaries, prepared in conformity
with Mexican GAAP and filed with the SEC or provided to the trustee.
"Affiliate" means, as applied to any person, any other person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such person. For purposes of this definition, "control",
including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with", as applied to any person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means:
. an investment by our company or any of our Restricted Subsidiaries in
any other person under which that person shall become a Restricted
Subsidiary or shall be merged into or consolidated with our company or
any of our Restricted Subsidiaries, provided that such person's primary
business is related, ancillary or complementary to the Pulp and Paper
Business, or
128
. an acquisition by our company or any of our Restricted Subsidiaries of
the property and assets of any person other than our company or any of
our Restricted Subsidiaries that constitute substantially all of a
division or line of business of such person, provided that the property
and assets acquired are related, ancillary or complementary to the Pulp
and Paper Business.
"Asset Disposition" means the sale or other disposition by our company or
any of our Restricted Subsidiaries, other than to our company or another
Restricted Subsidiary, of:
. all or substantially all of the Capital Stock of any Restricted
Subsidiary or
. all or substantially all of the assets that constitute a division or
line of business of our company or any of our Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition, including by way
of merger, consolidation or sale-leaseback transaction, in one transaction or
a series of related transactions by our company or any of our Restricted
Subsidiaries to any person other than our company or any of our Restricted
Subsidiaries of:
. all or any of the Capital Stock of any Restricted Subsidiary, other than
directors' qualifying shares or shares required by applicable law to be
held by a person other than our company or a Restricted Subsidiary or de
minimis shares of a Restricted Subsidiary required to be owned by
another person under applicable law in order to maintain the corporate
status of such Restricted Subsidiary,
. all or substantially all of the property and assets of an operating unit
or business of our company or any of our Restricted Subsidiaries or
. any other property and assets, other than the Capital Stock or other
Investment in an Unrestricted Subsidiary, of our company or any of our
Restricted Subsidiaries outside the ordinary course of business of our
company or such Restricted Subsidiary and,
in each case, that is not governed by the provisions of the indenture
applicable to mergers, consolidations and sales of assets of our company.
However, "Asset Sale" shall not include:
. sales or other dispositions of inventory, receivables and other current
assets,
. sales, transfers or other dispositions of assets constituting a
Permitted Investment or Restricted Payment permitted to be made under
the "Limitation on Restricted Payments" covenant,
. sales, transfers or other dispositions of assets with a fair market
value not in excess of $10 million in any transaction or series of
related transactions,
. the sale or other disposition of Temporary Cash Investments,
. any sale, transfer, assignment or other disposition of any property
equipment that has become damaged, worn out, obsolete or otherwise
unsuitable for use in connection with the business of our company or our
Restricted Subsidiaries, or
. the sale, conveyance or other transfer of accounts receivable and
related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Subsidiary,
in connection with a Qualified Receivables Transaction.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing:
(1) the sum of the products of
(a) the number of years from such date of determination to the dates
of each successive scheduled principal payment of such debt
security and
(b) the amount of each such principal payment by
(2) the sum of all such principal payments.
129
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents, however designated, whether
voting or non-voting, in equity of such person, whether outstanding on the
closing date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any person, any lease of any
property, whether real, personal or mixed, of which the discounted present
value of the rental obligations of such person as lessee, in conformity with
Mexican GAAP, is required to be capitalized on the balance sheet of such
person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as:
(1) (a) a person or any persons acting together which would constitute a
"group" (a "Group") for purposes of Sections 13(d) and 14(d)(2) of the
Exchange Act, or any successor provision thereto, together with any
Affiliates or Related persons thereof, other than any person or Group
controlled by the Existing Shareholders together with any Affiliates
or Related persons thereof, has become the beneficial owner, by way of
purchase, merger, consolidation or otherwise, of 35% or more of Voting
Stock of our company and (b) such person or Group, together with any
Affiliates or Related persons thereof, has become the beneficial
owner, by way of purchase, merger, consolidation or otherwise of a
greater percentage of Voting Stock of our company than that held by
the Existing Shareholders, together with Affiliates or Related persons
thereof; or
(2) at any time during any consecutive two-year period individuals who at
the beginning of such period were members of our board of directors,
together with any new directors whose election by such board of
directors or whose nomination for election by the shareholders of our
company was approved by a vote of a majority of directors then still
in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority of our board of
directors then in office.
"Collateral" means, in the case of the 2006 notes, an unsubordinated
promissory note issued by GID to our company, as amended and restated in
connection with the exchange offer in a principal amount that is at least
equal to the principal amount of outstanding 2006 notes, and in the case of
the 2008 notes, an unsubordinated promissory note issued by GID to us in a
principal amount that is at least equal to the principal amount of outstanding
2008 notes.
"Commodity Agreement" means any forward commodity contract, commodity swap
agreement, commodity option agreement or other similar agreement or
arrangement.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
. Consolidated Interest Expense;
. income and asset taxes;
. depreciation expense;
. amortization expense; and
. all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an
accrual or reserve is, or is required by Mexican GAAP to be, made), less
all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for our company and our Restricted
Subsidiaries in conformity with Mexican GAAP.
130
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness, including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation; all commissions, discounts and
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
interest paid by our company or any of our Restricted Subsidiaries with
respect to Indebtedness that is Guaranteed or secured by our company or any of
our Restricted Subsidiaries to the extent not recovered from the underlying
obligor; and the component of rentals allocable to interest in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by our company and our Restricted Subsidiaries during such period;
excluding, however:
. any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (3) of the
definition thereof, but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (3) of the definition
thereof, and
. any premiums, fees and expenses, and any amortization thereof, payable
in connection with the offering of the exchange notes and other
Indebtedness, all as determined on a consolidated basis, without taking
into account Unrestricted Subsidiaries, in conformity with Mexican GAAP.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of our company and our Restricted Subsidiaries,
which shall be as of a date not more than 30 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries,
plus, to the extent not included, any Preferred Stock of our company, less any
amounts attributable to Disqualified Stock or any equity security convertible
into or exchangeable for Indebtedness, the cost of treasury stock and the
principal amount of any promissory exchange notes receivable from the sale of
the Capital Stock of our company or any of our Restricted Subsidiaries, each
item to be determined in conformity with Mexican GAAP.
"Consolidated Senior Indebtedness" means Indebtedness of our Restricted
Subsidiaries and any Indebtedness of our company which is secured by a Lien.
"Consolidated Senior Indebtedness" means, without duplication,
. Indebtedness of our Restricted Subsidiaries, except for Indebtedness
owed to our company or any other Restricted Subsidiary,
. any Indebtedness of our company guaranteed by any of our Restricted
Subsidiaries, and
. any Indebtedness of our company secured by a Lien.
"Consolidated Senior Indebtedness Interest Coverage Ratio" means, on any
Transaction Date, the ratio of:
. the aggregate amount of Consolidated EBITDA for the then most recent
four fiscal quarters prior to such Transaction Date (the "Four Quarter
Period") to
. the aggregate Consolidated Senior Indebtedness Interest Expense during
such Four Quarter Period.
In making the foregoing calculation,
(A) pro forma effect shall be given to any Consolidated Senior
Indebtedness incurred or repaid, repurchased, defeased or otherwise
discharged during the period (the "Reference Period") commencing on
the first day of the Four Quarter Period and ending on the Transaction
Date, other than Consolidated Senior Indebtedness under a revolving
credit or similar arrangement to the extent of the commitment
thereunder or under any predecessor revolving credit or similar
arrangement in effect on the last day of such Four Quarter Period
unless any portion of such Consolidated Senior
131
Indebtedness is projected, in the reasonable judgment of our senior
management, to remain outstanding for a period in excess of 12 months
from the date of the incurrence thereof, in each case as if such
Consolidated Senior Indebtedness had been incurred or repaid,
repurchased, defeased or otherwise discharged on the first day of such
Reference Period;
(B) Consolidated Senior Indebtedness Interest Expense attributable to
interest on any Consolidated Senior Indebtedness, whether existing or
being incurred computed on a pro forma basis and bearing a floating
interest rate shall be computed as if the rate in effect on the
Transaction Date, taking into account any Interest Rate Agreement
applicable to such Consolidated Senior Indebtedness if such Interest
Rate Agreement has a remaining term in excess of 12 months or, if
shorter, at least equal to the remaining term of such Indebtedness,
had been the applicable rate for the entire period;
(C) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions, including giving pro forma effect to the application of
proceeds of any Asset Disposition, that occur during such Reference
Period as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; and
(D) pro forma effect shall be given to asset dispositions and asset
acquisitions, including giving pro forma effect to the application of
proceeds of any asset disposition, that have been made by any person
that has become a Restricted Subsidiary or has been merged with or
into our company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such person was a
Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that
occurred on the first day of such Reference Period;
provided that to the extent that clause (C) or (D) of this definition requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the four full fiscal quarters
immediately preceding the Transaction Date of the person, or division or line
of business of the person, that is acquired or disposed for which financial
information is available.
"Consolidated Senior Indebtedness Interest Expense" means, for any period,
the aggregate amount of interest in respect of Consolidated Senior
Indebtedness including, without limitation, amortization of original issue
discount on any Consolidated Senior Indebtedness and the interest portion of
any deferred payment obligation; all commissions, discounts and other fees and
charges owed with respect to Consolidated Senior Indebtedness; interest paid
by our company or any of our Restricted Subsidiaries with respect to
Consolidated Senior Indebtedness that is Guaranteed or secured by our company
or any of our Restricted Subsidiaries to the extent not recovered from the
underlying obligor; and the component of rentals allocable to interest in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by our company and our Restricted Subsidiaries during such
period but only to the extent that such Capitalized Lease Obligations are
Consolidated Senior Indebtedness; excluding, however:
. any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (3) of the
definition thereof, but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (3) of the definition
thereof.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement, currency option or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
person that by its terms or otherwise is:
(1) required to be redeemed prior to the Stated Maturity of the exchange
notes,
132
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the exchange
notes or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Indebtedness having a scheduled maturity
prior to the Stated Maturity of the exchange notes;
provided that any Capital Stock that would not constitute Disqualified Stock
but for provisions thereof giving holders thereof the right to require such
person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the exchange notes shall not constitute Disqualified Stock if the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained
in "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants and such Capital Stock specifically provides that such
person will not repurchase or redeem any such stock pursuant to such provision
prior to our company's repurchase of such exchange notes as are required to be
repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of
Notes upon a Change of Control" covenants.
"Existing Stockholders" means
. Ing. Miguel Rincon, Dr. Jose Rincon and Sr. Jesus Rincon and members of
their immediate families and their estates and heirs and
. any trust established for the benefit of, or any company or other entity
controlled by, one or more of those persons, and any Successor or
Affiliate thereof.
"fair market value" means the price that would be paid in an arm's-length
transaction between a willing seller under no compulsion to sell and a willing
buyer under no compulsion to buy, as determined in good faith by our board of
directors, whose determination shall be conclusive if evidenced by a board
resolution.
"GID notes" means the 12 5/8% exchange notes due 2003 of Grupo Industrial
Durango, S.A. de C.V.
"GID Refinancing" means the issuance of Indebtedness by our company to
refinance any Indebtedness of GID, provided that any Indebtedness issued by
our company subsequent to the Pledge Release Date will not be included in this
definition.
"Government Securities" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of
or obligations guaranteed by, the United States of America for the payment of
which guarantee or obligations the full faith and credit of the United States
of America is pledged and which are not callable or redeemable at the option
of the issuer thereof.
"Guarantee" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing, whether pursuant to a guaranty, a fianza,
an aval or otherwise, any Indebtedness of any other person and, without
limiting the generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of such person:
. to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness of such other person, whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, unless such purchase
arrangements are on arm's-length terms and are entered into in the
ordinary course of business, to take-or-pay, or to maintain financial
statement conditions or otherwise, or
. entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof, in whole or in part;
provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
133
"Indebtedness" means, with respect to any person at any date of
determination, without duplication:
(1) all indebtedness of such person for borrowed money;
(2) all obligations of such person evidenced by bonds, debentures,
exchange notes or other similar instruments;
(3) all obligations of such person in respect of letters of credit or
other similar instruments, including reimbursement obligations with
respect thereto, but excluding obligations with respect to letters of
credit, including trade letters of credit, securing obligations, other
than obligations described in (1) or (2) above or (5), (6) or (7)
below, entered into in the ordinary course of business of such person
to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
business day following receipt by such person of a demand for
reimbursement;
(4) all obligations of such person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than
six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
excluding Trade Payables;
(5) all Capitalized Lease Obligations;
(6) all Indebtedness of other persons secured by a Lien on any asset of
such person, whether or not such Indebtedness is assumed by such
person; provided that the amount of such Indebtedness shall be the
lesser of:
(a) the fair market value of such asset at such date of determination
and
(b) the amount of such Indebtedness;
(7) all Indebtedness of other persons Guaranteed by such person to the
extent such Indebtedness is Guaranteed by such person; and
(8) to the extent not otherwise included in this definition, obligations
under Commodity Agreements, Currency Agreements and Interest Rate
Agreements, other than Commodity Agreements, Currency Agreements and
Interest Rate Agreements designed solely to protect our company or our
Restricted Subsidiaries against fluctuations in commodity prices,
foreign currency exchange rates or interest rates and that do not
increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in commodity prices, foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder.
The amount of Indebtedness of any person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided:
(A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue discount
of such Indebtedness at such time as determined in conformity with
Mexican GAAP,
(B) that money borrowed and set aside at the time of the incurrence of any
Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such
money is held to secure the payment of such interest and
(C) that Indebtedness shall not include:
(x) any liability for federal, state, local or other taxes of any
jurisdiction,
(y) performance, surety or appeal bonds provided in the ordinary
course of business or
(z) agreements providing for indemnification, adjustment of purchase
price or similar obligations, or Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of our
134
company or any of our Restricted Subsidiaries pursuant to such
agreements, in any case incurred in connection with the disposition
of any business, assets or a Restricted Subsidiary, other than
Guarantees of Indebtedness incurred by any person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition, so long as the principal
amount does not to exceed the gross proceeds actually received by our
company or any Restricted Subsidiary in connection with such
disposition.
For the purposes of computing the amount of Indebtedness of any person
outstanding at any time, all such items shall be excluded to the extent that
they would be eliminated as intercompany items for purposes of such persons
consolidated financial statements.
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of:
. the aggregate amount of Consolidated EBITDA for the then most recent
four fiscal quarters prior to such Transaction Date (the "Four Quarter
Period") to
. the aggregate Consolidated Interest Expense during such Four Quarter
Period.
In making the foregoing calculation,
(A) pro forma effect shall be given to any Indebtedness incurred or
repaid, repurchased, defeased or other-wise discharged during the
period (the "Reference Period") commencing on the first day of the
Four Quarter Period and ending on the Transaction Date, other than
Indebtedness under a revolving credit or similar arrangement to the
extent of the commitment thereunder, or under any predecessor
revolving credit or similar arrangement, in effect on the last day of
such Four Quarter Period unless any portion of such Indebtedness is
projected, in the reasonable judgment of our senior management, to
remain outstanding for a period in excess of 12 months from the date
of the incurrence thereof, in each case as if such Indebtedness had
been incurred or repaid, repurchased, defeased or otherwise discharged
on the first day of such Reference Period;
(B) Consolidated Interest Expense attributable to interest on any
Indebtedness, whether existing or being incurred, computed on a pro
forma basis and bearing a floating interest rate shall be computed as
if the rate in effect on the Transaction Date, taking into account any
Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months
or, if shorter, at least equal to the remaining term of such
Indebtedness, had been the applicable rate for the entire period;
(C) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions, including giving pro forma effect to the application of
proceeds of any Asset Disposition, that occur during such Reference
Period as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; and
(D) pro forma effect shall be given to asset dispositions and asset
acquisitions, including giving pro forma effect to the application of
proceeds of any asset disposition, that have been made by any person
that has become a Restricted Subsidiary or has been merged with or
into our company or any Restricted Subsidiary during such Reference
Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such person was a
Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that
occurred on the first day of such Reference Period;
provided that to the extent that clause (C) or (D) of this definition
requires that pro forma effect be given to an Asset Acquisition or Asset
Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the person, or
division or line of business of the person, that is acquired or disposed for
which financial information is available.
135
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any person means any direct or indirect advance, loan or
other extension of credit, including, without limitation, by way of Guarantee,
but excluding Guarantees of Indebtedness that are permitted under the
"Limitation on Indebtedness" covenant and advances to customers or suppliers
in the ordinary course of business that are recorded as accounts receivable,
prepaid expenses or deposits on the balance sheet of our company or our
Restricted Subsidiaries and endorsements for collection or deposit arising in
the ordinary course of business, or capital contribution to, by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others, or any purchase or acquisition of
Capital Stock, bonds, exchange notes, debentures or other similar instruments
issued by, such person and shall include:
. the designation of a Restricted Subsidiary as an Unrestricted Subsidiary
and
. the retention of the Capital Stock or any other Investment by our
company or any of our Restricted Subsidiaries, of (or in) any person
that has ceased to be a Restricted Subsidiary, including without
limitation, by reason of any transaction permitted by the third bullet
of the detailed description of the "Limitation on the Issuance and Sale
of Capital Stock of Restricted Subsidiaries" covenant.
For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant:
. the amount of or a reduction in an Investment shall be equal to the fair
market value thereof at the time such Investment is made or reduced and
. in the event our company or a Restricted Subsidiary makes an Investment
by transferring assets to any person and as part of such transaction
receives Net Cash Proceeds, the amount of such Investment shall be the
fair market value of the assets less the amount of Net Cash Proceeds so
received, provided the Net Cash Proceeds are applied in accordance with
clause (1)(A) or (1)(B) of the "Limitation on Asset Sales" covenant.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest.
"Mexican GAAP" is defined to mean accounting principles generally accepted
in Mexico, including accounting principles which account for the effects of
inflation as provided for under Bulletin B-10 "Recognition of the Effects of
Inflation on the Financial Information," as amended, issued by the Mexican
Institute of Public Accountants.
"Mexican Withholding Taxes" means any present or future tax, duty, levy,
impost, assessment or other governmental charge, including any interest or
penalties, imposed or levied by Mexico or any political subdivision of Mexico
or by any authority or agency of Mexico having power to tax.
"Mexico" means the Estados Unidos Mexicanos (the United Mexican States) and
any branch of power, ministry, department, authority or statutory corporation
or other entity, including a trust, owned or controlled directly or indirectly
by the Estados Unidos Mexicanos or any of the foregoing or created by law as a
public entity.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale in the
form of cash or cash equivalents, including payments in respect of
deferred payment obligations, to the extent corresponding to the
136
principal, but not interest, component thereof, when received in the
form of cash or cash equivalents and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net
of
(1) brokerage commissions and other fees and expenses, including fees
and expenses of counsel and investment bankers, related to such
Asset Sale;
(2) provisions for all taxes, whether or not such taxes will actually
be paid or are payable, as a result of such Asset Sale without
regard to the consolidated results of operations of our company and
our Restricted Subsidiaries, taken as a whole;
(3) payments made, or required to be made, to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that
either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale; and
(4) appropriate amounts to be provided by our company or any Restricted
Subsidiary as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, whether or not
required by Mexican GAAP; and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of
such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations, to the
extent corresponding to the principal, but not interest, component
thereof, when received in the form of cash or cash equivalents and
proceeds from the conversion of other property received when converted
to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in
connection with such issuance or sale and net of taxes paid or payable
as a result thereof.
"Overnight Bank Deposits" means overnight or time deposits having maturities
of seven days or less with any financial institution organized under the laws
of the United States, any state thereof or Mexico which would not otherwise
qualify as a Temporary Cash Investment, provided that such financial
institution is not under intervention, receivership, or any similar
arrangement at the time of making such overnight on time deposit.
"Permitted Investment" means:
. an Investment in our company or a Restricted Subsidiary or a person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, our company or a
Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of our company and
our Restricted Subsidiaries on the date of such Investment,
. Temporary Cash Investments and Overnight Bank Deposits,
. payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes,
. stock, obligations or securities received in satisfaction of judgments
or in settlement or obligations owing to our company or a Restricted
Subsidiary or upon the perfection, foreclosure or enforcement of a Lien
in favor of our company or a Restricted Subsidiary,
. Commodity Agreements, Interest Rate Agreements and Currency Agreements
designed solely to protect our company or our Restricted Subsidiaries
against fluctuations in commodity prices, interest rates or foreign
currency exchange rates,
. loans or advances made to employees of our company or a Restricted
Subsidiary in the ordinary course of business consisting with past
practices of our company or such Restricted Subsidiary, provided that
137
such loans in the aggregate to all employees do not exceed US$2.5
million per year and US$5.0 million prior to the Stated Maturity of the
exchange notes,
. extensions of credit in the nature of accounts receivable or exchange
notes receivable arising from the sale or lease of goods and services in
the ordinary course of business,
. pledges or deposits required in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security,
. pledges or deposits in connection with (1) the non-delinquent
performance of bids, trade contracts, other than for borrowed money,
leases or statutory obligations, (2) continued obligations on surety or
appeal bonds and (3) other non-delinquent obligations of a like nature,
in each case incurred in the ordinary course of business,
. advances, loans or extensions of credit to suppliers in the ordinary
course of business by our company or any Restricted Subsidiary;
. Investments consisting of non-cash consideration received in connection
with an Asset Sale permitted by the "Limitation on Sale of Assets"
covenant and
. customary Investments required by the terms of any Qualified Receivables
Transaction to the extent such Investments are made in the ordinary
course of business.
"Permitted Liens" means:
. Liens for taxes, assessments, governmental charges or claims that are
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with
Mexican GAAP shall have been made,
. statutory and common law Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other similar Liens
arising in the ordinary course of business and with respect to amounts
not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with Mexican GAAP shall have been made,
. Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security,
. Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory or regulatory obligations, bankers' acceptances,
surety and appeal bonds, government contracts, performance and return-
of-money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money),
. easements, rights-of-way, municipal and zoning ordinances and similar
charges, encumbrances, title defects or other irregularities that do not
materially interfere with the ordinary course of business of our company
and our Restricted Subsidiaries taken as a whole,
. Liens (including extensions and renewals thereof) upon real or personal
property acquired after the closing date; provided that (a) such Lien is
created solely for the purpose of securing Indebtedness incurred, in
accordance with the "Limitation on Indebtedness" covenant described
above, to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such
Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the
commencement of full operation of such property, (b) the principal
amount of the Indebtedness secured by such Lien does not exceed 100% of
such cost and (c) any such Lien shall not extend to or cover any
property or assets other than such item of property or assets and any
improvements on such item,
138
. leases or subleases granted to others that do not materially interfere
with the ordinary course of business of our company and our Restricted
Subsidiaries, taken as a whole,
. Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of our company or our
Restricted Subsidiaries relating to such property or assets,
. any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease,
. Liens arising from filing Uniform Commercial Code financing statements
regarding leases,
. Liens on property of, or on shares of Capital Stock or Indebtedness of,
any person existing at the time such person becomes, or becomes a part
of, any Restricted Subsidiary; provided that such Liens do not extend to
or cover any property or assets of our company or any Restricted
Subsidiary other than the property or assets acquired,
. Liens in favor of our company or any Restricted Subsidiary,
. Liens arising from the rendering of a final judgment or order against
our company or any Restricted Subsidiary that does not give rise to an
Event of Default,
. Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof,
. Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the
importation of goods,
. Liens encumbering customary initial deposits and margin deposits, and
other Liens, in each case, securing Indebtedness under Commodity
Agreements, Interest Rate Agreements and Currency Agreements designed
solely to protect our company or any of our Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities,
. Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by our company
or any of our Restricted Subsidiaries in the ordinary course of business
in accordance with the past practices of our company and our Restricted
Subsidiaries prior to the closing date,
. Liens on any assets acquired by our company or any Restricted Subsidiary
after the closing date, which Liens were in existence prior to the
acquisition of such assets (to the extent that such Liens were not
created in contemplation of or in connection with such acquisition),
provided that such Liens are limited to the assets so acquired and the
proceeds thereof,
. Liens incurred in accordance with the indenture in favor of the trustee
under the indenture,
. Liens arising by virtue of any statutory, regulatory, contractual or
warranty requirements of our company or any Restricted Subsidiary,
including, without limitation, provisions relating to rights of offset
and set-off, bankers' liens or similar rights and remedies, and
. Liens upon specific items of inventory or other goods and proceeds of
any person securing such person's obligations in respect of banker's
acceptance issued or created for the account of such person to
facilitate the purchase, shipment or storage of such inventory or other
goods.
"Pledge Release Date" means the date on which the collateral agent releases
the Collateral, which date shall be concurrent with, or subsequent to, the
date that the trustee receives the Pledge Release Instruction stating that the
Refinancing Condition has occurred.
"Pledge Release Instruction" means an officers' certificate signed by two
officers of our company stating that, as of the date of the officers'
certificate, the Refinancing Condition has occurred and which includes a
calculation of the Refinancing Condition.
139
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents, however designated, whether
voting or non-voting, of such person's preferred or preference equity, whether
now outstanding or issued after the closing date, including, without
limitation, all series and classes of such preferred stock or preference
stock.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of our company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if:
. a Public Equity Offering has been consummated and
. at least 15% of the total issued and outstanding Common Stock of our
company has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under
the Securities Act.
"Pulp and Paper Business" means the manufacture of pulp, paper and packaging
products and businesses related, ancilliary or complementary thereto,
including, without limitation,
. ownership and operation of forestry businesses,
. the production of raw materials such as wood, wood chips, kaolin,
caustic soda and precipitated calcium carbonate,
. the manufacture of primary products such as hardwood pulp, softwood
pulp, coated or uncoated freesheet, containerboard, linerboard,
corrugating medium and boxboard,
. the manufacture of converted products such as newsprint, notebooks,
stationary, corrugated shipping containers, folding carton boxes, multi-
wall sacks and bags and molded pulp products,
. the performance of marketing and other operations supporting such
businesses and
. the ownership and operating of assets used in connection with any of the
foregoing businesses, such as chemical, water treatment and power
generation assets.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by our company or a Restricted
Subsidiary pursuant to which our company or a Restricted Subsidiary may sell,
convey or otherwise transfer to
. a Receivables Subsidiary, in the case of a transfer by our company or
any Restricted Subsidiary, and
. any other person, in the case of a transfer by a Receivables Subsidiary,
or may grant a security interest in, any accounts receivable, whether now
existing or arising in the future, of our company or any Restricted Subsidiary
and any asset related thereto, including without limitation, all collateral
securing the accounts receivable, all contracts and all guarantees or other
obligations in respect of the accounts receivable, proceeds of the accounts
receivable and other assets which are customarily transferred, or in respect
of which security interests are customarily granted, in connection with asset
securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of our company
which engages in no activities other than in connection with the financing of
accounts receivables and which is designated by our board of directors as
provided below as a Receivables Subsidiary:
(1) No portion of the Indebtedness or any other obligations, contingent or
otherwise, of which:
(a) is guaranteed by our company or any other Restricted Subsidiary,
excluding guarantees of obligations, other than the principal of,
and interest on, Indebtedness, pursuant to Standard Securitization
Undertakings,
140
(b) is recourse to or obligates our company or any other Restricted
Subsidiary in any way other than pursuant to Standard
Securitization Undertakings, or
(c) subjects any property or asset of our company or any other
Restricted Subsidiary, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(2) with which neither our company nor any other Restricted Subsidiary has
any material contract, agreement or arrangement or understanding,
except in connection with a Qualified Receivables Transaction, other
than on terms no less favorable to our company or such other
Restricted Subsidiary than those that might be obtained at the time
from persons that are not Affiliates of our company, other than fees
payable in the ordinary course of business in connection with
servicing accounts receivable; and
(3) to which neither our company nor any Restricted Subsidiary has any
obligation to maintain or preserve such entity's financial condition
or cause such entity to achieve certain levels of operating results.
Any designation of a Subsidiary of our company as a Receivables Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy
of the board resolution giving effect to such designation and an officer's
certificate certifying that the designation complied with the preceding
conditions and was permitted by the indenture.
"Refinancing Condition" means the first date on which our company's
Consolidated Senior Indebtedness, excluding our exchange notes and any
Indebtedness secured under the pledge agreement or secured in connection with
the GID Refinancing, is equal to or less than 15% of our company's total
consolidated Indebtedness.
"Related person" of any person means any other person that owns, or any
controlling Affiliate of any other person that owns:
. 5% or more of the outstanding Common Stock of such person or
. 5% or more of the Voting Stock of such person.
"Released Indebtedness" means, with respect to any Asset Sale, Indebtedness:
. which is owed by our company or any Restricted Subsidiary (the
"Obligors") prior to such Asset Sale,
. which is assumed by the purchaser or any affiliate thereof or forgiven
or cancelled in connection with such Asset Sale and
. with respect to which the Obligors receive written unconditional
releases from each creditor no later than the closing date of such Asset
Sale.
"Replacement Assets" means, on any date, property or assets, other than
current assets, of a nature or type or that are used in a business, or an
Investment in a company having property or assets of a nature or type, or
engaged in a business, similar or related to the nature or type of the
property and assets of, or the business of, our company and our Restricted
Subsidiaries existing on such date.
"Restricted Subsidiary" means any Subsidiary of our company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries,
. for the most recent fiscal year of our company, accounted for more than
10% of the consolidated revenues of our company and our Restricted
Subsidiaries or
141
. as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of our company and our Restricted Subsidiaries,
all as set forth on the most recently available consolidated financial
statements of our company for such fiscal year.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by our company or any Restricted
Subsidiary which are reasonably customary in an accounts receivable
securitization transaction.
"Stated Maturity" means:
. with respect to any debt security, the date specified in such debt
security as the fixed date on which the final installment of principal
of such debt security is due and payable and
. with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed
date on which such installment is due and payable.
"Subsidiary" means, with respect to any person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such person and
one or more other Subsidiaries of such person.
"Temporary Cash Investment" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the
United States of America or any agency thereof;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing within 365 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in
excess of US$200.0 million, or the foreign currency equivalent
thereof, and has outstanding debt which is rated "A", or such similar
equivalent rating, or higher by S&P or Moody's or any money market
fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above or
clause (6) below entered into with a bank or trust company meeting the
qualifications described in clause (2) above or clause (9) below;
(4) commercial paper maturing not more than 90 days after the date of
acquisition, issued by a corporation, other than an Affiliate of our
company, organized and in existence under the laws of the United
States of America, any state thereof or any foreign country recognized
by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" or higher according to Moody's
or "A-1" or higher according to S&P;
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or
by any political subdivision or taxing authority thereof, and rated at
least "A" by S&P or Moody's;
(6) Certificados de la Tesoreria de la Federacion (Cetes) or Bonos de
Desarrollo del Gobierno Federal (Bondes) issued by the Mexican
government and maturing not more than 365 days after the acquisition
thereof;
(7) Investments in money market funds substantially all of whose assets
are comprised of securities of the types described in clauses (1)
through (6) above and (9) below including, without limitation, the
Chase Vista Money Market Mutual Funds or any other mutual fund for
which the trustee or an affiliate of the trustee serves as an
investment manager, administrator, shareholder servicing agent and/or
custodian or subcustodian;
142
(8) demand deposit accounts with U.S. banks or Mexican banks specified in
clause (9) of this definition maintained in the ordinary course of
business; and
(9) certificates of deposit, bank promissory notes and bankers'
acceptances denominated in Pesos, maturing not more than 365 days
after the acquisition thereof and issued or Guaranteed by any one of
the four largest banks, based on assets as of the immediately
preceding December 31, organized under the laws of Mexico and which
are not under intervention or controlled by the Instituto para la
Proteccion al Ahorro or any successor thereto or any banking
subsidiary of a foreign bank which has capital, surplus and undivided
profits aggregating in excess of US$200.0 million, or the foreign
currency equivalent thereof, and has outstanding debt which is rated
"A", or such similar equivalent rating, or higher by S&P or Moody's.
"Trade Payables" means, with respect to any person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the incurrence of any
Indebtedness, the date such Indebtedness is to be incurred and, with respect
to any Restricted Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means:
. any Subsidiary of our company that at the time of determination shall be
designated an Unrestricted Subsidiary by the board of directors in the
manner provided below; and
. any Subsidiary of an Unrestricted Subsidiary.
The board of directors may designate any Restricted Subsidiary, including
any newly acquired or newly formed Subsidiary of our company, to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, our company or any Restricted
Subsidiary; provided that:
(A) any Guarantee by our company or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"incurrence" of such Indebtedness and an "Investment" by our company
or such Restricted Subsidiary, or both, if applicable, at the time of
such designation;
(B) either
(I) the Subsidiary to be so designated has total assets of US$1,000 or
less or
(II) if such Subsidiary has assets greater than US$1,000, such
designation would be permitted under the "Limitation on
Restricted Payments" covenant; and
(C) if applicable, the incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants.
The board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such designation and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if incurred at such time,
have been permitted to be incurred, and shall be deemed to have been
incurred, for all purposes of the indenture.
143
Any such designation by the board of directors shall be evidenced to the
trustee by promptly filing with the trustee a copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such person.
"Wholly Owned" means, with respect to any Subsidiary of any person, the
ownership of at least 97% of the outstanding Capital Stock of such Subsidiary,
other than any director's qualifying shares or Investments by foreign
nationals mandated by applicable law or de minimis shares required to be owned
by another person under applicable law in order to maintain the corporate
status of such Subsidiary, by such person or one or more Wholly Owned
Subsidiaries of such person.
144
TAXATION
United States Federal Income Taxation
In the opinion of White & Case LLP, special U.S. tax counsel to the company,
the following is a description of the material U.S. federal income tax
consequences of the exchange offer and the consent payment. This description
is based on the Internal Revenue Code of 1986, as amended (the "Code"), income
tax regulations (proposed and final) issued under the Code, and administrative
and judicial interpretations of the Code and regulations, each as in effect
and available as of the date of this prospectus and consent solicitation.
These income tax laws, regulations, and interpretations, however, may change
at any time, and any change could be retroactive to the issuance date of our
exchange notes. These income tax laws and regulations are also subject to
various interpretations, and the U.S. Internal Revenue Service (the "IRS") or
the U.S. courts could later disagree with the explanations or conclusions set
out below.
Except where we state otherwise, this description deals only with GID notes
held as capital assets, as defined in the Code, and with exchange notes held
as capital assets, as defined in the Code, by a holder who acquires such
exchange notes pursuant to the exchange offer.
We do not address all of the tax consequences that may be relevant to a
holder. We also do not address, except as stated below, certain tax
consequences to
. holders that may be subject to special tax treatment, such as financial
institutions, insurance companies, real estate investment trusts,
regulated investment companies, tax-exempt organizations or dealers or
traders in securities or currencies,
. persons whose functional currency for U.S. federal income tax purposes
is not the U.S. Dollar, and
. persons that hold or will hold notes 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.
Moreover, this summary does not address the U.S. federal estate and gift or
alternative minimum tax consequences of the exchange offer and does not
address any state, local or non-U.S. tax consequences of the exchange offer.
For purposes of this description, a U.S. Holder is a beneficial owner of GID
notes or our exchange notes, as the case may be, who for U.S. federal income
tax purposes is:
. a citizen or resident of the United States, including some former
citizens or residents of the United States;
. a corporation or partnership created or organized in or under the laws
of the United States or any State, 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.
A non-U.S. Holder is a beneficial owner of GID notes or our exchange notes,
as the case may be, other than a U.S. Holder.
145
The Exchange Offer
The exchange of GID notes for our exchange notes pursuant to the exchange
offer by a U.S. Holder will constitute a material modification of the terms of
the GID notes and, therefore, the exchange will constitute a taxable exchange
for U.S. federal income tax purposes. Accordingly, a U.S. Holder will
recognize gain or loss equal to the difference, if any, between the amount
realized on the exchange (other than accrued but unpaid interest which will be
taxable as such) and the U.S. Holder's adjusted tax basis in the GID note.
Since the exchange notes will be listed on the New York Stock Exchange on the
date of their issuance, they will be considered to be publicly traded for U.S.
federal income tax purposes and the amount realized will be equal to the fair
market value of the exchange notes on that date. Subject to the application of
the market discount rules discussed below, any gain or loss will be capital
gain or loss. In the case of a non-corporate U.S. Holder, generally the
maximum marginal U.S. federal income tax rate applicable to such capital gain
will be lower than the maximum marginal U.S. federal income tax rate
applicable to ordinary income if the U.S. Holder's holding period for the
exchanged GID notes exceeds one year. Any gain or loss recognized on the
exchange generally will be treated as U.S. source gain or loss, as the case
may be, for U.S. foreign tax credit purposes. The deductibility of any capital
losses is subject to limitations.
If a U.S. Holder holds GID notes with accrued market discount, as defined in
the Code, then any gain recognized by such holder on the exchange of such
notes for our exchange notes would be recharacterized as ordinary interest
income to the extent of the accrued market discount that had not previously
been treated as ordinary income.
The law is unclear with respect to the treatment of the consent payment. The
receipt of a consent payment by a U.S. Holder may be treated either as:
. additional consideration received in exchange for tendered GID notes, in
which case payments would be taken into account as part of the amount
realized in the manner described above, or
. as separate consideration for consenting to the proposed amendments, in
which case payments would constitute ordinary income to the U.S. Holder.
Corporacion Durango intends to treat the consent payment for U.S. federal
income tax purposes as additional consideration paid to the U.S. Holders in
exchange for their tendered GID notes, although there can be no assurance that
the IRS will not attempt to treat the consent payment as ordinary income.
While the issue is not free from doubt, holders of GID notes that do not
participate in the exchange offer should not be deemed to have engaged in a
taxable exchange for U.S. federal income tax purposes as a result of the
elimination of substantially all of the restrictive covenants in the GID
indenture. Each holder of GID notes is urged to consult its own tax advisor
with regard to the tax consequences of not participating in the exchange
offer.
Our Exchange Notes
Interest
Interest paid on our exchange notes, including any Additional Amounts, that
is qualified stated interest (as defined below) will be includible in a U.S.
Holder's gross income as ordinary interest income in accordance with the U.S.
Holder's usual method of tax accounting for U.S. federal income tax purposes.
In addition, interest on our exchange notes (including any original issue
discount, as described below) will be treated as foreign source income for
U.S. federal income tax purposes. For U.S. foreign tax credit limitation
purposes, interest on our exchange notes generally will constitute passive
income, or, in the case of certain U.S. Holders, financial services income,
unless such interest is subject to withholding tax at a rate of 5% or more, in
which case such interest will constitute high withholding tax interest.
146
Subject to the discussion below under the caption "U.S. Backup Withholding
Tax and Information Reporting," payments of interest on our exchange notes
(including any original issue discount, as described below) to a non-U.S.
Holder generally will not be subject to U.S. federal income tax unless the
interest income is effectively connected with the conduct by the non-U.S.
Holder of a trade or business in the United States.
Original Issue Discount
The amount of original issue discount ("OID") on an exchange note is the
excess of the stated redemption price at maturity over its issue price. An
exchange note's stated redemption price at maturity is the sum of all payments
provided by the exchange note other than qualified stated interest. Qualified
stated interest is stated interest that is unconditionally payable at least
annually at a single fixed rate over the entire term of the exchange note. If
the exchange offer is consummated and the 2006 notes (1) are issued within 6
months of the date we issued the $180.0 million of the 2006 notes in February
2001 and certain other conditions are met or (2) are issued with de minimis
OID, as defined below, then the 2006 notes will be deemed to have the same
issue date, the same issue price, and (with respect to holders) the same
adjusted issue price as the 2006 notes issued in February 2001. Corporacion
Durango believes that the fair market value of a 2006 note on the date of
exchange will be such that any OID on the 2006 note will be de minimis, and,
therefore, the 2006 notes issued pursuant to the exchange offer should have
the same issue date, the same issue price, and (with respect to holders) the
same adjusted issue price as the 2006 notes issued in February 2001. If,
however, the exchange offer is delayed such that the 6-month window described
above closes and the 2006 notes issued pursuant to the exchange offer have
more than de minimis OID (determined independently of the 2006 notes issued in
February 2001), then, subject to the discussion below under "Pre-Issuance
Accrued Interest," the issue price of each 2006 note issued pursuant to the
exchange offer will be the fair market value of the 2006 note on the date of
exchange. With respect to the 2008 notes, subject to the discussion below
under "Pre-Issuance Accrued Interest," the issue price of each 2008 note will
be the fair market value of the 2008 note on the date of exchange.
Each U.S. Holder (whether a cash or accrual method taxpayer) of an exchange
note with OID exceeding a de minimis amount will be required to include in
income all OID as it accrues, in advance of the receipt of some or all of the
related cash payments. De minimis OID is defined as an amount of OID that is
equal to 0.0025 multiplied by the product of the stated redemption price at
maturity and the number of complete years to maturity from the issue date.
Corporacion Durango believes that the fair market value of an exchange note on
the date of exchange will be such that any OID on the exchange note will be de
minimis. If the fair market value of the exchange note on the date of
exchange, however, is less than its stated redemption price at maturity to an
extent that the exchange note has OID in excess of a de minimis amount, a U.S.
Holder of an exchange note will be required to include in income all OID as it
accrues, in advance of the receipt of some or all of the related cash
payments.
The amount of OID includible in income by the U.S. Holder of an exchange
note is the sum of the daily portions of OID with respect to the exchange note
for each day during the taxable year or portion of the taxable year on which
such U.S. Holder held such an exchange note ("accrued OID"). The daily portion
is determined by allocating to each day in any accrual period other than the
initial short accrual period and the final accrual period a pro rata portion
of the amount equal to the excess of (1) the product of an exchange note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and properly adjusted for the length of the accrual period) over (2)
the amount of any qualified stated interest payments allocable to such accrual
period. The yield to maturity is the discount rate that, when applied to all
payments under an exchange note, results in a present value equal to the issue
price. The amount of OID allocable to the final accrual period is the
difference between the amount payable at maturity (other than qualified stated
interest) and the adjusted issue price of the exchange note at the beginning
of the final accrual period. The amount of OID allocable to the initial short
accrual period may be computed under any reasonable method. The adjusted issue
price of an exchange note at the start of any accrual period is equal to its
issue price increased by the accrued OID for each prior accrual period, and
the amount of any qualified stated interest that accrued prior to the
beginning of the accrual period but is not payable until a later date, and
reduced by all payments other than qualified stated interest.
147
The OID discussion set forth above is subject to the discussion below
regarding the amortizable bond premium rules.
According to applicable U.S. Treasury Regulations, the possibility of a
change in the payments on the exchange notes will not affect the amount or
timing of interest income, including OID, recognized by a U.S. Holder of an
exchange note if, as of the issue date of the exchange notes, the likelihood
of the change occurring is remote or the potential amount of the change is
incidental. We intend to take the position that the possibility of the payment
of a Change of Control redemption premium in respect of the exchange notes is
a remote or incidental contingency, and do not intend to treat the possibility
of any such payments as affecting the yield to maturity of the exchange notes.
Our determination that the possibility of such payments represents remote or
incidental contingencies is binding on a U.S. Holder unless such U.S. Holder
discloses an intention to take a contrary position to the IRS in the proper
manner.
Pre-Issuance Accrued Interest
While the issue is not free from doubt, the accrued interest in excess of
the interest that would have accrued using the rate of the GID notes should be
treated as pre-issuance accrued interest. Absent a decision to use the
alternative method to adjust the issue price as described below, the pre-
issuance accrued interest will not affect the issue price of the 2006 notes.
The pre-issuance accrued interest, however, will result in a portion of the
February 1, 2002 interest payment that exceeds the interest accrued from the
exchange offer date not being treated as qualified stated interest. This
portion of the February 1, 2002 interest payment will instead be included in
the stated redemption price at maturity of the 2006 notes and will be taken
into account in accordance with the OID rules discussed above. Alternatively,
a U.S. Holder may determine the issue price of the 2006 notes by subtracting
from the issue price, as determined under the OID rules discussed above, the
amount of the pre-issuance accrued interest. If the issue price of the 2006
notes were determined in this manner, a portion of the February 1, 2002
interest payment would be treated as a return of the pre-issuance accrued
interest, rather than an amount payable on the 2006 notes.
Amortizable Bond Premium
An exchange note will have amortizable bond premium if the U.S. Holder's
adjusted tax basis in the exchange note immediately after its acquisition is
greater than the exchange note's stated redemption price at maturity. In such
a case, the U.S. Holder would not be required to include any OID in income.
A U.S. Holder will acquire an exchange note with amortizable bond premium,
and hence would not be required to include OID in income, only if the fair
market value of an exchange note, which would be the same as the U.S. Holder's
adjusted tax basis in the exchange note immediately after its acquisition,
exceeds the exchange note's stated redemption price at maturity. We believe
that the fair market value of an exchange note on the date of exchange likely
will not exceed the exchange note's stated redemption price at maturity, and,
therefore, the exchange notes likely will not have amortizable bond premium.
If, however, the exchange notes have amortizable bond premium, a U.S. Holder
of an exchange note may elect to amortize the premium and may also offset
qualified stated interest with such premium under a complex set of rules in
the Code and Treasury regulations promulgated thereunder. Each U.S. Holder is
urged to consult its own tax advisor with regard to the application of the
amortizable bond premium rules to its particular situations.
Sale, Exchange or Retirement
Upon the sale, exchange or retirement of our exchange notes, a U.S. Holder
will recognize taxable gain or loss equal to the difference, if any, between
the amount realized on the sale, exchange or retirement (other than accrued
but unpaid qualified stated interest which will be taxable as such), and the
U.S. Holder's adjusted tax basis in the exchange notes. A U.S. Holder's
adjusted tax basis in an exchange note generally will equal the
148
issue price of such note to the holder, increased by the amount of OID
previously accrued in gross income in respect of the exchange note by such
U.S. Holder and decreased by all payments previously received on the exchange
note (other than payments of qualified stated interest). Any gain or loss will
be capital gain or loss. In the case of a noncorporate U.S. Holder, generally
the maximum marginal U.S. federal income tax rate applicable to such a capital
gain will be lower than the maximum marginal U.S. federal income tax rate
applicable to ordinary income if a U.S. Holder's holding period for the
exchange notes exceeds one year and will be further reduced if such holding
period exceeds five years. Any gain or loss recognized on the sale, exchange
or retirement of our exchange notes generally will be treated as U.S. source
gain or loss, as the case may be, for U.S. foreign tax credit purposes. The
deductibility of any capital losses is subject to limitations.
Subject to the discussion below under the caption "U.S. Backup Withholding
Tax and Information Reporting," any gain realized by a non-U.S. Holder upon
the sale, exchange or retirement of our exchange notes generally will not be
subject to U.S. federal income tax, unless:
. the gain is effectively connected with the conduct by the non-U.S.
Holder of a trade or business in the United States or
. in the case of any gain realized by an individual non-U.S. Holder, the
holder is present in the United States for 183 days or more in the
taxable year of the sale, exchange or retirement and other conditions
are met.
U.S. Backup Withholding Tax and Information Reporting
U.S. backup withholding tax and information reporting requirements generally
apply to certain payments to certain noncorporate holders that are United
States persons. Information reporting generally will apply to payments of
principal of, and interest on a note and to proceeds of the sale or redemption
of a note made within the United States to a holder (other than an exempt
recipient, including a corporation, a payee that is not a United States person
who provides appropriate certification and certain other persons). A payor
will be required to withhold from such payments within the United States on
our notes to a holder that is a United States person (other than an exempt
recipient) if such holder fails to furnish its correct taxpayer identification
number or otherwise fails to comply with, or establish an exemption from, such
backup withholding requirements. Under recently enacted legislation, the
backup withholding tax rate of 31% will be reduced as of August 7, 2001 to
30.5%. This rate will be further reduced to 30% for years 2002 and 2003, 29%
for years 2004 and 2005, and 28% for 2006 and thereafter. Payments within the
United States of principal and interest to a holder that is not a United
States person will not be subject to backup withholding tax and information
reporting requirements if an appropriate certification is provided by the
holder to the payor and the payor does not have actual knowledge, or a reason
to know, that such certification is incorrect. In the case of such payments
within the United States to a foreign simple trust, a foreign grantor trust or
a foreign partnership (other than payments to a foreign simple trust, a
foreign grantor trust or foreign partnership that qualifies as a withholding
foreign trust or a withholding foreign partnership within the meaning of
applicable U.S. Treasury Regulations and payments to a foreign simple trust, a
foreign grantor trust or a foreign partnership that are effectively connected
with the conduct of a trade or business in the United States), the
beneficiaries of the foreign simple trust, the persons treated as the owners
of the foreign grantor trust or the partners of the foreign partnership, as
the case may be, will be required to provide the certification discussed above
in order to establish an exemption from backup withholding tax and information
reporting requirements. Moreover, a payor may rely on a certification provided
by a payee that is not a United States person only if such payor does not have
actual knowledge or a reason to know that any information or certification
stated in such certificate is incorrect.
Each holder is urged to consult its own tax advisor with regard to the
application of the United States federal income tax laws to its particular
situation as well as any tax consequences that may arise under the laws of any
non-U.S., state, local or other taxing jurisdiction.
United States--Mexico and Other Tax Treaties
The United States and Mexico have entered into a Convention for the
Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to
Income Taxes, the U.S.--Mexico Treaty. Provisions of the U.S.--Mexico Treaty
that may affect the taxation to which certain U.S. holders of our exchange
notes may be subject to are summarized below under "Mexican Taxation."
149
The United States and Mexico have also entered into an agreement that
regulates the exchange of information regarding tax matters.
Mexico has also entered into, and is negotiating, several other tax treaties
that may reduce or have an impact on the amount of Mexican tax to which the
holders of our exchange notes are subject. Prospective holders of our exchange
notes should consult their own tax advisors as to the tax consequences, if
any, of these treaties.
Mexican Taxation
In the opinion of White & Case, S.C. special Mexican counsel to the company,
the following is a description of the material consequences under Mexican
federal tax law and of the U.S.--Mexico Treaty, as currently in effect, of the
purchase, ownership and disposition of our exchange notes by a holder that is
not a resident of Mexico and that will not hold our exchange notes or a
beneficial interest in our exchange notes in connection with the conduct of a
trade or business through a permanent establishment or fixed base
(establecimiento permanente or base fija) in Mexico, or a Foreign Holder. The
discussion below does not address all Mexican tax considerations that may be
relevant to particular investors, nor does it address the special tax rules
applicable to certain categories of investors or any tax consequences under
the tax laws of any state or municipality of Mexico. This summary is based
upon the federal tax laws of Mexico as in effect on the date of this
prospectus and consent solicitation, which are subject to change.
Foreign Holders According to Mexican Taxation
For purposes of Mexican taxation, an individual or corporation that does not
satisfy the necessary require-ments to be considered a Mexican resident for
tax purposes as described below is deemed to be a Foreign Holder. Individuals
are considered Mexican residents when they have established their home in
Mexico, unless these individuals have resided in another country for more than
183 days, whether consecutive or not, within a single calendar year and are
able to demonstrate that they have become residents of this other country for
tax purposes. A legal entity is considered a Mexican resident when
incorporated in accordance with applicable Mexican laws or when the main
management of its business or its effective head office is established in
Mexico. Unless otherwise proven, an individual who is a Mexican national is
considered a Mexican resident for tax purposes. A Foreign Holder conducting a
trade or business through a permanent establishment or fixed base in Mexico
will be required to pay regular income tax in Mexico on income attributable to
the permanent establishment or fixed base, which could include income from our
exchange notes.
Taxation of Interest
Under Mexico's Income Tax Law, or the Income Tax Law, payments of interest
made by us in respect of our exchange notes will be subject to Mexican
withholding taxes assessed at the following rates:
. 4.9% if (i) such payments are made to Foreign Holders to the extent the
exchange notes are placed in a country with which Mexico has in force a
treaty for the avoidance of double taxation (which currently includes
the United States of America) or during 2001 if the exchange notes are
placed in a country with which Mexico has successfully concluded
negotiations regarding a treaty for the avoidance of double taxation;
(ii) the exchange notes are registered with the Special Section of the
NRS; (iii) the regulations to be issued by the Ministry of Finance
regarding information requirements are complied with; (iv) the exchange
notes are placed through banks or brokerage houses; and (v) the
effective beneficiaries, whether acting directly or indirectly, jointly
with related parties or severally, receiving more than 5% of interest
paid under our exchange notes are not (x) our shareholders holding 10%
or more of our voting stock, directly or indirectly, jointly with
related parties or severally or (y) corporations or other entities, 20%
or more of the stock of which is owned, directly or indirectly, jointly
or severally, by persons related to us; and
. 10% if such payments are made to Foreign Holders to the extent that the
exchange notes are placed in countries other than those referred to in
the above item, provided that the requirements in (ii) and (iii) of the
above item are met.
150
Payments of interest on our exchange notes are expected to be subject to a
4.9% withholding tax since the conditions specified above are expected to be
satisfied. If those conditions are not satisfied or would cease to be
satisfied, withholding taxes may be higher.
We have agreed, subject to certain exceptions, to pay the additional amounts
in respect of Mexican withholding taxes that may apply in connection with
interest payments on the exchange notes. For a description of the exceptions
when we are not required to pay such additional amounts, see "Description of
Our Exchange Notes--Common Terms of the Exchange Notes--Additional Amounts."
In addition, we have agreed, subject to exceptions, to pay additional
consideration to an exchanging holder of GID notes in respect of Mexican
withholding taxes, if any, imposed on a consent payment. For a description of
payments of additional consideration to an exchanging holder of GID notes in
respect of Mexican withholding taxes imposed on a consent payment, see the
consent and letter of transmittal.
Payments of interest made by us with respect to our exchange notes to non--
Mexican pension or retirement funds will be exempt from Mexican taxes,
provided that any such fund (i) is duly organized pursuant to the laws of its
country of origin, (ii) is the effective beneficiary of the income from such
payments of interests, (iii) receives income pursuant to such payments of
interest which is exempt from income tax in that country, and (iv) is
registered with the Ministry of Financing and Public Credit for that purpose.
In the event that the trustee forecloses on the unsubordinated promissory
notes of GID pledged by our company, payments of principal and interest by GID
to you will be subject to a withholding tax. However, GID will also agree to
gross up for any withholding taxes that are required by law to be withheld
under the terms of the unsubordinated promissory notes.
Taxation of Principal
Under existing Mexican law and regulations, a Foreign Holder will not be
subject to any Mexican taxes in respect of payment of principal made by us
with respect to our exchange notes.
The Exchange Offer
A Foreign Holder will not be subject to any Mexican tax upon the exchange of
GID notes for our exchange notes, nor for the consent payment, since we
consider it will be treated by us as additional consideration for Mexican tax
purposes, paid to the Foreign Holders in exchange for their tendered GID
notes.
Taxation on Dispositions
Capital gains resulting from the sale or other disposition of our exchange
notes by a Foreign Holder are not taxable in Mexico.
Transfer Taxes, etc.
A Foreign Holder will not be liable for estate, gift, inheritance or similar
taxes with respect to its holdings, nor will it be liable for Mexican stamp,
registration or similar taxes.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a corporation organized under the laws of Mexico. In addition, most
of our directors, officers and controlling persons, as well as experts named
in this prospectus and consent solicitation reside outside the United States,
and all or a substantial portion of their assets and the assets of Corporacion
Durango, are located in Mexico. As a result, it may be difficult for investors
to effect service of process within the United States upon these persons or to
enforce against them, either inside or outside the United States, judgments
obtained against these persons in U.S. courts, or to enforce in U.S. courts
judgments obtained against these persons in courts in jurisdictions outside
the United States, in each case, in any action predicated upon civil
liabilities under the U.S. federal securities laws. Based on the opinion of
White & Case S.C., our Mexican counsel, there is doubt as to the
enforceability against these persons in Mexico, whether in original actions or
in terms for enforcement of judgments of U.S. courts, of liabilities
predicated solely upon the U.S. federal securities laws.
151
LEGAL MATTERS
Certain legal matters in connection with this exchange offer and consent
solicitation and the validity of the exchange notes will be passed upon for us
by White & Case LLP, New York, New York and White & Case S.C., Mexico City,
Mexico. Certain legal matters in connection with this exchange offer and
consent solicitation will be passed upon for the dealer manager and
solicitation agent by Shearman & Sterling, New York, New York and Ritch
Heather y Mueller, S.C., Mexico City, Mexico.
EXPERTS
The combined and consolidated financial statements of Corporacion Durango,
S.A. de C.V. and subsidiaries as of December 31, 1999 and 2000 and for the
three years then ended included in this prospectus and consent solicitation
have been so included in reliance on the report of PricewaterhouseCoopers,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of GID and its subsidiaries as of
December 31, 1999 and 2000 and for the three years ended December 31, 2000
included in this prospectus and consent solicitation have been so included in
reliance on the report of PricewaterhouseCoopers, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of Durango Paper Company, formerly the
Gilman Pulp and Paper Group, as of December 17, 1999 and for the period from
January 1, 1999 through December 17, 1999 included in this prospectus and
elsewhere in the registration statement have been included in this prospectus
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere in this
prospectus and consent solicitation, and upon the authority of said firm as
experts in accounting and auditing.
The combined financial statements of Durango Paper Company, formerly the
Gilman Pulp and Paper Group, as of December 31, 1997 and 1998 and for each of
the two years in the period ended December 31, 1998, included in this
prospectus and consent solicitation, have been audited by Grant Thornton LLP,
independent certified public accountants, to the extent and for the periods
indicated in their reports.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form F-4 with respect to the exchange offer and our exchange
notes. This prospectus and consent solicitation, which constitutes a part of
the registration statement on Form F-4, does not contain all of the
information set forth in that registration statement. For further information
about us and the exchange notes we refer you to those registration statements.
We have been subject to the information requirements of the Exchange Act
since the effectiveness of the registration statement on Form F-1 filed by us
with the SEC for our 13 1/8% Senior Notes due 2006 in January 2001 and the
acceptance of our related listing application by the New York Stock Exchange.
Our company will file with the SEC all reports and other information as it
would be required to file under Section 13(a) or 15(d) under the Securities
Exchange Act. In addition to annual reports on Form 20-F, our company will
also be required to file on Form 6-K interim consolidated reports, including
consolidated financial statements, as soon as they are available, but in no
event no later than 60 days after the end of each interim period, prepared in
accordance with Mexican GAAP. We will file these interim consolidated reports
with the SEC whether or not we are subject to corporate reporting requirements
under Mexican law.
If the SEC does not permit the filings described above, our company will
provide annual and interim reports and other information to the trustee within
the same time periods that would be applicable if our company were required
and permitted to file those reports with the SEC. We will also instruct the
trustee to mail those reports and other information to holders at their
addresses set forth on the security register.
152
In addition, the NYSE requires that we timely disclose to the market all
material information that might reasonably be expected to materially affect
the value of the exchange notes, and in which the NYSE, the holders of the
exchange notes and the public have an interest.
You may read and copy our registration statements and any reports,
statements or other information filed by us at the Securities and Exchange
Commission's public reference facilities located at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at one of the
Securities and Exchange Commission's public reference facilities in New York,
New York and Chicago, Illinois. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
facilities.
153
As filed with the Securities and Exchange Commission on July 30, 2001
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20 F/A
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-13148
Grupo Industrial Durango, S.A. de C.V.
(Exact name of Registrant as specified in its charter)
Durango Industrial Group
(Translation of Registrant's name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
Torre Corporativa Durango
Potasio 150
Ciudad Industrial
Durango, Durango, Mexico 34220
(52-18) 29-1000
(Address and telephone number of principal executive offices)
________________________________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
--------------------
------------------------------------------
Series A Common Stock, without par value ("Series A Shares")
New York Stock Exchange*
Ordinary Participation Certificates ("CPOs"), each representing one Series A
Share New York Stock Exchange*
American Depositary Shares ("ADSs"), each representing two CPOs
New York Stock Exchange
________________
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the United States
Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 53,832,867 Series A Shares, without par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 [ ] Item 18 [X]
================================================================================
A-1
TABLE OF CONTENTS
-----------------
Page
----
INTRODUCTION....................................................................
..................................1
PART I
................................................................................
.........................3
Item 1. Identity of Directors, Senior Management and
Advisors....................................................3
Item 2. Offer Statistics and Expected
Timetable..................................................................3
Item 3. Key
Information.....................................................................
.....................3
Selected Financial
Data............................................................................
......3
Dividends.......................................................................
.........................5
Exchange Rate
Information.....................................................................
...........6
Risk
Factors.........................................................................
....................7
Risk Factors Related to Our
Business.....................................................................7
Risks Relating to
Mexico..........................................................................
.......9
Item 4. Information on the
Company.........................................................................
.....10
Organization....................................................................
........................10
History and Development of the
Company..................................................................10
Business Overview
................................................................................
......14
Subsidiaries and Operating
Divisions....................................................................15
Our Business
Strategy........................................................................
...........17
Our
Products........................................................................
....................17
Customers.......................................................................
........................20
Sales and
Marketing.......................................................................
..............20
Raw
Materials.......................................................................
....................21
Distribution and Supply of Our
Products.................................................................22
Our
Competition.....................................................................
....................23
Environmental
Matters.........................................................................
..........24
Insurance.......................................................................
........................24
Paper and Packaging
Industry........................................................................
....25
Property, Plant and
Equipment.......................................................................
....28
Item 5. Operating and Financial Review and
Prospects............................................................30
General
................................................................................
...............30
Recent Market
Conditions......................................................................
..........30
Sales
................................................................................
...............30
Pricing
................................................................................
...............30
Cost of
Production......................................................................
................31
Inflation.......................................................................
........................32
Exchange
Rates...........................................................................
...............32
Capacity
Utilization.....................................................................
...............33
Segment
Reporting.......................................................................
................33
Results of
Operations......................................................................
.............34
Year Ended December 31, 2000 Compared With Year Ended December 31,
1999.................................34
Year Ended December 31, 1999 Compared With Year Ended December 31,
1998.................................36
Liquidity and Capital
Resources.......................................................................
..37
A-2
Sources and Uses of
Cash............................................................................
....37
Indebtedness....................................................................
........................38
Bank
Debt............................................................................
...................38
Capital
Expenditures....................................................................
................38
Differences Between Mexican GAAP and U.S.
GAAP..........................................................39
New Accounting Pronouncements under Mexican
GAAP........................................................39
New Accounting Pronouncements under U.S.
GAAP...........................................................39
Item 6. Directors, Senior Management and
Employees..............................................................40
Board of Directors and Executive
Officers...............................................................40
Statutory
Auditor.........................................................................
..............43
Compensation of Directors and
Officers..................................................................43
Remuneration
Committee.......................................................................
...........43
Audit
Committee.......................................................................
..................44
Our
Employees.......................................................................
....................44
Item 7. Major Shareholders and Related Party
Transactions.......................................................46
General
................................................................................
...............46
Voting
Trust...........................................................................
.................47
Related Party
Transactions....................................................................
..........47
Item 8. Financial
Information.....................................................................
..............48
Legal
Proceedings.....................................................................
..................48
Dividend
Policy..........................................................................
...............48
Significant
Changes.........................................................................
............48
Item 9. The Offer and
Listing.........................................................................
..........48
Trading on the Mexican Stock
Exchange...................................................................48
Item 10. Additional
Information.....................................................................
.............51
Limitations Affecting ADS
Holders.......................................................................51
Exchange
Controls........................................................................
...............51
Mexican Income
Taxation........................................................................
.........51
Taxation of
Dividends.......................................................................
............51
Taxation of Capital
Gains...........................................................................
....53
Other Mexican
Taxes...........................................................................
..........53
United States Federal Income
Taxation...................................................................53
Documents on
Display.........................................................................
...........56
Material
Contracts.......................................................................
...............57
Enforceability of Civil
Liabilities.....................................................................
57
Item 11. Quantitative and Qualitative Disclosure about Market
Risk...............................................57
Interest Rate
Risk............................................................................
..........57
Foreign Currency Exchange Rate
Risk.....................................................................58
Equity Derivative
Contract........................................................................
......58
Item 12. Description of Securities Other than Equity
Securities..................................................58
PART II
................................................................................
........................58
Item 13. Defaults, Dividend Arrearages and
Delinquencies.........................................................58
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds............................58
Item 15.
[Reserved]......................................................................
........................59
A-3
Item 16.
[Reserved]......................................................................
........................59
PART III 56
Item 17. Financial
Statements......................................................................
..............59
Item 18. Financial
Statements......................................................................
..............59
Item 19.
Exhibits........................................................................
......................II-1
A-4
INTRODUCTION
In this annual report, the "Company," "we," "us" and "our" refer to Grupo
Industrial Durango, S.A. de C.V. and its consolidated subsidiaries, as the
context may require. We are a corporation organized under the laws of the United
Mexican States ("Mexico").
International Disclosure Standards
On September 28, 1999, the United States Securities and Exchange Commission
adopted international disclosure standards for foreign private issuers that
became mandatory for annual reports relating to fiscal years ending on or after
September 30, 2000. We have prepared this annual report in accordance with the
new standards.
Presentation of Financial Information
We report our financial statements in Pesos (as defined below) and prepare
our financial statements in accordance with generally accepted accounting
principles in Mexico, or Mexican GAAP, which differ in certain significant
respects from generally accepted accounting principles in the United States, or
U.S. GAAP. Note 20 to our audited consolidated financial statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to such financial statements, and a reconciliation to U.S. GAAP of
our consolidated net income and total stockholders' equity as of and for the
years ended December 31, 1998, 1999 and 2000. We have a fiscal year end of
December 31.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation in
Financial Information," and Bulletin B-12, "Statement of Changes in Financial
Position," issued by the Mexican Institute of Public Accountants (as defined
below), our audited consolidated financial statements are reported in period-end
Pesos to adjust for the inter-period effects of inflation. The presentation of
financial information in period-end, or constant, currency units is intended to
eliminate the distorting effect of inflation on the financial statements and to
permit comparisons across comparable periods in comparable monetary units.
Consequently, under Mexican GAAP, non-monetary assets, with the exception of
inventories and fixed assets of non-Mexican origin, are restated using the
National Consumer Price Index (Indice Nacional de Precios al Consumidor), or the
NCPI. Inventories are restated at current replacement costs while fixed assets
of non-Mexican origin are restated by the inflation of the country of origin
prior to translation to Pesos at the period-end exchange rate. The effects of
inflation accounting under Mexican GAAP, other than the restatement of fixed
assets of non-Mexican origin, have not been reversed in the reconciliation to
U.S. GAAP.
In 1998, we adopted Bulletin B-15, "Foreign Currency Transactions and
Translation of Financial Statements of Foreign Operations," which prescribes the
methodology for the translation and recognition of inflation of the financial
information of foreign subsidiaries. Therefore, the Peso amounts of our revenues
and expenses of our U.S.-based subsidiaries may be impacted by the foreign
exchange rate fluctuations and inflation rates in the United States.
Bulletin B-15 also prescribes the methodology for the restatement of prior
period information to constant Pesos as of the most recent balance sheet
presented. Instead of using the NCPI to restate prior period consolidated
financial information, under Bulletin B-15, prior period information is
deconsolidated by subsidiary or country of origin to which the applicable
inflation rate is applied and then retranslated to Pesos at the most recent
reporting period date. For the purposes of U.S. GAAP, we have restated all
consolidated financial information in constant Pesos as of December 31, 2000
using the NCPI. For a more detailed discussion of Mexican GAAP inflation
methodologies, see Note 3 to our audited consolidated financial statements.
U.S. Dollar (as defined below) amounts shown in the audited consolidated
financial statements have been included solely for the convenience of the reader
and are translated from Pesos at an exchange rate of Ps 9.6098 per US$1.00, the
interbank free market exchange rate as reported by the Mexican Central Bank
(Banco de Mexico) as of
A-5
December 31, 2000. These translations should not be construed as representations
that the Peso amounts actually represent such U.S. Dollar amounts or could be
converted into U.S. Dollars at the rate indicated or at any other rate. Unless
otherwise indicated, all other U.S. Dollar amounts appearing in this annual
report have been translated from Pesos at such exchange rate. The noon buying
rate in the City of New York for cable transfers in Pesos as certified for
United States customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on December 31, 2000 was Ps 9.618 to $1.00. On June 15,
2001, the Noon Buying Rate was Ps 9.054 to $1.00. For historical information
concerning the Peso to Dollar exchange rate from January 1, 1996 to a recent
date see "Item 3. Key Information - Exchange Rate Information."
In this annual report, references to "Pesos" or "Ps" are to Mexican Pesos
and references to "U.S. Dollars," "Dollars," "dollars", "US$" or "$" are to
United States Dollars.
Except where otherwise indicated, financial data for all periods throughout
this annual report has been restated in constant Pesos as of December 31, 2000.
The term "billion" as used in this annual report means one thousand
million. References to the "capacity" or "rated capacity" of production
facilities are to the designed capacity of such facilities, which does not take
into account operating interruptions for normal scheduled maintenance or
production-run changeovers.
All references in this annual report to tons refer to short tons (1 short
ton = 0.907 metric tons).
For the convenience of the reader, all figures in U.S. Dollars herein are
calculated using the exchange rate as of December 31, 2000 of Ps 9.6098 per U.S.
Dollar.
Special Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements that involve
substantial risks and uncertainties, including, in particular, statements about
our plans, strategies and prospects under the captions "Item 3. Key
Information", "Item 4. Information on the Company" and "Item 5. Operating and
Financial Review and Prospects". You can identify these statements by forward-
looking words such as "anticipate", "believe", "could", "estimate", "expect",
"intend", "may", "should", "will", and "would" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position or state other "forward-looking" information. We believe that
it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed below in the section captioned "Item 3.
Key Information - Risk Factors", as well as any cautionary language in this
annual report, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements. You should be aware that the occurrence of
the events described in these risk factors and elsewhere in this annual report
could have a material adverse effect on our business, financial condition, and
results of operations. The forward-looking statements are subject to risks,
uncertainties, and assumptions about us, including, among other things:
. our substantial debt and debt service obligations;
. developments in, or changes to, the laws, regulations and governmental
policies governing our business, including environmental liabilities;
. the competitive nature of the industries in which we are operating;
. changes in the U.S. Dollar-Peso exchange rate, interest rates and
other domestic, and international market and industry conditions;
. the cyclicality of the paper and packaging industries; and
A-6
. our ability to retain key personnel required to operate our business.
PART I
Item 1. Identity of Directors, Senior Management and Advisors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
Selected Financial Data
The following table sets forth our selected consolidated financial data for
each of the periods presented. The data do not represent all of our financial
information. You should read this information together with the audited
consolidated financial statements as of December 31, 1999 and 2000 and for the
three fiscal years then ended and the information under "Item 5. Operating and
Financial Review and Prospects."
The selected consolidated historical income statement information for the
fiscal years ended December 31, 1998, 1999 and 2000, and the selected historical
balance sheet information as of December 31, 1999 and 2000 have been derived
from the consolidated financial statements that were audited by
PricewaterhouseCoopers, our independent public accountants, as indicated in
their report included elsewhere herein. The selected consolidated historical
income statement information for the fiscal years ended December 31, 1996 and
1997, and the selected historical balance sheet information as of December 31,
1996 and 1997, have been derived from the consolidated financial statements
which are not included in this annual report.
Our audited consolidated financial statements were prepared in accordance
with Mexican GAAP, which differ in certain significant respects from U.S. GAAP.
Note 20 to our audited consolidated financial statements provides a description
of the principal differences between Mexican GAAP and U.S. GAAP, as they relate
to such financial statements. In addition, Note 20 to our audited consolidated
financial statements contains a reconciliation to U.S. GAAP of our consolidated
net income and stockholders' equity.
Operating income plus depreciation and amortization is referred to by us as
adjusted EBITDA. Operating income under U.S. GAAP may differ from operating
income under Mexican GAAP due to U.S. GAAP adjustments and also because
provisions for employee profit sharing are reclassified as an operating expense
under U.S. GAAP. Adjusted EBITDA to net interest is calculated as adjusted
EBITDA divided by the sum of gross debt and long-term debt, less cash and
temporary investments, with the resulting difference divided by adjusted
EBIITDA. EBITDA IS not a measure of financial condition or performance under
either Mexican GAAP or U.S. GAAP. In addition, all companies do not calculate
EBITDA in a uniform manner so that our EBITDA calculations may not be
comparable to those of other companies.
A-7
Year ended
December 31,
--------------------------------------------------------------------------------
-----
1996 1997(1)
1998 1999 2000 2000
--------------------------------------------------------------------------------
-----
(millions of constant Pesos
restated as of (millions
December 31, 2000, excluding ratios,
share and per share amounts) of US$)(2)
Consolidated Statement of Income Data:
Mexican GAAP:
Net sales................................. 4,737.7 4,932.2
6,036.4 5,832.0 6,075.0 632.2
Cost of sales............................. 3,245.2 3,531.5
4,487.2 4,308.0 4,553.0 473.8
Gross profit.............................. 1,492.5 1,400.7
1,549.2 1,524.0 1,522.0 158.4
Selling and administrative expenses....... 332.1 348.2
421.1 431.4 437.4 45.5
Operating income.......................... 1,160.4 1,052.5
1,128.1 1,092.6 1,084.6 112.9
Other expenses............................ (134.8) (171.8)
(205.3) (56.2) (31.9) (3.3)
Financing cost:
Interest expense...................... 945.0 784.6
859.2 766.1 700.4 72.9
Interest income....................... (230.1) (146.3)
(114.7) (86.0) (94.2) (9.8)
Foreign exchange loss (gain), net..... 216.5 176.2
1,190.6 (264.0) 74.5 7.8
Loss (gain) from monetary position.... (1,364.4) (703.1)
(857.5) (617.0) (414.2) (43.1)
---------- -------------
------------- ------------- ------------- -------------
Total financing cost...................... (433.0) 111.4
1,077.6 (200.9) 266.5 27.8
---------- -------------
------------- ------------- ------------- -------------
Amortization of negative
goodwill (3)...................... (137.2) (409.7)
(272.5) 0.0 0.0 0.0
Income before income and asset
taxes and profit sharing and
minority interest..................... 1,595.8 1,179.0
117.7 1,237.3 786.2 81.8
Provisions for:
Income and asset taxes................ 7.0 0.2
7.8 129.2 229.5 23.9
Employee profit sharing............... 12.9 13.2
11.6 5.8 6.8 0.7
Tax loss carry-forwards...............
Deferred income tax...................
161.8 16.8
Net income before minority interest....... 1,575.9 1,165.6
98.3 1,102.3 388.1 40.4
Minority interest......................... 11.4 2.5
(10.9) 3.0 (1.5) (0.2)
---------- -------------
------------- ------------- ------------- -------------
Net income................................ 1,564.5 1,163.1
109.2 1,099.3 389.6 40.6
---------- -------------
------------- ------------- ------------- -------------
Basic and diluted earnings per share...... 29.1 21.7
2.0 20.4 7.2 0.8
Weighted-average number of shares
outstanding..............................53,678,551 53,678,812
53,678,812 53,857,931 53,874,979 53,874,979
U.S. GAAP: (4)(5)
Income (loss) before income and asset
taxes and profit-sharing and minority
interest................................. 1,571.2 761.9
(283.7) 1,425.1 648.4 67.5
Net income (loss)......................... 1,625.0 259.4
(159.6) 1,925.7 6.1 0.6
Basic and diluted earnings per share(6)... 30.3 4.8
(3.0) 35.8 0.1 0
Weighted-average number of shares
outstanding..............................53,678,551 53,678,812
53,678,812 53,857,931 53,874,979 53,874,979
Balance Sheet Data:
Mexican GAAP:
Cash and temporary investments............ 891.5 685.4
1,114.6 693.0 620.1 64.5
Total current assets...................... 2,722.0 2,702.8
3,247.9 3,280.4 2,972.6 309.3
Property, plant and equipment, net........ 9,595.1 10,087.6
10,970.2 9,532.7 9,300.7 967.8
Total assets.............................. 12,944.1 13,351.7
14,568.7 13,138.9 12,609.6 1,312.2
Short-term debt, including current
portion of long term debt................ 92.5 54.1
570.7 148.0 383.4 39.9
Long-term debt............................ 5,936.3 5,828.3
6,676.6 5,621.2 5,049.0 525.4
Capital stock............................. 3,619.7 3,619.3
3,623.8 3,687.2 3,686.6 383.6
Total majority stockholders' equity....... 5,420.1 5,641.7
5,625.4 5,595.2 3,348.5 348.4
Total minority stockholders' equity....... 121.7 113.1
127.0 63.3 34.9 3.7
---------- -------------
------------- ------------- ------------- -------------
Total stockholders' equity (net assets)... 5,541.8 5,754.8
5,752.4 5,658.5 3,383.4 352.1
---------- -------------
------------- ------------- ------------- -------------
U.S. GAAP:(4)(5)
Total assets.............................. 12,430.0 13,149.5
14,568.7 13,229.6 13,109.5 1,364.2
Total stockholders' equity (net assets)... 1,742.9 2,031.9
1,927.3 2,856.1 3,015.0 313.7
Other Financial Data (Mexican GAAP)(4)(5):
Adjusted EBITDA(7)........................ 1,495.9 1,367.7
1,462.2 1,416.5 1,379.8 143.6
Resources generated by operating
activities............................... 1,885.0 1,136.9
287.6 1,332.7 947.3 98.6
Resources (used in) generated by
financing activities.................. 128.6 (173.1)
1,148.6 (1,577.0) (626.5) (65.2)
Resources used in investing activities.... (1,728.7) (1,169.8)
(1,007.0) (177.2) (393.7) (41.0)
A-8
Year ended
December 31,
--------------------------------------------------------------------------------
-----
1996 1997(1)
1998 1999 2000 2000
--------------------------------------------------------------------------------
-----
(millions of constant Pesos
restated as of (millions
December 31, 2000, excluding ratios,
share and per share amounts) of US$)(2)
Capital expenditures...................... 218.3 272.8
962.4 107.3 327.8 34.1
Adjusted EBITDA to interest expense....... 1.6 1.7
1.7 1.8 2.0 2.0
Adjusted EBITDA to net interest expense... 2.1 2.1
2.0 2.1 2.3 2.3
Total Debt to Adjusted EBITDA............. 4.0 4.3
5.0 4.1 3.9 3.9
Net Debt to Adjusted EBITDA............... 3.4 3.8
4.2 3.6 3.5 3.5
Other Financial Data (U.S. GAAP):
Adjusted EBITDA........................... 1,471.3 963.4
1,171.6 1,520.5 1,329.9 138.4
Cash flow provided by (used in) operating
activities............................... 471.0 489.1
(738.1) 667.7 107.9 11.2
Cash flow provided by (used in)
financing activities.................. 1,614.4 553.2
2,195.0 (962.1) 91.7 9.5
Cash flow used in investing activities.... (1,800.5) (1,244.3)
(916.1) (149.1) (376.0) (39.1)
_________________
(1) The 1997 income statement data include results of operations of the
McKinley Group for the period from October 22, 1997, the date of the
acquisition thereof, to December 31, 1997. The balance sheet data as of
December 31, 1997 include the assets and liabilities of the McKinley Group.
(2) U.S. Dollar amounts shown in the consolidated financial statements have
been included solely for the convenience of the reader and are translated
from Pesos, as a matter of arithmetic computation only, at an exchange rate
of Ps 9.6098 per U.S. Dollar, the interbank free market exchange rate as
reported by the Mexican Central Bank as of December 31, 2000. Translations
herein should not be construed as a representation that the Peso amounts
have been or could be converted into U.S. Dollars at the foregoing or any
other rate.
(3) Negative goodwill arose in the acquisition of the Ponderosa Companies in
July 1996. Such negative goodwill was fully amortized by year-end 1997.
In 1997, the Company recorded negative goodwill in the acquisition of the
McKinley Group. Such negative goodwill was fully amortized by year-end
1998.
(4) Amounts of sales and long-term debt under U.S. GAAP do not differ
materially from these amounts under Mexican GAAP. See Note 20 to our
audited consolidated financial statements.
(5) The difference between net income under U.S. and Mexican GAAP primarily
reflects differing accounting treatment for deferred income taxes,
employees' statutory profit-sharing, employee benefits, Bulletin B-15
restatement, negative goodwill and restatements of non-monetary assets
under Mexican GAAP and U.S. GAAP. See "Item 5. Operating and Financial
Review and Prospects - Differences Between Mexican GAAP and U.S. GAAP" and
Note 20 to our audited consolidated financial statements. As of January 1,
2000, Bulletin D-4 is effective in Mexico. This Bulletin governs the
treatment of deferred taxes, similar to that of Statement of Financial
Accounting Standards Board No. 109 - "Accounting for Income Taxes". See
Note 3(n) to our audited consolidated financial statements.
(6) See Note 20 to our audited consolidated financial statements.
______________
Dividends
Please see "Dividend Policy" in "Item 8. Financial Information".
A-9
Exchange Rate Information
The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rate, or, as the case may be, noon buying
rate as reported by the Federal Reserve Bank of New York, for the purchase of
U.S. Dollars, expressed in nominal Pesos per U.S. Dollar.
Noon
Buying Rate/(1)/
------------------------------------------------------
Year ended December 31, High
Low Average/(2)/ Period-End
------------
------------ ------------ ------------
1996...................................................... 8.045
7.325 7.635 7.881
1997...................................................... 8.410
7.717 7.917 8.070
1998...................................................... 10.630
8.040 9.152 9.901
1999...................................................... 10.600
9.243 9.563 9.480
2000 (full year).......................................... 10.087
9.188 9.475 9.618
December...................................... 9.618
9.370 9.467 9.618
2001:
January....................................... 9.972
9.665 9.769 9.679
February...................................... 9.780
9.657 9.711 9.692
March......................................... 9.706
9.485 9.599 9.485
April......................................... 9.422
9.187 9.328 9.261
May........................................... 9.291
8.946 9.147 9.165
June 1 through June 15, 2001.................. 9.180
9.045 9.099 9.054
-----------------
(1) Source: Federal Reserve Bank of New York.
(2) Average of month-end rates.
A-10
Risk Factors
We are subject to various risks resulting from changing economic,
political, industry and business and financial conditions that may affect our
results of operation or financial condition. These risks are described below.
Risk Factors Related to Our Business
We are vulnerable to cyclicality and fluctuations in pricing.
Our business is affected by trends in international prices and demand for
paper. Prices for containerboard and industrial paper and, to a lesser extent,
converted products such as corrugated containers and multi-wall sacks and bags
have historically been subject to cyclical fluctuations. Pricing is affected not
only by demand for packaging and paper products, which correlates with real
economic growth, but also by current inventory levels of customers. In addition,
the packaging and paper industries are highly capital intensive and the impact
of new production facilities may result in supply/demand imbalances.
We are vulnerable to increases in inflation.
Our profitability may be negatively affected by increases in inflation. Our
Peso-based labor costs and raw material costs increase as the rate of inflation
increases. If, as in the past three years, increases in prices of our products
do not keep pace with increases in inflation, real prices of our products will
decline. As a result, our revenues would decline unless we had a comparable
increase in our sales volume to offset the decline in real prices of our
products.
Our operations may be adversely affected by increases in the price of raw
materials.
The cost of our supply of recycled fiber and pulp is directly affected by
trends in international and domestic prices of old corrugated container, or OCC,
material and virgin pulp, which stem from market fluctuations caused by factors
beyond our control. Generally, demand and prices for these raw materials vary
directly with demand and prices for finished paper. In addition, the cost of OCC
in Mexico is affected both by the inflation and exchange rates. We might not be
able to recoup any future increases in the costs of raw materials through
increases in sales prices for our products, which would adversely affect our
operating income.
We are vulnerable to competition from international paper producers with
substantial resources.
We currently face increasing competition from non-Mexican producers due in
part to significantly enhanced market access for imported products. Many of our
competitors are large international paper producers with substantial resources
at their disposal. We try to maintain our prices below U.S. prices and in the
past, this price differential, combined with protective tariffs, has discouraged
imports from the United States. With the gradual elimination of tariffs and
generally low prices for paper and packaging products in the United States over
the last three years, competition from imports has increased and may increase
further. Increased competition from imports may have a material adverse affect
on us by driving down our prices and decreasing our revenues.
Our operations may be restricted by covenants in our loan agreements.
We are party to certain loan agreements and indentures which have negative
covenants and other restrictions which may limit our ability to freely conduct
our operations. In addition, Corporacion Durango, which owns 59% of our
company, is party to an indenture related to the GID 2003 Notes (as defined
below) containing certain restrictive covenants which may also affect our
ability to freely run our operations.
These restrictive covenants may limit our ability to:
. incur additional debt;
. pay dividends, acquire shares of stock, make payments on subordinated debt
or make investments;
A-11
. place limitations on distributions from subsidiaries;
. issue or sell capital stock of subsidiaries;
. issue guarantees;
. sell or exchange assets;
. enter into transactions with shareholders and affiliates;
. create liens; and
. effect mergers.
We may be adversely affected by the imposition and enforcement of more
stringent environmental and safety requirements.
We are subject to strict environmental regulations in Mexico and the United
States. Changes in environmental regulations, or changes in the enforcement
policies of existing environmental regulations, could adversely affect us. Our
Mexican operations are supervised by the Ministry of the Environment and Natural
Resources (Secretaria del Medio Ambiente y Recursos Naturales) and our U.S.
operations are supervised by the Environmental Protection Agency, or EPA, and
other federal, state and local regulatory agencies. These agencies are
responsible for the implementation of pollution control laws and regulations and
could take action against us by shutting down plants, revoking licenses,
imposing fines or obligating us to clean up waste produced by us, if we fail to
comply with their environmental regulations. It is also possible that the
relevant governmental agencies will issue additional regulations, will seek a
more stringent interpretation of existing regulations or will exercise stricter
enforcement actions that would require us to spend additional funds on
environmental matters.
In addition, the enactment of new environmental laws or regulations in
Mexico or the United States may cause us to spend additional funds, which may be
material, in order to meet compliance with the new laws or regulations. For
example, in 1998 the EPA enacted new regulations relating to air and water
emissions, commonly known as the Cluster Rules, from factories in the pulp and
paper industry.
Our principal stockholders own all of our shares and may take actions not in
your interest as a holder of our shares.
The Rincon family indirectly owns 87.19% of our outstanding voting stock.
As a result, the Rincon family has the power to elect all of our directors and
determine the outcome of any action requiring shareholder approval, including
transactions with related parties, corporate reorganizations and the timing and
payment of any future dividends. The interests of the Rincon family as equity
holders may differ from your interests. See "Principal Stockholders" and
"Certain Relationships and Related Party Transactions".
If we lose key members of our management team and are unable to attract other
qualified personnel, our business could be adversely affected.
Our success largely depends on the continuing contributions of our
management. Our managers have been with our company for an average of 15 years
and have successfully implemented our past strategic acquisitions. In
particular, our chief executive officer, chief operations officer, and chief
financial officer have been with our company since it was founded. The loss of
key personnel or our inability to attract and retain other qualified managers
could adversely affect us.
A-12
Risks Relating to Mexico
If Mexico experiences future political and economic crises, our business could
be adversely affected.
We are a Mexican company with a substantial part of our operations in
Mexico. As a result, the political and economic environment within Mexico can
have a significant impact on our financial condition and results of operations.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities, in general, and on us, in particular,
and on market conditions, prices, and returns on Mexican securities, including
our securities.
In the past, Mexico has experienced economic crises, caused by internal and
external factors, characterized by negative economic growth, exchange rate
instability, high inflation, high domestic interest rates, reduced liquidity in
the banking sector, reduced consumer purchasing power, and high unemployment.
The last economic crisis in 1994 occurred as a result of a series of internal
disruptions and political events, including a large fiscal deficit, the
assassination of two political figures, substantial outflows of foreign exchange
capital, significant devaluation of the Peso, and civil unrest in the southern
state of Chiapas.
Similar crises could have a material adverse affect on our financial
condition and results of operations by causing volatility in domestic demand for
packaging and paper products and domestic shipment volumes, a substantial
increase in our interest expense, and an increase in our cost of goods and
services purchased in Pesos.
Our profitability may be adversely affected by currency fluctuations.
As of December 31, 2000, we had Ps 5,049.0 million (US$525.4 million) of
outstanding long-term debt, 100% of which was denominated in U.S. Dollars. We
are exposed to a Peso devaluation risk. The Peso has devalued substantially
against the U.S. Dollar in the past and may devalue significantly in the future.
The value of the Peso, based on the exchange rate calculated and published by
the Mexican Central Bank, declined by 61% against the U.S. Dollar during 1994,
by an additional 54% during 1995 and continued to weaken between 1995 and 1998.
A devaluation of the Peso would negatively affect our results of operations by
increasing our cost of borrowing since the Peso cost of interest payments on our
U.S. Dollar indebtedness would increase.
In 1999, the Peso appreciated against the U.S. Dollar. An appreciation of
the Peso against the U.S. Dollar generally results in our receiving less Pesos
for our U.S. Dollar sales, but our U.S. Dollar-based costs decrease. An
appreciation of the Peso against the U.S. Dollar may negatively affect us
because we may not be able to pass along our increased Peso-denominated costs
through new increases that keep pace with inflation. In addition, an
appreciation would result in intensified competition from U.S. Dollar-
denominated imports, which would become cheaper in Peso terms.
Since a majority of our sales are either denominated in U.S. Dollars or
linked to movements in the value of the U.S. Dollar, we do not currently engage
in hedging activities to protect operations and future obligations in foreign
currencies. Declines in the value of the Peso relative to the U.S. Dollar could
temporarily adversely affect our ability to meet our U.S. Dollar-denominated
obligations, increase our interest expense and operating costs, and negatively
affect the value of Mexican securities such as ours.
We may not be able to make payments in U.S. Dollars.
In the past, the Mexican economy has experienced balance of payment
deficits and shortages in foreign exchange reserves, and the Mexican government
has responded by restricting the ability of Mexican or foreign persons or
entities to convert Pesos to foreign currencies generally, and U.S. Dollars in
particular. The Mexican government may institute a restrictive exchange control
policy in the future. Any restrictive exchange control policy could prevent or
restrict our access to U.S. Dollars to meet our U.S. Dollar obligations and
could also have a
A-13
material adverse effect on our business, financial condition and results of
operations. We cannot predict the impact of any such measures on the Mexican
economy.
The price of our shares and ADSs may be affected by economic developments in
other emerging market countries.
The market value of securities of Mexican companies is, to varying degrees,
affected by economic and market conditions in other emerging market countries.
Investors' reactions to developments in any of these other countries may have an
adverse effect on the market value of securities of Mexican issuers. In 1997 and
1998, prices of both Mexican debt securities and Mexican equity securities
dropped substantially as a result of a sharp drop in the value of Asian markets
and of the economic crises in Russia and in Brazil. The market value of our
shares and ADSs could be adversely affected by events elsewhere, especially in
emerging market countries.
We prepare our financial statements in accordance with Mexican GAAP, which
differ from U.S. GAAP.
We prepare our financial statements in accordance with Mexican GAAP. These
principles differ in significant respects from U.S. GAAP as further discussed in
Note 20 to our audited consolidated financial statements. In particular, all
Mexican companies must incorporate the effects of inflation directly in their
accounting records and in published financial statements. The effects of
inflation accounting under Mexican GAAP are not eliminated in the reconciliation
to U.S. GAAP. For this and other reasons, the presentation of our financial
statements and reported earnings may differ from that of companies in other
countries. In addition, as a foreign registrant, the preparation of U.S. GAAP
information is only performed on an annual basis.
Item 4. Information on the Company.
Organization
We are a corporation operating under the laws of Mexico. We were
incorporated on January 22, 1982 in Mexico. However, some of our underlying
operating companies have been in existence since 1975. Our corporate existence
under our corporate charter continues until January 21, 2081, but it is
extendible by a resolution approved by the majority of our shareholders. We are
87.19% indirectly owned by members of the Rincon family, which has been involved
in the pulp, paper and converting industry for over 20 years. The members of the
Rincon family hold their interest in us through their wholly-owned subsidiaries,
Corporacion Durango, S.A. de C.V. ("Corporacion Durango"), owning 59.20% of our
capital stock, and Administradora Corporativa y Mercantil, S.A. de C.V.
("Administradora Corporativa y Mercantil"), owning 27.99% of our capital stock.
Our legal name is "Grupo Industrial Durango, S.A. de C.V." Our principal
executive offices are located at Torre Corporativa Durango, Potasio 150, Ciudad
Industrial, Durango, Durango, United Mexican States 34220, and our telephone
number is (52-18) 29-1000.
Our agent for service of process in the United States is Durango Paper
Company, 1000 Osborne Street, St. Marys, Georgia 31558.
History and Development of the Company
We were formed in 1975 from the combination of a forest products
transportation company and a regional wholesaler of building products. Since
our formation, we have pursued a strategy of forward integration, implemented by
both acquisitions and internal expansion, to attain our present position as
Mexico's largest producer, in terms of capacity, of corrugated containers,
containerboard and industrial paper.
Our transformation from a regional lumber and forest products company into
one of Mexico's largest integrated packaging and forest products companies began
in 1987. Recognizing the opportunity to purchase complementary industrial
assets at attractive prices, we completed the purchase of approximately 75% of
the shares of Grupo Industrial Atenquique, S.A. de C.V. ("GIA") in 1987. We
acquired the remaining 25% of GIA's shares in
A-14
an exchange transaction completed in July 1996. In 1988, we purchased a company
whose principal asset, a pulp mill, was integrated with the assets of
Corporacion Durango's wholly-owned subsidiary, Corporacion Industrial Centauro,
S.A. de C.V. ("CIC"). As part of the CIC transaction, we also purchased a
high-capacity paperboard and industrial paper machine that was installed at its
Centauro mill in 1991. The GIA and CIC acquisitions, together with the
installation of the Centauro machine, made us the largest containerboard and
industrial paper producer in Mexico, in terms of capacity. In 1991, we acquired
four independent multi-wall sack and bag converters (of which one plant was
subsequently merged into one of our subsidiaries) and purchased a group of
plywood and particleboard companies.
In 1993, we acquired Empaques de Carton Titan, S.A. de C.V. ("Titan") from
Grupo Industrial Alfa, S.A. de C.V. (presently Alfa, S.A. de C.V. ("Alfa")) and
Stone Container Corporation ("Stone Container"). Titan was founded over 50
years ago in Monterrey, Nuevo Leon by Don Eugenio Garza Sada to meet the growing
needs of the beer, glass and packaged snacks industries in that region. Titan
evolved to become the largest Mexican corrugated container producer, in terms of
capacity, a leading Mexican producer of molded pulp products (primarily egg
cartons) and a significant Mexican producer of containerboard and industrial
paper. Over the years, Titan has also established itself as a national leader
in innovation, quality customer service, technology and competitiveness in the
packaging sector.
Also in 1993, we acquired Sacos Mexicanos, S.A. de C.V. ("Samesa") from
Cementos Apasco, S.A. de C.V. ("APASCO") and acquired three multi-wall sack and
bag companies from the Welbanks group. The 30,000-ton-per-year Samesa plant is
used to supply multi-wall sacks and bags to the cement maker APASCO. The plants
acquired from the Welbanks group have a combined capacity of 38,000 tons per
year.
In 1994, we acquired from the Dabdoub family group Comercializadora
Industrial Gusymex, S.A. de C.V., a holding company controlling six other
companies (collectively, the "Dabdoub Companies"), which produce corrugated
containers, containerboard, industrial paper and paper tubes. The acquisition
of the Dabdoub Companies added to our production network three operating
corrugated container plants with an aggregate capacity of 80,000 tons per year
and a small paper mill with a capacity of 25,000 tons per year. The acquisition
added to our market position in corrugated containers, providing additional
coverage in the areas of Guadalajara and Chihuahua, and added several new
customers in the maquiladora sector.
In 1995, we completed the acquisition of Cartones y Empaques del Sur, S.A.
de C.V., a company whose principal asset is a corrugated container plant in
Tapachula, Chiapas having a capacity of 40,000 tons. This plant has enabled us
to serve new customers, particularly agricultural producers, in a region where
there is little competition from other producers of packaging products. The
plant is located in the southwestern portion of the state of Chiapas and is the
only facility of its kind in Mexico within a 625 mile radius.
In March 1996, we also completed the purchase of Central de Envases y
Empaques, S.A. de C.V., the principal asset of which is a corrugated container
plant in Mexicali, Baja California having a current annual capacity of 24,000
tons. This acquisition has allowed us to further expand its business in the
important maquiladora sector, which currently encompasses approximately 2,600
factories, mostly in the electronics, textile and auto parts sectors.
In June 1996, we completed the purchase of a holding company and four
forest product companies (the "Ponderosa Companies"), located in the northern
state of Chihuahua, for approximately $32 million. The acquisition has given us
access to raw material resources in an important forest region of Mexico, where
we previously had no forestry operations. The acquisition of the Ponderosa
Companies, which operate in the U.S. border region and which have historically
exported almost half of their production, has strengthened significantly our
export sales of forest products.
With a view to further capturing Mexican and NAFTA related market
opportunities, in October 1997, we acquired McKinley Paper Company ("McKinley
Paper") and certain related companies (together with McKinley Paper, the
"McKinley Group") from a U.S. subsidiary of Amcor Limited. McKinley Paper
operates a modern and highly efficient paper mill in New Mexico having a
capacity of 182,000 tons per year, and two recycling centers in New Mexico and
Arizona.
A-15
In January 1998, we acquired from Box USA Group, Inc. two corrugated
container plants in Texas, having an aggregate capacity of 72,000 tons per year,
and a smaller sheet plant in Arizona. These latter facilities have been
integrated into our operations in the United States as part of Durango
International, Inc. Approximately 75% of our manufacturing revenue is derived
from the Mexican market, with the remaining 25% coming from the United States.
In July 2000, we purchased the Eyemsa Tepatitln Plant, which is a
corrugated container plant in Jalisco having an aggregate capacity of 50,000
short tons. This acquisition has allowed us to expand our packaging segment.
Since 1989, we have also expanded internally. In addition to the
installation of a modern containerboard and industrial paper machine at our
Centauro mill, we have constructed two corrugated container plants having a
combined capacity of 70,000 tons per year.
The following table lists the Company's total capital expenditures and a
breakdown of the principal acquisitions and facility additions since the
beginning of 1987:
CAPITAL EXPENDITURES BREAKDOWN
(In millions of US$)
TOTAL - CAPITAL EXPENDITURES 1998
100.1
---------------------------------
----------------
Construction of pulp mill..........................................
32.7
Titan box plant upgrade............................................
12.4
Increase capacity McKinley Paper...................................
11.9
Increase capacity of molded products...............................
10.9
TOTAL - CAPITAL EXPENDITURES 1999
11.2
---------------------------------
----------------
Titan box plant upgrade............................................
7.9
Particleboard plant upgrade........................................
1.1
TOTAL - CAPITAL EXPENDITURES 2000
34.1
---------------------------------
----------------
Centauro paper mill upgrade........................................
13.8
Acquisition of box plant...........................................
8.6
TOTAL - CAPITAL EXPENDITURES 10Q2001
19.0
------------------------------------
----------------
Acquisition of box plant...........................................
8.3
Centauro paper mill upgrade........................................
5.5
Titan box plant upgrade............................................
2.7
TOTAL - CAPITAL EXPENDITURES 2001 estimated
21.0
-------------------------------------------
----------------
Acquisition of box plant...........................................
9.6
Centauro paper mill upgrade........................................
8.1
Titan box plant upgrade............................................
3.2
A-16
Principal Acquisitions and Facility Additions
January 1, 1987 -- December 31, 2000
Year
Principal Products
Acquired/
Constructed
1. Principal Acquisitions
Grupo Industrial Atenquique, S.A. de C.V., its subsidiaries and 1987
Containerboard and industrial
affiliates (acquired from the Mexican federal government).
paper, corrugated containers
Celulosicos Centauro, S.A. de C.V. (predecessor of CIC, acquired 1988
Virgin pulp and forest
from Grupo Industrial Alfa, S.A. de C.V.)
products
Triplay Ponderosa de Durango, S.A. de C.V. and Maderas Moldeadas, 1991
Plywood and particleboard
S.A. and affiliates (acquired from their shareholders)..............
Sacos y Envases de Mexico, S.A. de C.V. 1991
Multi-wall sacks and bags
(acquired from the Morodo group).....................................
Bolsas y Papeles de Mexico, S.A. and affiliates and Sacos Mexicanos, 1993
Multi-wall sacks and bags
S.A. (acquired from the Welbanks group and Cementos Apasco, S.A. de
C.V., respectively).................................................
Empaques de Carton Titan, S.A. de C.V. (acquired from Alfa and Stone 1993
Corrugated containers, molded
Container)..........................................................
pulp egg cartons,
containerboard and industrial
paper
Comercializadora Industrial Gusymex, S.A. de C.V. 1994
Corrugated containers,
(holding company and subsidiaries, acquired from Dabdoub group)......
containerboard and industrial
paper, paper tubes
Cartones y Empaques del Sur, S.A. de C.V. (acquired from PIC 1995
Corrugated containers
International Inc. and other shareholders)..........................
Central de Envases y Empaques, S.A. de C.V. 1996
Corrugated containers
(acquired from Grupo Industrial Garcia Franco).......................
Productos Industriales Ponderosa, S.A. de C.V. (holding company and 1996
Plywood, particleboard,
subsidiaries, acquired from Empresa La Moderna, S.A. de C.V. and
specialized wood products,
minority shareholders)..............................................
resins
Amcor Paper US, Inc. (holding company of McKinley Group; renamed 1997
Containerboard and industrial
Durango International, Inc.)........................................
paper; recycled fiber
collection operations
Corrugated container facilities located in Houston, Texas; Dallas, 1998
Corrugated containers
Texas; Nogales, Arizona.............................................
Corrugated container facility located in Tepatitln, Jalisco, Mexico 2000
Corrugated containers
2. Facility Additions
Construction of Industrias Centauro, S.A. de C.V. paper mill......... 1991
Containerboard and industrial
paper
Construction of Ciudad Guzman and Tultitlan container plants
(Empaques de Atenquique, S.A. de C.V.).............................. 1992
Corrugated containers
Our increased level of integration in recent years has had several
important effects on our business. Prior to the 1993 acquisitions, we converted
approximately one-third of our containerboard and industrial paper output into
corrugated containers and multi-wall sacks and bags, and sold approximately two-
thirds of our production to outside purchasers. We currently are able to ship
almost 100% of our now higher level of paper production to our own converting
facilities. By doing so, we can exploit the production and scale efficiencies
of our network to stabilize capacity utilization of both paper mills and
converting plants, improving control over unit costs.
A-17
Our focus on value-added packaging products has contributed to higher gross
and operating margins. Moreover, we believe that enhanced integration, combined
with an ability to manage raw material costs through alternative sourcing of
recycled fiber between domestic and foreign markets and a capability to produce
our own pulp, has helped reduce the sensitivity of our business to price and
demand cycles in the international paper market. As a means of maintaining
operating margins in changing market conditions, we seek to exploit our
flexibility in production and raw materials, as well as to vary our sales mix
across different product and customer markets.
Business Overview
We are the largest producer in Mexico of corrugated containers,
containerboard and industrial paper, and molded pulp egg cartons, and we are a
leading producer of multi-wall paper sacks and bags and forest products, based
on production capacity. As of year-end 2000, we had the capacity to produce
800,000 tons per year of containerboard and industrial paper at six mills,
712,000 tons per year of corrugated containers at 19 plants and 77,000 tons per
year of multi-wall sacks and bags at three plants. We have two integrated pulp
mills with the capacity to produce 220,000 tons per year of unbleached virgin
pulp, of which we are Mexico's sole producer. We also operate four molded pulp
egg carton plants and nine forest products plants which produce plywood and
particleboard. Paper and packaging, together, account for 92% of our sales.
We produce and supply paper to our converting facilities, which in turn
manufacture packaging products. Our products include:
. paper: containerboard (linerboard, corrugating medium and multi-wall paper);
. packaging: corrugated containers, multi-wall sacks and bags, and molded pulp
products; and
. forest products: plywood and particleboard.
In Mexico, we are the leading producer of corrugated containers with an
estimated 40% market share, based on information published by the National
Chamber for the Pulp and Paper Industry.
We are a rapidly growing paper company supplying the maquiladora sector, as
well as the traditional Mexican export sector, both of which have grown at a 19%
compounded annual growth rate since NAFTA took effect on January 1, 1994. Our
sales have grown at an 8.4% compounded annual growth rate. We believe we are the
leading domestic producer of corrugated containers used by the traditional
Mexican export sector with an estimated 70% market share in 2000, which sector's
needs are substantially supplied by Mexican producers. We also believe we are
the leading producer of corrugated containers for the maquiladora sector with an
estimated 80% market share of domestic production in 2000, which accounted for
an estimated 30% of this sector's total packaging requirements in 2000.
Our customers in Mexico and the United States include many of the largest
industrial, construction, consumer, agricultural, and media companies such as
Vitro, Nestle, Apasco, Cemex, Sony, Sara Lee, Mattel, Kimberly-Clark, Pizza Hut,
Paccess-Nike, Ampad, Quik-crete Concrete, and Chiquita. During 2000, none of our
customers accounted for a material amount of our revenues.
Our revenues were Ps 5,832.0 million in 1999 and Ps 6,075.0 million in
2000. For the twelve months ended December 31, 2000, approximately 33% of our
sales were made in U.S. Dollars, with the balance primarily U.S. Dollar-linked.
We are a holding company of various companies incorporated in Mexico and of
Durango International, Inc., a New Mexico company that wholly-owns McKinley
Paper.
We sell our products to a broad range of Mexican and U.S. manufacturers of
consumable and durable goods, which in turn serve the Mexican and U.S. markets,
the maquiladora sector and Mexico's major exporters. In Mexico, we produce
corrugated containers, containerboard, molded pulp egg cartons and forest
products, and multi-wall sacks and bags. In the United States, we produce
linerboard and corrugated containers through McKinley Paper and McKinley
Container Company ("McKinley Container"). Our U.S. operations allow us to
expand our geographic presence and market reach to continue to increase our
strategic position within the NAFTA region. Our U.S. operations also fill a
demand for higher quality products to be supplied into Mexico.
A-18
Subsidiaries and Operating Divisions
The following corporate chart sets forth all subsidiaries owned, directly
or indirectly, by us:
Grupo Industrial
Durango, S.A. de C.V.
(Mexican Corporation)
|
-----------------------------------------
| |
----------------------------------- |
| | |
99.99% 100% | 99.45%
Empaques de Carton Durango |
Porderosa Industrial
Titan, S.A. de C.V. International, Inc. |--- de
Mexico, S.A. de C.V.
(Mexican Corporation) (New Mexico Corporation) |
(Mexican Corporation)
| | |
| | |
| 99.97% (1) | 100% | 99.99%
| Envases y Empaques | Durango McKinley |
Administracion Corporativa
|--- de Mexico, S.A. de C.V. |---- Paper Company |--- de
Durango, S.A. de C.V.
| (Mexican Corporation) | (New Mexico Corporation) |
(Mexican Corporation)
| | | |
| 98.79% (2) | 100% | 99.96%
| Industrias | McKinley Container |
Porteadores de
| Centauro, S.A. de C.V. |---- Company |---
Durango, S.A. de C.V.
| (Mexican Corporation) | (Delaware Corporation) |
(Mexican Corporation)
| | | |
| 99.99% | 99% | 97.28%
| Cartonpack | McKinley |
Compania Industrial
|--- S.A. de C.V. | Container, L.P. |--- de
Atenquique, S.A. de C.V.
| (Mexican Corporation) | (Delaware Corporation)
(Mexican Corporation)
| |
|
| 99.99% | 100% 99.95%
| Cajas y Corrugados |--- MCC II, Inc.
Forestal de
|---de Chihuahua, S.A. de C.V. (Delaware Corporation)
Jalisco, S.A. de C.V.
| (Mexican Corporation)
(Mexican Corporation)
|
| 99.99%
|--- Central de Envases
| y Empaques, S.A. de C.V.
| (Mexican Corporation)
|
| 99.97%
| Papelera Heda
|--- S.A. de C.V.
| (Mexican Corporation)
|
| 100%
| Ectsa (1) 41.97% is controlled
through Compania Industrial de Atenquique.
|--- International, Inc. (2) 27.21% is controlled
through Empaques de Carton Titan.
(Texas Corporation)
A-19
We are comprised of various operating divisions which are distinguished by
product type as follows:
. paper: Pamex
McKinley Paper
. packaging: Titan
McKinley Container
. forest products: Ponderosa
Our operating divisions interact with each other to comprise a vertically
integrated unit. This integration enables us to limit purchases from external
suppliers and reduce costs. Our operating divisions are:
. Pamex. Our Pamex division, which encompasses all of our paper
production operations in Mexico, is the largest containerboard
manufacturer in Latin America. In 2000, approximately 86% of the
608,000 short tons of linerboard, corrugating medium and unbleached
kraft paper produced by Pamex was used to supply our Titan division.
The remainder of its production was sold to third party manufacturers
in Mexico and the United States.
. Titan. Our Titan division encompasses all of our packaging production
operations, including the McKinley Container operations, and is one of
the largest integrated paper-based packaging manufacturers in Latin
America. Titan's 2000 production of 690,000 short tons consisted of
corrugated containers, multi-wall sacks and bags, and molded pulp egg
cartons. Pamex supplies approximately 96% of Titan's domestic
containerboard requirements, with the balance, higher grade
containerboard, supplied primarily by McKinley Paper and Durango Paper
Company ("DPC"). Waste material generated in production of corrugated
containers is sold back to Pamex for recycling and to produce pulp.
Titan's sales are primarily to Mexico and the maquiladora sector.
. Ponderosa. Ponderosa, which encompasses all of our forest products
operations and is Mexico's largest forest-based building products
manufacturer, markets its products throughout the NAFTA region. In
2000, Ponderosa produced 166,000 short tons of particleboard and
plywood.
. McKinley Paper. McKinley Paper is a state-of-the-art recycled
linerboard manufacturer strategically located in the southwestern
United States to supply our packaging operations in the United States
and northern Mexico and to serve the growing maquiladora region.
McKinley Paper is a significant collector of old corrugated container,
or OCC, material, which is processed to create recycled fiber. In
2000, the majority of the paper needs of our packaging operations in
Dallas and Houston, Texas were supplied by McKinley Paper. McKinley
Paper's wastepaper collection plants in Phoenix, Arizona and
Albuquerque, New Mexico supplied Pamex with a significant amount of
its total OCC supply requirements in 2000.
Our operating divisions interact with each other through inter-company
sales as follows: Ponderosa sells wood chips and pine logs to Pamex for the
production of virgin pulp; Pamex sells containerboard to Titan for the
production of corrugated boxes and multi-wall sacks; McKinley Paper sells OCC to
Pamex for the production of recycled fiber and sells containerboard to Titan for
the production of corrugated containers; and Titan sells its waste to Pamex for
the production of recycled fiber.
We are a partially-owned subsidiary of Corporacion Durango, a company
controlled by the Rincon family. One of Corporacion Durango's subsidiaries is
Grupo Pipsamex, S.A. de C.V. ("Grupo Pipsamex"), Mexico's sole domestic
newsprint manufacturer and one of Mexico's leading bond paper manufactures.
Grupo Pipsamex, for example, purchases paper tubes and corrugated containers
from Pamex and Titan, respectively. However, neither the purchases by Grupo
Pipsamex from Pamex and Titan nor other purchases between Corporacion Durango
and us are material.
A-20
Our Business Strategy
Our business strategy is to strengthen our position as the leading
integrated paper and packaging company in Latin America, as well as to continue
our growth as a leading integrated paper producer in the NAFTA region. To
implement our strategy, we expect to:
. Increase our cash flow through enhanced efficiency and shifts to
higher margin products. We intend to continue to improve the
efficiency and productivity of our operations by either upgrading or
replacing our existing machinery, which we believe will result in a
reduction of bottlenecks. Through the use of improved technology, we
intend to increase the yield of pulp that can be produced from OCC
material, and increase the percentage of recycled pulp that can be
used in the production of our finished products while maintaining our
existing level of quality. We also intend to continue expanding our
collection of domestic OCC material to further reduce our reliance on
more expensive imported OCC material. We will continue to shift our
marketing efforts toward higher margin products such as bleached
board, niche paper and specialty packaging.
. Strengthen our leadership position in regional markets and increase
our market share in the United States. By maintaining high capacity
utilization and continuing to offer competitively priced, high quality
paper and packaging products, accompanied by outstanding customer
service, we believe we will solidify our role as a dominant producer
in Mexico and the maquiladora sector. In addition, we have experienced
a large increase in our sales to the United States since the adoption
of NAFTA. Our aggregate sales to the maquiladora and traditional
Mexican export sectors have grown at a 24.4% compounded annual rate
since 1994. Our recent cross- border acquisitions have illustrated our
strategy of leveraging the trade opportunities opened by the adoption
of NAFTA, and we expect the continuing integration of our Mexican and
U.S. operations to provide us with operating efficiencies as well. We
continue to increase our U.S. market share as a result of our
acquisitions. Our U.S. operations will also allow us to supply higher
quality products demanded in Mexico.
. Continue to expand our core businesses through internal and external
growth. We expect to continue to grow internally by selectively
expanding current production facilities and installing additional
equipment in order to reduce bottlenecks and increase capacity. We
intend to grow externally by continuing to pursue, on a selective
basis, strategic acquisitions of paper and packaging assets in Mexico
and the United States. The key characteristics of our acquisition
candidates include companies which have a combination of the following
factors:
. underperforming assets which can be easily turned around and
acquired for a compelling price;
. maintain sustained profitability and growth after the turnaround;
. add additional and/or complementary production capabilities;
. increase our geographic presence and/or penetration of existing
markets; or
. have synergies with our current businesses and can become part of
our vertical integration.
Our Products
General
Our main product groups are:
. Paper--containerboard (linerboard and corrugating medium)
. Packaging--corrugated containers, multi-wall sacks and bags, and molded pulp
products
. Forest products--plywood and particleboard.
A-21
Our total capacity by product, number of mills and plants, and actual
production and shipments for the periods indicated, is as follows:
Production (in thousands of short tons)
Current
-------
Annual
------
Installed Mills/
--------- ------
Capacity Plants December
31,
-------- ------
-------------------------------
Product Type 1998 1999
2000
------------ ------- -------
-------
Paper
Containerboard .......... 800 6 748.0 797.0
809.4
Packaging
Corrugated containers ... 712 19 553.0 568.0
599.3
Multi-wall sacks and bags 77 3 54.5 52.8
57.7
Molded pulp products and
others ................. 40 4 32.0 33.0
32.9
----- ----- ------- -------
-------
Total Packaging ..... 829 26 639.5 653.8
689.9
Forest products ......... 204 4 169.0 174.0
165.6
----- ----- ------- -------
-------
Total Production .... 1,833 36 1,556.5 1,624.8
1,664.9
______________
Shipments (in thousands of short tons)
December 31,
-------------------------------
Product Type 1998 1999 2000
------------ ------- ------- -------
Paper
Containerboard ................ 276.6 270.0 265.8
Packaging
Corrugated containers ......... 542.2 567.5 594.5
Multi-wall sacks and bags ..... 52.9 52.1 56.3
Molded pulp products and others 32.0 32.0 33.6
------- ------- -------
Total Packaging ........... 627.1 651.6 684.4
Forest products ............... 162.0 173.0 158.4
------- ------- -------
Total Shipments ........... 1,065.7 1,094.6 1,108.6
______________
A-22
Paper Products
Below is a description of our paper products and their usage:
Product Type Product Description
and Usage
--------------------------------
--------------------------------------------------------------------------
Containerboard ................ We produce linerboard and corrugating
medium, white-top and mottled white
linerboard and paper, high-performance
linerboard, multi-wall paper and
extensible paper. Our products are used by
corrugated container
manufacturers in the production of a wide
variety of corrugated containers.
We are able to produce a wide variety of
paper products, in terms of weight
and resistance, and we can use virgin and
recycled fiber as raw material in
different proportions to achieve the
characteristics required by our
customers. We sell our linerboard in rolls
of varying widths depending on
the capacity of the converting machinery on
which it will be used.
Packaging Products
Below is a description of our packaging products and their usage:
Product Type Product Description
and Usage
--------------------------------
--------------------------------------------------------------------------
Corrugated containers.............. We produce corrugated containers
manufactured from containerboard in
converting plants. Our products are used by
consumer, industrial and
agricultural goods producers to ship
products including home appliances,
electronics, spare parts, grocery products,
produce, books, tobacco and
furniture.
Multi-wall sacks and bags.......... We produce flat, expandable, glued, sewn
and laminated bags. Our products
are used by cement, powdered foods and
chemicals manufacturers for delivery
of cement, flour, powdered food, chemical
products, and by gypsum and lime
producers.
Molded pulp products............... We produce molded pulp products from
recycled newsprint and other similar
papers dyed in different colors and printed
at our facilities. Our products
are used by egg packaging companies and in
the electronics industry.
We produce a wide range of corrugated containers depending on the product
to be shipped, its size and weight and the distance the product is to be
shipped. Our multi-wall sacks and bags are high-resistance containers that are
designed to be used reliably in adverse conditions of filling, handling,
transporting, warehousing and distributing. The bags we manufacture are made
from paper produced from virgin pulp, which gives our bags their superior
strength.
A-23
Forest products
Below is a description of our forest products and their usage:
Product Type Product Description
and Usage
--------------------------------
--------------------------------------------------------------------------
Plywood............................ We produce ponderosa pine plywood, hardwood
plywood and medium density
overlay, and specialty plywood. Our
products are used in the construction
industry in Mexico and the United States.
Other uses are signs, doors,
concrete pouring, and toys.
Particleboard...................... We produce thermalfused melamine panels.
Our products are used in the
construction and furniture industry for raw
particle, shelving, and
stepping.
Demand in the Mexican forest products industry is driven primarily by the
Mexican construction and furniture industries. Following a decline in
construction activity after the December 1994 devaluation of the Peso, as well
as continuing budget austerity in the public sector, demand for our forest
products declined sharply in 1995 and has subsequently remained essentially
flat.
Customers
We sell our products primarily in Mexico and the United States. In 2000,
75% of our total sales were made in Mexico and 25% were made in and into the
United States.
Our major customers in Mexico and the United States include:
Paper Packaging
Forest Products
------------------------------ --------------------------------------
--------------------------------
Mexico Mexico
Mexico
No major customers Vitro
Grupo GEA
Apasco
Grupo Cambel
Nestle
Durart
Kimberly-Clark
Grupo Frid
Sara Lee
Gamesa and Sabritas (PepsiCo.)
Chiquita
United States United States
United States
Corru-Kraft No major customers
Sol Building
Paccess-Nike
Tech. Products
Stuart Entertainment
In 2000, sales to our 10 largest customers accounted for approximately 12%
of our net sales. However, none of our customers accounted for a material amount
of our revenues. We do not believe that the loss of any single customer would
have a material adverse effect on our business.
Sales and Marketing
Our sales and marketing staff are responsible for identifying and
developing markets as well as notifying our research and development staff of
customer product requirements. We sell our products through our direct sales
force at our Mexican offices located in Mexico City, Guadalajara and Monterrey,
Mexico, and our U.S. offices located in Albuquerque, New Mexico and in Houston
and Dallas, Texas. At December 31, 2000, we had approximately 42 employees
involved in direct sales.
A-24
We make substantially all of our sales directly to our clients. We only use
brokers in limited circumstances.
Our sales strategy involves targeting niche markets, such as the
maquiladora sector, Mexican export markets and lightweight markets. To date, the
limited competition in Mexico and our competitive pricing policy has resulted in
pricing not becoming a dominant factor while customer service and product
differentiation have become the primary elements of our sales effort. A core
element of our sales strategy is to establish long-term customer relationships
by ensuring that we satisfy our customers' specific requirements. The customized
service we provide and the strategic relationships we have developed ensure we
retain our existing customers while attracting new ones.
To support our direct sales efforts and to actively promote our products,
we engage in a variety of marketing activities. These activities include regular
meetings with our entire sales force and educational seminars and social outings
with clients.
Customer service is an important factor in maintaining and gaining market
share and clients. We deliver products to our customers in a manner that
addresses individual technical specifications, delivery methods, timing
constraints and other customer-specific requirements. Our sales force has
established customer complaint procedures and undergoes customer-retention
reviews to ensure that the level of our service is maintained and constantly
improved. Our advertising and promotional campaigns are carried out in
specialized industry publications and industry shows.
With respect to corrugated containers, by engaging in sales on both sides
of the Mexican-U.S. border, we continuously evaluate the pricing levels for our
products in both the U.S. and Mexican markets. While pricing is generally
negotiated on a yearly basis, our contracts normally include price adjustment
provisions to compensate for market movements as published in reputable trade
publications.
Raw Materials
We believe we have a flexible raw material mix. The principal raw materials
used in our production processes are recycled fiber and virgin pulp. Recycled
fiber is obtained by processing OCC material, magazines and office waste paper
material. We also use virgin pulp, which is made by processing wood chips, in
the production of 100% virgin kraft paper, and we mix virgin pulp with recycled
fiber to produce a variety of semi-recycled grades of other packaging and paper
products.
Recycled Fiber
Our business is affected by trends in international and domestic prices of
OCC material. The price differential between domestic and imported OCC material
fluctuates in Peso terms, due to demand and currency fluctuations, and at any
given time we may supply ourselves from either market, depending on the then
current price differential. We have progressively reduced our use of imported
OCC material for papermaking, from over 47% in 1995 to approximately 30% in
2000, due to a greater availability of domestic OCC material and an increase in
our collection efforts and because yields from recycled fiber have increased. We
believe that we are the largest collector of recycled fiber in Mexico.
In the United States, approximately 30% of our fiber requirements are
provided by our recycling centers in Albuquerque and Phoenix. We obtain the
balance of our requirements in the open market. As part of our strategy in
Mexico, we have been increasing the capacity of our collection centers for OCC
material in order to reduce the imports of this important raw material, and
consequently, to reduce costs. Our initiatives to shift our supply sources for
recycled fiber and strengthen our domestic collection efforts will help to
achieve our goal of maintaining low raw material costs.
A-25
Pulp
We are Mexico's sole producer of unbleached kraft pulp, and we are
currently able to produce 220,000 short tons of unbleached pulp per year, which
is more than sufficient to supply our internal requirements for virgin kraft
pulp.
In Mexico, we buy our wood, the raw material from which we produce virgin
kraft pulp, from small property owners and ejidos, which are small plots of land
granted by the Mexican government to small groups of land workers, located in
the states of Durango, Jalisco, Oaxaca and Michoacan. In total we have access to
approximately 600,000 hectares of forestry land. Recently, the Mexican
government has made significant changes to the ejido system in order to increase
productivity. The changes have restructured the ejido system to allow large
private investors to co-invest with small owners or to lease properties on a
long-term basis. We have traditionally managed our supply of forest resources
through direct negotiations with landowners. In general, we believe that our
existing wood supply arrangements are sufficient to provide for our currently
anticipated rates of consumption for the foreseeable future. We have a strong
presence in the Mexican forestry sector that allows us to effectively source our
wood supply. In the United States, we buy our wood chips from a single supplier,
Gilman Building Products, based on a long-term supply contract that expires in
December 2004.
Water
Other than at our Atenquique mill, which uses treated river water, we
obtain our water requirements for both our Mexican and U.S. operations from
wells located at our production facilities. We believe that our water supply is
sufficient for all existing and contemplated activities.
Our McKinley mill is one of only three "zero-effluent" paper mills in the
world. Water is initially obtained from wells, and after using it in the
papermaking process, it is then treated and recycled through the plant.
Accordingly, the ongoing water supply requirements at our McKinley mill are
significantly less than for conventional paper mills.
Energy
Our Atenquique mill has the ability to generate its own power from on-site
power plants and does so depending on prices. Three of our Titan mills generate
their own power from on-site power plants, while the other Titan mills purchase
all of their power from the Comision Federal de Electricidad, the Mexican state-
owned electric company. Some of our mills generate a portion of the power needed
in our pulp mills: the Centauro paper mill generates about 40% of its power
while the balance is purchased from the Comision Federal de Electricidad. Our
other Mexican plants purchase all their power from the Comision Federal de
Electricidad. The contracts for power supply signed with the Comision Federal de
Electricidad are the standard contracts used for all Mexican companies and there
is no specific termination date for the contracts.
In the United States, our McKinley mill is supplied by a rural electric
cooperative at formula prices under a long-term contract.
Distribution and Supply of Our Products
Our distribution network is one of the most extensive and most efficient
delivery systems within the Mexican paper and packaging industry. Our production
facilities are strategically located in close proximity to our suppliers and
customers. In creating our vertically integrated manufacturing process, we have
generally located our raw material supply, processing and production assets near
major industrial centers around Mexico to reduce transportation costs and
delivery time for our products. We distribute and deliver our products from our
plants as well as from several warehouses strategically located throughout
Mexico. In the United States, we deliver our products from our plants located in
Prewitt, New Mexico and Dallas and Houston, Texas, and from warehouses located
throughout the United States. We consider that an effective delivery time ranges
from 1 to 5 days from the date of the purchase order to the delivery of the
product to our customer. We are able to adjust deliveries of our products
through the use of a just-in-time system, offering same day deliveries, at the
request of our customers.
A-26
We currently own approximately 350 trailer trucks and have relationships
with independent operators of approximately 650 additional trucks. We use our
trucks to transport wood from our forests to our production facilities. We also
use our trucks and trucks operated by independent operators to ship finished
products to our customers in Mexico and in the United States. Our location near
city centers allows these independent operators to benefit by hauling our
freight both to and from destinations. This also reduces our shipping costs.
We also use railroads for the transportation of raw material to our
production facilities and finished products to our customers.
Among our products, containerboard and industrial paper, which are
transported in large rolls, can be economically shipped over long distances.
Corrugated containers and bags have a much smaller economic shipping radius
because their low density results in a relatively high transport cost per ton
compared to paper. Consequently, our broad network of corrugated container and
bag plants, located near major industrial centers around Mexico, is an important
factor in the timely and economic delivery of our packaging products to both
local and national customers.
We rely heavily on our distribution and supply system to obtain raw
materials for our strategically located network of production facilities and to
deliver our products to customers. We believe that the reach and efficiency of
our distribution and supply system are important to our customers, and we
believe customer loyalty depends as much on service and quality as on price.
Our Competition
In Mexico we compete with a number of Mexican paper producers and small
packaging companies and with major foreign integrated paper producers, who are
primarily importers from the United States. In addition, as an integrated paper
producer, we compete not only with other integrated paper producers but also
with companies that produce only paper or converted products. Many of our
foreign competitors have greater financial resources than we do. In the United
States, we compete with major international integrated paper producers. We
compete primarily on customer service, product quality differentiation and
price.
Constant review and benchmarking of competitive factors are necessary to
remain competitive in our industry. We monitor the paper industry through market
publications and through our participation in many industry-related events.
While pricing is normally negotiated on an annual basis for the majority of our
products, our contracts normally include price adjustment provisions to
compensate for market movements as published in reputable trade publications.
In Mexico we serve approximately 40% of the containerboard market,
according to the National Chamber for the Pulp and Paper Industry. In addition,
we believe we also serve 40% of the packaging market and 35% of the woods
product market in Mexico.
We produce, distribute and sell different paper grades and paper products,
which we believe gives us, unlike our Mexican competitors, the flexibility to
avoid the impact of cyclicality in the market. We can increase paper production
for export opportunities, as conditions warrant, such as changes in raw material
prices, without interrupting a steady supply of paper to our internal converting
operations and our existing customers. While the phased reduction in Mexican
tariffs under NAFTA may increase our competition from U.S. producers of
containerboard and industrial paper, we are not aware of any plans by domestic
or foreign producers to construct additional production capacity in Mexico.
A-27
Environmental Matters
Our Mexican operations are subject to the Mexican General Law of Ecological
Stabilization and Environment Protection and the rules and regulations published
under this law. Under this law, companies engaged in industrial activities are
subject to the regulatory jurisdiction of the Ministry of the Environment and
Natural Resources.
In 1988, we reached an agreement with Mexican environmental regulatory
authorities on what would constitute compliance, and we proceeded to implement a
compliance plan. Today, our paper mills are in compliance with general standards
established by law and with specific standards promulgated by the Mexican
regulatory authorities. In 1995, we purchased approximately 26% of Planta
Ecologica Industrial, S.A. de C.V., a joint venture of industrial water users in
Monterrey, Nuevo Leon. The joint venture processes and recycles water used by
plants in the industrial park where our Titan paper mill is located. Our paper
mills are subject to periodic environmental audits by the Ministry of the
Environment and Natural Resources. We have frequently been recognized for our
environmental record and our role in implementing modern forest management
techniques. However, there can be no assurance that relevant authorities will
continue to find our environmental procedures adequate, or that more stringent
environmental laws will not be enacted by Mexico in the future. Were enforcement
of existing laws to increase, or new environmental laws to be enacted, we could
incur material compliance costs.
Our U.S. operations are subject to federal, state, and local provisions
regulating the discharge of materials into the environment and otherwise related
to the protection of the environment. Compliance with these provisions,
primarily the Federal Clean Air Act, Clean Water Act, Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), and
Resource Conservation and Recovery Act ("RCRA"), has not required us to invest
substantial funds.
We are committed to protecting the health and welfare of our employees, the
public, and the environment and strive to maintain compliance with all state and
federal environmental regulations in a manner that is also cost effective. In
any construction of new facilities and the modernization of existing facilities,
we intend to use state-of-the-art technology for our air and water emissions.
These forward-looking programs will minimize the impact that changing
regulations have on capital expenditures for environmental compliance.
Future expenditures for environmental control facilities will depend on new
laws and regulations and other changes in legal requirements and agency
interpretations, as well as technological advances. We expect the trend toward
more stringent environmental regulation to continue for the foreseeable future.
The trend in interpretation and application of existing regulations by
regulatory authorities also appears to be toward increasing stringency. Given
these uncertainties, we currently estimate that capital expenditures for
environmental purposes at our Mexican operations during the year 2001 will be
approximately US$1.0 million.
In addition to these capital expenditures, we incur significant ongoing
maintenance costs to maintain compliance with environmental regulation. We do
not believe that these capital expenditures or maintenance costs will have a
material adverse effect on our earnings. In addition, expenditures for
environmental compliance should not have a material impact on our competitive
position, because other companies are also subject to these regulations.
Insurance
We carry "all risk" insurance policies for each of our facilities. These
policies cover our property, plant, equipment, raw materials, finished products
and inventory at levels customary with market practice.
A-28
Paper and Packaging Industry
There are four major groups of paper products produced by the paper
industry:
. packaging paper, which includes linerboard, corrugating medium, kraft
paper, and tubing and folding cartons;
. printing and writing paper;
. sanitary paper; and
. specialty paper.
We produce packaging paper.
Although data for 2000 will not be available until August, in 1999 global
paper and paperboard consumption totaled 316 million metric tons. Of this, 108
million metric tons were consumed in North America, with 95 million in the U.S.
and 5 million in Mexico. In that year, global consumption rose by 24.6%, with
U.S. and Mexican growth rates of 4.2% and 9.2%, respectively. These two markets
were the largest and 13th largest in the world, respectively. Moreover, the
growth rate for Mexico was exceeded only by Korea among the 15 largest consuming
nations. In fact, growth rates for Mexico in recent years have been exceeded
only by Korea, China and Indonesia.
Within the industry, packaging paper and paperboard is the largest sector
with 162 million metric tons consumed in 1999 (51% of total global consumption).
This tonnage represents containerboard, which is converted into corrugated
boxes. This industry is relatively fragmented, as the top 10 largest global
producers account for less than 30% of supply. In addition, since corrugated
boxes are used to package consumer durable and non-durable products, pricing
fluctuates in tandem with changes in global economic demand. Hence, U.S. and
Mexican producers are challenged this year as corrugated box shipments are 5.5%
lower through May in the United States. Pricing, however, has been relatively
flat. Most producers of containerboard are forward-integrated, selling at least
half of their production to their own corrugated box plants.
Mexican Paper and Packaging Industry
Volume. Based on installed capacity, Mexico's paper industry is the
second largest in Latin America. According to the 2001 annual report of the
Mexican National Chamber for the Pulp and Paper Industry, the total size of
Mexico's paper industry in 2000, based on "apparent demand", was 5.7 million
short tons including temporary imports. Mexican production is distributed among
64 plants. Apparent demand consists of domestic production, as reported by
manufacturers, plus imports, minus exports. Mexico's apparent demand in 2000 was
broken down as follows:
Packaging Paper: 54.1%
Printing and Writing Paper: 27.5%
Sanitary Paper: 12.7%
Specialty Paper: 5.7%
Apparent demand is a concept similar to consumption, but does not reflect
increases and reductions in inventories by customers. Apparent demand may not
match consumption in any given year; however, over a period of years, the two
measures should tend to approximate one another.
Over the past decade, levels of apparent demand for paper have fluctuated
according to changes in gross domestic product ("GDP"). Thus, as GDP increases,
apparent demand also increases. Changes in Mexican paper demand have
historically amounted to 1-2 times the change in GDP for a given year.
A-29
Mexican Apparent Demand
for the Paper Industry
(all figures in thousands of short tons)
Aggregate Apparent
--------- --------
Year Production Imports Exports Demand % Change % GDP
Change
---- ---------- ------- ------- ------ --------
------------
1995 ... 3,358 710 426 3,641 (12.7)%
(6.2)%
1996 ... 3,548 836 263 4,121 13.2%
5.1%
1997 ... 3,848 1,127 209 4,766 15.6%
6.8%
1998 ... 4,044 1,267 253 5,057 6.1%
4.8%
1999 ... 4,177 1,540 247 5,471 8.2%
3.7%
2000 ... 4,296 1,785 227 5,854 7.0%
6.9%
______________
Source: 2001 Annual Report, Camara Nacional de las Industrias de la Celulosa
y del Papel
The decline of Mexican apparent demand for the paper industry in 1995 was a
product of macroeconomic events, including, in particular, the devaluation of
the Peso, which caused an overall reduction in demand and Mexican GDP. From 1996
to 2000, apparent demand for the paper industry outpaced GDP.
The dominant portion of the total market for paper products is the market
for packaging paper. The table below shows Mexican apparent demand from 1995 to
2000 for packaging paper in short tons. In 2000, packaging paper accounted for
57.4% of Mexico's total paper production and 54.1% of apparent demand for paper.
Mexican Apparent Demand for Packaging Paper
(all figures in thousands of short tons)
Aggregate Apparent
--------- --------
Year Production Imports Exports Demand % Change
---- ---------- ------- ------- ------ --------
1995 ... 1,953 235 250 1,938 (5.7)%
1996 ... 2,083 346 131 2,298 18.6%
1997 ... 2,154 494 72 2,576 12.1%
1998 ... 2,307 583 65 2,825 9.7%
1999 ... 2,389 691 91 2,989 5.8%
2000 ... 2,464 790 67 3,187 6.6%
______________
Source: 2001 Annual Report, Camara Nacional de las Industrias de la Celulosa y
del Papel
Apparent demand for packaging paper declined in 1995, but by 1996, had
increased by 18.6%. This growth reflected the rebound of the economy and
increased demand in the U.S. border region due to growth in the operations of
maquiladoras. Apparent demand for packaging paper increased by 12.1% in 1997,
9.7% in 1998, 5.8% in 1999, and 6.6% in 2000, reflecting continued economic
growth throughout North America.
Pricing. In the past three years, prices for Mexican paper and packaging
products have been influenced by a combination of factors, including:
. growth of the Mexican economy and 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-U.S. Dollar exchange rate.
A-30
Containerboard and industrial paper are commodities priced in relation to
international paper, recycled fiber and pulp prices. Because the paper industry
is highly capital intensive, prices may also be affected by industry capacity
utilization rates and by additions of new capacity.
The prices of corrugated containers and multi-wall sacks and bags in Mexico
are affected by prevailing prices of containerboard and industrial paper, as
well as the following factors:
. resistance specifications;
. quality control;
. customer service;
. printing and graphics specifications;
. volume of production runs; and
. proximity to customers and industrial centers (due to the
transportation cost of converted products).
Prevailing international prices for paper and packaging, as well as U.S. price
levels, declined sharply during late 1995 and remained weak until the first half
of 1999. Since June 1999, international prices for paper products have
recovered, including U.S. price levels, the benefits of which have begun to be
felt in Mexico.
Over the last three years, Mexican corrugated container prices have tended
to be approximately 15% lower than U.S. prices, while prices for Mexican
containerboard and industrial paper have tended to be approximately 10-15% lower
than U.S. prices. We believe that these price differentials provide some
protection against competition from imports of these products. However, there
can be no assurance given as to any future price levels for our products or
future price differentials, if any, between Mexican and U.S. paper and packaging
products.
Under NAFTA, tariffs and other barriers will gradually disappear. Mexico
maintained a protective tariff on corrugated containers of 5% through 2000,
which has been eliminated in 2001. Multi-wall sacks and bags were protected by a
3% tariff in 2000. This tariff is scheduled to decline 1% per year from 2000 to
0% in 2003. All tariffs are scheduled to be eliminated by the year 2003. As a
result, the elimination of tariffs has had the effect of shortening the lag time
between price changes in the U.S. and Mexican packaging and paper industries.
For a description of the impact of prices on our results of operations, see
"Item 5. Operating and Financial Review and Prospects".
North American Paper and Packaging Industry
Since mid-1995, the North American paper and packaging industry has
experienced a prolonged down cycle characterized by continued price pressures,
excess capacity and the inability of many industry participants to earn
satisfactory returns on capital. To maintain reasonable capacity utilization,
U.S. paper producers generally continued to maintain high export levels in 2000,
including exports to Mexico. These exports have increased supply in the Mexican
market and kept pressure on Mexican paper prices during 2000.
More recently, the industry has begun to recover. Industry participants
have been shutting down non-competitive facilities, and an industry
consolidation seems to be underway, evidenced by the recently-announced business
combinations of Georgia Pacific Corporation with Fort James, Jefferson Smurfit
Group with Stone Container, Weyerhauser Company with MacMillan-Bloedel Limited
and International Paper with Champion International. In 2000, prices for U.S.
containerboard increased by approximately US$100 per short ton, although U.S.
packaging prices have not yet responded to raw materials increases accordingly.
Historically, price changes in Mexico have tended to lag price movements in the
United States by a few months.
A-31
Property, Plant and Equipment
The table below sets forth information regarding the identity, location,
products and capacity of our production facilities:
short tons per year
-------------------
Paper 800,000
Containerboard
Centauro Mill, (Durango).................. 264,000
Atenquique Mill (Jalisco)................. 132,000
McKinley Mill, (New Mexico, U.S.)......... 200,000
Monterrey Mill (Nuevo Leon)............... 137,000
Guadalajara Mill (Jalisco)................ 40,000
Texcoco Mill (Edo. de Mexico)............. 27,000
-------
Total.............................. 800,000
Pulp 220,000
Unbleached Soft Wood Pulp
Centauro Mill, (Durango).................. 110,000
Atenquique Mill (Jalisco)................. 110,000
-------
Total.............................. 220,000
short tons per year
-------------------
Packaging 829,000
Corrugated containers
Mexicali Plant (Baja California Norte)...... 26,000
Chihuahua Plant (Chihuahua)................. 29,000
Monterrey Centro Plant (Nuevo Leon)......... 33,000
CartonPack (Nuevo Leon)..................... 44,000
Monterrey Plant (Nuevo Leon)................ 44,000
Culiacan Plant (Sinaloa).................... 22,000
Guadalajara Plant (Jalisco)................. 50,000
Guadalajara Ceosa Plant (Jalisco)........... 20,000
Guadalajara San Sebastian Plant (Jalisco)... 22,000
Queretaro Plant (Queretaro)................. 33,000
Atempack Juarez Plant (Edo. de Mexico)...... 33,000
Atempack Tultitlan Plant (Edo. de Mexico)... 55,000
Titan Tlalnepantla Plant (Edo. de Mexico)... 55,000
Eyemsa Izcalli Plant (Edo. de Mexico)....... 40,000
Eyemsa Tlalnepantla Plant (Edo. de Mexico).. 33,000
Eyemsa Tapachula Plant (Chiapas)............ 44,000
Eyemsa Tepatitlan Plant (Jalisco)........... 50,000
McKinley Dallas Plant (Texas, U.S.)......... 46,000
McKinley Houston Plant (Texas, U.S.)........ 33,000
-------
Total................................ 712,000
Multi-wall Sacks and Bags
Cd. Guzman Plant (Jalisco).................. 22,000
Tula Plant (Hidalgo)........................ 22,000
Apasco Plant (Edo. de Mexico)............... 33,000
-------
Total................................ 77,000
Molded Pulp Packaging
Titan Apodaca Mill (Nuevo Leon)............. 21,500
Titan Guadalajara Mill (Jalisco)............ 7,500
Titan Hermosillo Mill (Sonora).............. 7,500
Titan Monterrey Mill (Nuevo Leon)........... 3,500
-------
Total................................ 40,000
Forest products 204,000
Particleboard Chihuahua Mill (Chihuahua).... 132,000
Particleboard Durango Mill (Durango)........ 17,000
Plywood Anahuac Mill (Chihuahua)............ 26,000
Plywood Durango Mill (Durango).............. 29,000
-------
Total................................ 204,000
In addition to our facilities described above, our headquarters are located
in Durango, Mexico, approximately 900 kilometers (560 miles) north of Mexico
City. We maintain sales offices in Mexico City, Guadalajara, Jalisco and
Monterrey, Nuevo Leon and representative offices in Albuquerque, New Mexico, and
in Dallas, Houston and Rio Grande, Texas, and in St. Marys, Georgia. Our various
production facilities in Mexico are located in the states of Durango, Nuevo
Leon, Jalisco, Baja California, Sonora, Estado de Mexico, Hidalgo, Queretaro,
Sinaloa, Chihuahua and Chiapas, as well as in Mexico City. In the United States,
we operate facilities in the states of New Mexico and Texas.
A-32
Item 5. Operating and Financial Review and Prospects.
General
You should read this discussion in conjunction with our audited
consolidated financial statements and the notes thereto and other financial
information included elsewhere in this annual report.
Recent Market Conditions
We experienced a decline in adjusted EBITDA margins in the fourth quarter
of 2000, largely as a result of the market downturn in Mexico and the United
States which began in the fall of 2000. We expect to see an improvement in our
adjusted EBITDA margins by the end of 2001 as we expect market conditions to
improve.
We have benefited from acquiring low performing assets and making them
profitable by integrating them into our company. Our acquisitions have also
substantially affected our product mix. In addition, we expect that the
diversification of our product base will better position us to withstand
cyclical fluctuations in the market. We also expect to benefit from the
geographic diversification of our subsidiaries, which allows us to naturally
hedge our U.S. Dollar-denominated debt and to take advantage of exchange rate
and price differentials in order to maximize our profit margins.
Sales
We produce paper, packaging and forest products in Mexico and the United
States. In 2000, paper and packaging products accounted for approximately 92% of
our total sales. In 2000, we sold approximately 75% of our paper and packaging
products in Mexico and the remaining 25% in the United States. Our sales in the
United States include exports sales from our Mexican operations and domestic
sales from our U.S. operations. In 2000, approximately 40% of our total
packaging sales were to Mexican companies that primarily export their products,
including exporters located in the border region, maquiladoras located outside
the border region and other Mexican exporters.
For fiscal year 2000, approximately 25% of our sales were made in U.S.
Dollars, with the balance primarily U.S. Dollar-linked.
Pricing
From 1998 through 2000, the pricing of our products has been influenced by
a number of factors, including:
. international prices for paper and packaging products, which are
significantly influenced by industry capacity utilization rates and by
increases in capacity due to the capital intensive nature of the paper
and packaging industry;
. growth in the demand for packaging products as a result of the growth
of the Mexican and U.S. economies;
. fluctuations in the exchange rate between the Peso and the U.S.
Dollar; and
. economic conditions in Mexico and the United States including
prevailing inflation rates.
Paper products. The paper industry is cyclical, with demand closely
correlated with overall economic activity. Prices for our paper products
primarily reflect international paper prices. From 1997 through June 1999,
international prices for paper products were low compared to the prior four
years. However, from June 1999 through December 2000, international prices for
paper products recovered, the benefits of which were felt in Mexico. However, in
2001, prices remained at the same levels and the industry was unable to
implement expected price increases.
A-33
Prices for paper products in Mexico are lower than prices in the United
States, reflecting the generally lower cost structure in Mexico. We compete with
U.S. and Mexican producers in both the United States and Mexico.
As a result of our production flexibility resulting from our vertical
integration, we have been able to maintain a higher level of operating income
during the down cycle in international paper prices than we could have achieved
without vertical integration. When prices for paper products are low, we use
virtually all of our paper production in our converting operations because
finished products, like packaging, earn higher margins. During down cycles, our
sales and cost of sales are reduced, but the overall impact on our operating
income is small. During periods of higher international paper prices, we
purchase paper for use in our converting operations from small Mexican paper
producers at favorable rates. This allows us to export a significant portion of
our higher-quality paper production and take advantage of the increased margins
available from sales of our paper products outside of Mexico.
Packaging products. In general, the prices of our packaging products
fluctuate in accordance with inter-national prices. Prices for corrugated
containers in Mexico have historically tended to be approximately 15% below
corrugated container prices in the United States, and prices for Mexican
containerboard have tended to be 10% to 15% lower than in the United States. In
the past, this price differential, combined with protective tariffs, has
discouraged imports from the United States. With the gradual elimination of
tariffs and generally low prices for packaging products in the United States
over the last three years, competition from imports has increased. Our prices
for packaging products over the last three years have declined in the face of
competition from imports.
Cost of Production
Historically, costs of production have been incurred in Pesos and consist
primarily of raw materials, labor, energy and depreciation costs. A portion of
our costs and operating expenses in Mexico are denominated in U.S. Dollars,
primarily the cost of imported OCC, which is the primary raw material used in
our papermaking activities.
The cost of virgin pulp and OCC, the primary raw materials used in the
production of our paper products, is significantly affected by international
prices for those products, which vary depending upon the supply and demand for
finished paper. Changes in the Peso-U.S. Dollar exchange rate also affect our
cost of importing OCC into Mexico. Mexican OCC prices tend to follow price
movements in the United States but are generally lower because Mexican OCC is
lower in quality. We have made substantial investments to improve production,
technology and domestic collection efforts, which have resulted in greater
efficiency, increased yields of recyclable waste paper and higher collections of
Mexican OCC, all of which result in reduced costs.
Our energy cost represents approximately 9% of our cost of production. In
particular, our mills are run primarily by electricity. We purchase 60% of our
electricity needs from the Comision Federal de Electricidad, the Mexican state-
owned electric company, under long-term contracts, and we produce the remainder
at our own power plants. These long-term contracts guarantee the supply of
electricity at prices that have historically increased by the Mexican inflation
rate. We use heating oil, instead of natural gas, to produce electricity at our
power plants. The prices for heating oil in Mexico have fluctuated less in 2000
than the prices for natural gas because the prices for heating oil are regulated
by Petroleos Mexicanos, the Mexican state-owned oil company. Generally, the
price for heating oil is not influenced by price changes in the open market
because of the price regulation of the Mexican government. Instead, heating oil
prices in Mexico have historically followed the trend of the Mexican inflation
rate, which increased only 8.9% in 2000. As a result, our energy costs have
risen less than if we had to purchase heating oil or natural gas on the open
market. See "Item 4. Information on the Company-Raw Materials-Energy."
A-34
Inflation
The table below shows Mexican inflation and gain from monetary position for
the periods indicated according to the NCPI:
Year Ended
December 31,
--------------------------------------------------------
1998
1999 2000
-------
-------- -------
Inflation................................. 18.6%
12.3% 8.9%
Gain from monetary position............... 857,472 6
17,039 414,226
Generally, these levels of inflation have resulted in lower real prices
since we have not been able to increase prices in line with increases in
inflation. High levels of inflation have also resulted in higher Peso-based
labor and raw material costs. As a result, during the periods under discussion,
operating margins and net income have been negatively affected.
In addition, a component of our "Financing Cost" includes our gain or loss
from monetary position which refers to the gains or losses, due to the effects
of inflation, from holding net monetary liabilities or assets. A gain from
monetary position results from holding net monetary liabilities during periods
of inflation as the purchasing power represented by nominal Peso liabilities
declines over time. Accordingly, since our monetary liabilities, debt and other
payables exceeded our monetary assets, cash, temporary investments and accounts
receivable, in 1998, 1999 and 2000 we recorded a gain from monetary position for
those periods. This had a non-cash effect on the income statement.
Exchange Rates
The table below shows the appreciation and devaluation of the Peso against
the U.S. Dollar and the period-end exchange rates for 1998, 1999 and 2000:
Year Ended December 31,
--------------------------------
1998 1999 2000
---- ---- ----
Peso devaluation (revaluation) against the U.S. Dollar/(1)/.......
22.7% (4.0%) 1.2%
Mexican inflation (based on changes in NCPI)/(1)/.................
18.6% 12.3% 8.9%
United States inflation (based on changes in CPI*)/(1)/...........
1.6% 2.7% 3.4%
Inflation differential (Mexican vs. U.S.)/(2)/....................
16.7% 9.4% 5.3%
Change in relative value of the Peso to the U.S. Dollar/(2)/......
(5.1%) 12.3% 3.9%
(1) The relevant rates and their indices used to calculate the percentages in
the table were as follows:
NCPI CPI
Exchange Rate
---- ---
-------------
December 31, 1998....................... 275.04 163.90
9.8963
December 31, 1999....................... 308.92 168.30
9.4986
December 31, 2000....................... 336.60 174.00
9.6098
(2) Compounded.
* "CPI" means the United States Consumer Price Index.
In 1997 and 1998, the Peso devalued against the U.S. Dollar, which
devaluation was significant in 1998. A devaluation of the Peso affects our
results of operations by increasing our cost of borrowing since the Peso cost of
interest payments on our U.S. Dollar indebtedness increases.
A-35
In addition, a devaluation generally benefits Mexican traditional exports
and maquiladora exports. Our ability to maintain profitable operations during
periods of devaluation has been in large part a result of our strength in
marketing to export-oriented customers.
In 2000, the Peso fluctuated throughout the year, primarily appreciating
throughout the year. However, in November and December, the Peso devalued
against the U.S. Dollar resulting in a devaluation of 1.2% for the year. A
devaluation of the Peso against the U.S. Dollar generally results in our
receiving more Pesos for our U.S. Dollar sales but our U.S. Dollar-based costs
increase.
The impact of exchange rate and inflation fluctuations on our interest
expense and interest income are reflected in the "Interest Expense" and
"Interest Income" components of "Financing Cost."
In addition, we record a foreign exchange gain or loss with respect to U.S.
Dollar-denominated monetary assets or liabilities of our Mexican subsidiaries
when the Peso appreciates or depreciates in relation to the U.S. Dollar. Our
U.S. Dollar-denominated monetary liabilities, which principally consist of our
U.S. Dollar-denominated indebtedness for borrowed money, exceed our U.S. Dollar-
denominated monetary assets, which principally consist of U.S. Dollar bank
deposits. As a result, we have recorded a foreign exchange loss during each
period in which the Peso depreciated in relation to the U.S. Dollar and a
foreign exchange gain for each period in which the Peso appreciated in relation
to the U.S. Dollar.
Capacity Utilization
Our operations have high fixed costs. Accordingly, to obtain low unit
production costs and maintain adequate operating margins, we seek to maintain a
high capacity utilization rate. Our paper mills operated at an average capacity
of approximately 98% in 1998, 99% in 1999 and 100% in 2000. We believe that our
vertically integrated operations will allow us to maintain high levels of
capacity utilization during down cycles. However, we cannot assure you that this
will be the case.
Segment Reporting
We manage our business on a product basis. Our reportable segments are:
. Packaging: this segment includes the manufacturing and selling of
corrugated containers, molded pulp, and multi-wall sacks and bags.
This segment includes the operating results of Titan.
. Paper: this segment includes the manufacturing and selling of
containerboard (linerboard, corrugating medium and multi-wall paper),
and paper, made from natural and recycled fibers. This segment
includes the operating results of Pamex and McKinley Paper.
. Forest products: this segment includes the manufacturing and selling
of plywood and particleboard. This segment includes the operating
results of Ponderosa.
A-36
The following table shows our total sales, intersegment sales, sales to
third parties, operating income and EBITDA by segment:
As of
December 31, 2000
--------------------------------------------------------------------------------
---------
Operating Income
Sales
to -------------------
Intersegment
------------ Operating Before Depreciation
-------------- Third
------------- -------------------
Total Sales Sales
Parties Income and Amortization
--------------
------------ ------------- -------------------
Packaging.......................... 4,458,076 68,939
4,389,137 690,355 788,059
Paper.............................. 2,923,975 1,744,400
1,179,575 350,383 517,024
Forest products.................... 556,072 49,777
506,295 43,901 74,695
Eliminations....................... (1,863,116) (1,863,116)
-- -- --
---------- ----------
--------- --------- ---------
Consolidated total................. 6,075,007 --
6,075,007 1,084,639 1,379,778
========== ==========
========= ========= =========
As of
December 31, 1999
--------------------------------------------------------------------------------
---------
Operating Income
Sales
to -------------------
Intersegment
------------ Operating Before Depreciation
-------------- Third
------------- -------------------
Total Sales Sales
Parties Income and Amortization
--------------
------------ ------------- -------------------
Packaging.......................... 4,138,630 56,571
4,082,059 635,603 743,681
Paper.............................. 2,746,247 1,621,084
1,125,163 357,270 537,594
Forest products.................... 682,428 57,646
624,782 99,743 135,219
Eliminations....................... (1,735,301) (1,735,301)
-- -- --
---------- ----------
--------- --------- ---------
Consolidated total................. 5,832,004 --
5,832,004 1,092,616 1,416,494
========== ==========
========= ========= =========
As of
December 31, 1998
--------------------------------------------------------------------------------
---------
Operating Income
Sales
to -------------------
Intersegment
------------ Operating Before Depreciation
-------------- Third
------------- -------------------
Total Sales Sales
Parties Income and Amortization
--------------
------------ ------------- -------------------
Packaging.......................... 4,329,600 106,457
4,223,143 745,514 871,983
Paper.............................. 2,727,960 1,588,583
1,139,377 293,720 460,385
Forest products.................... 798,027 124,187
673,840 88,875 129,848
Eliminations....................... (1,819,227) (1,819,227)
-- -- --
---------- ----------
--------- --------- ---------
Consolidated total................. 6,036,360 --
6,036,360 1,128,109 1,462,216
========== ==========
========= ========= =========
The following is our geographic sales information for the periods
indicated:
As of
December 31, 2000
--------------------------------------------------------------------
1998
1999 2000
----------
---------- ----------
Mexico........................................... 6,549,680
6,095,323 6,293,016
United States.................................... 1,305,907
1,471,982 1,645,107
Eliminations..................................... (1,819,227)
(1,735,301) (1,863,116)
----------
---------- ----------
Consolidated total............................... 6,036,360
5,832,004 6,075,007
==========
========== ==========
Results of Operations
Year Ended December 31, 2000 Compared With Year Ended December 31, 1999
Net Sales. Our net sales increased 4.2% from Ps 5,832.0 million in 1999 to
Ps 6,075.0 million in 2000. This increase in net sales is a result of a 1.3%
increase in shipments of our products due to a 5% increase in shipments of our
packaging products which was offset, in part, by a 1.6% reduction in shipments
of our paper products. Sales of our packaging products increased 7.5% from Ps
4,082.1 million in 1999 to Ps 4,389.1 million in 2000. Sales of our paper
increased 4.8% from Ps 1,125.2 million in 1999 to Ps 1,179.6 million in 2000,
and sales of our forest products decreased 19% from Ps 624.8 million in 1999 to
Ps 506.3 million in 2000.
Cost of Sales. Cost of sales increased 5.7% from Ps 4,308.0 million in
1999 to Ps 4,553.0 million in 2000 primarily due to increases in prices of our
principal raw materials, reflecting a negative effect caused by a 1.2%
depreciation of the Peso.
A-37
Gross Profit. Our gross profit remained relatively the same, decreasing
slightly from Ps 1,524.0 million in 1999 to Ps 1,522.0 million in 2000.
Selling and Administrative Expenses. Our selling and administrative
expenses increased 1.4% as a consequence of an increase of approximately 5.0% in
the volume of shipments of packaging products.
Operating Income. Our operating income decreased slightly, from Ps 1,092.6
million in 1999 to Ps 1,084.6 million in 2000. The decrease in operating income
was primarily caused by our increased cost of sales as detailed above. The
operating income for the packaging segment increased 8.6% from Ps 635.6 million
in 1999 to Ps 690.4 million in 2000, which offset a 1.9% decline in our paper
segment operating income which decreased from Ps 357.3 million in 1999 to Ps
350.4 million in 2000. The operating income for the forest products segment
decreased 56% from Ps 99.7 million in 1999 to Ps 43.9 million in 2000 due to an
increase in our fixed unit costs resulting form an 8.4% decrease in shipments.
Notwithstanding the decrease in operating income during 2000, and based on
publicly available information, we believe that we have continued to outperform
the industry, as our operating margin (net operating income divided by revenues)
remained stable around 18% during a year characterized by price, demand and
capacity adjustment in the industry worldwide.
Comprehensive Financing Cost. Our comprehensive financing cost increased
from a gain of Ps 200.9 million in 1999 to a loss of Ps 266.5 million in 2000.
The main factors for this change were a decrease in interest expense from 1999
to 2000 of approximately Ps 65.7 million as a consequence of a devaluation of
the Peso lower than the inflation rate and a significant change from a foreign
exchange gain of Ps 264.0 million in 1999 to a foreign exchange loss of Ps 74.5
million in 2000. Interest income increased from Ps 86.0 million in 1999 to Ps
94.1 million in 2000, reflecting a recovery in the Mexican economy that reduced
interest rates for investments. Our gain from monetary position decreased from
Ps 617.0 million in 1999 to Ps 414.2 million in 2000 due to a lower inflation
rate registered in Mexico. We continue to seek to reduce leverage in a manner
consistent with strategic objectives.
Other Expenses. Other expenses decreased from Ps 56.2 million in 1999 to Ps
31.9 million in 2000, mainly due to write-offs of deferred charges.
Provisions for Taxes and Employee Profit Sharing. Provisions for taxes and
employee profit sharing increased from Ps 135.0 million in 1999 to Ps 236.4
million in 2000, primarily as a result of the following: (i) an increase in
taxable income, (ii) an amortization of tax loss carry-forward in 1999 which did
not occur in 2000, and (iii) in 1999 we had deductions based on an accelerated
depreciation which did not occur in 2000. In addition, in 2000 we adopted
Bulletin D-4, a full liability method for recognizing deferred income taxes,
whereas in prior years we had used a partial liability method. Consequently, our
historical effective income taxes may not be indicative of those in future
years.
Net Income. Our net income decreased from Ps 1,099.3 million in 1999 to Ps
389.6 million in 2000, primarily due to the increase in our comprehensive
financing cost. Furthermore, our net income has been materially affected in
recent years, both positively and negatively, by exchange gains or losses and by
non-cash gains or losses from monetary position.
A-38
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
Net Sales. Our net sales, in spite of an increase of approximately 5% in
shipments of corrugated containers, decreased 3.4% from Ps 6,036.4 million in
1998 to Ps 5,832.0 million in 1999. This decrease reflects a negative effect
caused by a 4% appreciation of the Peso which reduced, in Peso terms, sales made
in the United States and sales in Mexico linked to the U.S. Dollar and reflects
the fact that the price increases for our products (in Peso terms) were below
the inflation rate registered in Mexico during 1999. Sales of our packaging
products decreased 3.3% from Ps 4,223.1 million in 1998 to Ps 4,082.1 million in
1999. Sales of our paper products remained relatively the same, decreasing
slightly from Ps 1,139.4 million in 1998 to Ps 1,125.2 million in 1999, and
sales of our forest products decreased 7.3% from Ps 673.8 million in 1998 to Ps
624.8 million in 1999.
Cost of Sales. Cost of sales, in spite of price increases in our principal
raw materials, decreased 4.0% from Ps 4,487.1 million in 1998 to Ps 4,308.0
million in 1999, reflecting a positive effect caused by a 4% appreciation of the
Peso, better operating efficiency in all facilities and higher capacity
utilization overall.
Gross Profit. Our gross profit decreased 1.6% from Ps 1,549.2 million in
1998 to Ps 1,524.0 million in 1999.
Selling and Administrative Expenses. Our selling and administrative
expenses increased 2.4% as a consequence of having McKinley Container fully
integrated into our company and an increase of approximately 5% in the volume of
shipments of corrugated containers.
Operating Income. Our operating income decreased by approximately 3.1% from
Ps 1,128.1 million in 1998 to Ps 1,092.6 million in 1999. The decrease in
operating income was primarily caused by the negative impact on net sales of the
appreciation of the Peso. The operating income for the packaging segment
decreased 14.7% from Ps 745.5 million in 1998 to Ps 635.6 million in 1999, which
offset a 21.6% increase in our paper segment operating income which increased
from Ps 293.7 million in 1998 to Ps 357.3 million in 1999. The operating income
for the forest products segment increased 12.3% from Ps 88.9 million in 1998 to
Ps 99.7 million in 1999 due to a 6.9% increase in shipments.
Comprehensive Financing Cost. Our comprehensive financing cost decreased
from a loss of Ps 1,077.7 million in 1998 to a gain of Ps 200.9 million in 1999.
The main factors for this change were a decrease in interest expense from 1998
to 1999 of approximately Ps 93.1 million and as a consequence of the
appreciation of the Peso, a significant change from a foreign exchange loss of
Ps 1,190.6 million in 1998 to a foreign exchange gain of Ps 264.0 million in
1999. Interest income fell from Ps 114.7 million in 1998 to Ps 86.0 million in
1999, reflecting a recovery in the Mexican economy that reduced interest rates
for investments.
Other Expenses. Other expenses decreased from a gain of Ps 67.2 million in
1998 to a loss of Ps 56.2 million in 1999, mainly due to the amortization of
negative goodwill related to the acquisition of McKinley Paper in 1998 and
write-offs of other deferred charges in 1999.
Provisions for Taxes and Employee Profit Sharing. Provisions for taxes and
employee profit sharing increased from Ps 19.4 million in 1998 to Ps 135.0
million in 1999, primarily as a result of an increase in current taxes payable,
which was related to our foreign exchange gain, and changes in the procedure for
the tax consolidation method for our Mexican subsidiaries. The changes in the
procedure of the tax consolidation method consist of applying 60% of the
subsidiaries' profits or losses for tax consolidation purposes rather than 100%
as was done in the past.
Net Income. Our net income increased from Ps 109.2 million in 1998 to Ps
1,099.3 million in 1999, primarily due to a decrease in comprehensive financing
cost. Our net income has been materially affected in recent years, both
positively and negatively, by exchange gains or losses and by non-cash gains or
losses from monetary position.
A-39
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity have historically consisted of net cash
generated by our operating activities, corporate borrowings under working
capital facilities, issuances of debt and equity securities and equity
contributions. Our management believes the funding available to it from these
and other sources will be sufficient to satisfy our working capital and debt
service requirements for the foreseeable future.
At December 31, 2000, we had cash and temporary investments totaling Ps
620.1 million. We invest our cash balances primarily in short-term Peso-
denominated instruments issued by major Mexican banks. As of December 31, 2000,
our short-term debt totaled approximately Ps 383.4 million.
Net resources generated from operating activities were Ps 947.3 million in
2000 and Ps 1,332.7 million for 1999. We had a decrease in inventories of Ps
146.2 million due to better efficiency between our shipments and our production,
and an increase in other assets of Ps 31.1 million in 2000. These increases were
partially offset by a decrease in accounts receivable of Ps 119.8 million due to
lower sales, and a decrease in accounts payable of Ps 210.6 million due to a
decrease in inventory.
Net resources used in investing activities were Ps 393.7 million in 2000,
and Ps 177.2 million in 1999, respectively.
Net resources used in financing activities were Ps 626.5 million in 2000
compared with Ps 1,577.0 million in 1999.
The source of the net resources used in investing and financing activities
were generated mainly by operating activities.
The net resources used in financing activities were mainly due to the
appreciation of the Peso versus the Dollar, which resulted in a decrease in
indebtedness by Ps 625.5 million. In addition, we reduced our bank debt by
US$14 million.
Investing activities Financing activities
(in millions of Pesos) (in millions of Pesos)
Atenquique (upgrade) Ps 23.9 Bank Debt Reduction
Ps 134.5
Tepatitlan (acquisition) 145.0 Debt reduction (by peso
appreciation) 124.2
Indutrias Centauro (upgrade) 114.5 Debt Reduction
367.8
Titan (equipment) 35.0 (in constant pesos by
Inflation)
Mckinley Paper (capex) 8.6
-----------
-----------
Total Ps 626.5
Ps 327.8
Other asset Ps 65.8
-----------
Although our interest expense has decreased primarily due to the effect
from the constant Peso restatement process, the overall interest rates on our
total indebtedness remained at 11.8% in 1998, 1999 and 2000.
Because a large proportion of our sales are priced in U.S. Dollars, or
priced in a manner linked to the value of the U.S. Dollar, we generally do not
hedge our exposure to movements in foreign currency.
A-40
Indebtedness
In recent years, we have attempted to increase the stability of our balance
sheet by lengthening the maturity of our debt obligations.
As of December 31, 2000, our total debt was Ps 5,432.4 million (US$565.3
million), consisting of Ps 383.4 million (US$39.9 million) in short-term debt.
In February 2001, Corporacion Durango conducted a cash tender offer for all
of our US$180 million notes due August 2006. We have defeased all of the notes
that were not tendered in the cash tender offer. In connection with this cash
tender offer, Corporacion Durango made us an intercompany loan of $180 million,
bearing annual interest at 13-1/8%, payable semi-annually.
Bank Debt
As of December 31, 2000, excluding our indebtedness under our 12-5/8% notes
due 2003 (the "GID 2003 Notes"), primarily all of our outstanding indebtedness
was bank debt. The following table sets forth the maturity profile of our long-
term debt, in millions, including the GID 2003 Notes, as of December 31, 2000:
After
2002 2003 2004 2004
----- ----- ----- -------
Ps 460.3 299.6 295.8 1,590.7
US$ 47.9 31.2 30.7 165.5
We have extended the maturity of substantially all of our bank debt that
was due in 2000 to 2004 and repaid the remainder. We have Ps 903.3 million
(US$94.0 million) of indebtedness owed to Banamex, S.A. de C.V. ("Banamex")
which matures in 2004. This loan has a floating interest rate of LIBOR (as
defined below) plus 2.8%.
In addition, as of December 31, 2000, we had a Ps 384.4 million (US$40.0
million) loan from The Chase Manhattan Bank which matures in 2002 and that has
an interest rate of LIBOR plus 1.5%.
GID 2003 Notes
--------------
We have US$250.0 million of notes outstanding due in July 2003, bearing
interest at 12-5/8% per annum, payable semi-annually. The GID 2003 Notes were
issued under an indenture that restricts our ability to incur additional debt,
pay dividends or make investments, issue capital stock, enter into transactions
with affiliates, create leases and sell assets. The GID 2003 Notes are senior,
unsecured obligations of our company.
Capital Expenditures
We have implemented a capital investment program to help our overall
operations. We have implemented a series of measures to increase capacity,
improve efficiency and bring our plants into proper compliance with
environmental regulations. Our capital expenditures amounted to Ps 962.4 million
(US$100.1 million) in 1998, Ps 107.3 million (US$11.2 million) in 1999, and Ps
327.8 million (US$34.1 million) in 2000. Our capital expenditures relating to
environmental matters amounted to Ps 43.2 million (US$4.5 million) in 1998, Ps
24.2 million (US$2.5 million) in 1999, Ps 7.8 million (US$0.8 million) for 2000
and are estimated at Ps 9.5 million (US$1.0 million) for 2001 and Ps 9.5 million
(US$1.0 million) in 2002.
We have a total capital expenditure budget of Ps 201.8 million (US$21
million) for 2001 and Ps 182.6 million (US$19 million) for 2002. We are
concentrating on capacity expansion in paper, on new converting plants, on
environmental spending to ensure compliance, and on upgrading technology. We
expect to finance our capital expenditure plan with internally generated cash
revenues and some supplier financing. No assurance can be given that we will be
able to meet our capital expenditure budget.
A-41
Differences Between Mexican GAAP and U.S. GAAP
Our audited consolidated financial statements are prepared in accordance
with Mexican GAAP, which differ in certain respects from U.S. GAAP. The
principal differences between Mexican GAAP and U.S. GAAP as they relate to us
are negative goodwill, deferred income tax, employees' statutory profit sharing,
Bulletin B-15 restatement and fixed asset restatement. Each of these
differences affects both net income (loss) and stockholders' equity. Net income
under U.S. GAAP was Ps 1,625.0 million, Ps 259.4 million, Ps (159.6) million, Ps
1,925.7 million and Ps 6.1 million for the years ended December 31, 1996, 1997,
1998, 1999 and 2000, respectively. See Note 20 to our audited consolidated
financial statements for a further discussion of the adjustments under U.S.
GAAP.
Mexican GAAP financial statements recognize the effects of inflation,
whereas financial statements prepared under U.S. GAAP are presented on a
historical cost basis. We are not required to reverse many of the Mexican
inflation accounting adjustments when reconciling Mexican GAAP to U.S. GAAP, as
these adjustments provide a means of measuring the effects of price-level
changes in the inflationary Mexican economy. Accordingly, these inflation-
adjusted figures are considered a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes.
New Accounting Pronouncements under Mexican GAAP. Effective January 1,
2000, we adopted the provisions of the revised Bulletin D-4, "Accounting
Treatment of Income Tax, Asset Tax and Employees Profit Sharing." The new
Bulletin D-4 changes the accounting treatment from the partial liability method
to the full asset and liability method, requiring the recognition of the
deferred tax effects for the temporary differences between accounting and tax
values of assets and liabilities. In accordance with the new Bulletin D-4, the
net cumulative effect required the recognition of a net liability for deferred
income tax and employees' statutory profit sharing of approximately Ps 2,390,589
and a charge to stockholder's equity in the same amount.
In August 2000, the Mexican Institute of Public Accountants ("MIPA") issued
Bulletin B-4, "Comprehensive Income", to become effective January 1, 2001. This
Bulletin sets forth new guidelines for reporting and disclosing comprehensive
income and its components. Based on this Bulletin, comprehensive income will
include net income of the year and other items which, in accordance with other
bulletins, are recorded directly in stockholders' equity and which are not
capital contributions, reductions or distributions of capital.
Effective January 1, 2001, Bulletin C-2, "Financial Instruments", issued by
the MIPA gives new rules for recording those instruments in the accounting. It
requires recording assets or liabilities in the balance sheet, valued at their
fair value. The most significant effect which will be derived from adopting
this pronouncement is related with recording the "equity swap" contracts in the
balance sheet, as further described in Note 10 to our audited consolidated
financial statements.
New Accounting Pronouncements under U.S. GAAP. During June 1999, the
Financial Accounting Standards Board issued SFAS No. 137, "Deferral of the
Effective Date of SFAS No. 133," which defers the effective date of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," to fiscal years
beginning after June 15, 2000. SFAS 133 establishes a new model for the
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. Upon SFAS 133's initial application, all
derivatives are required to be recognized in the statement of financial position
as either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS 133. We do not believe that the adoption of this
statement will significantly affect our financial position or results of
operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
March 31, 2001. We do not expect the adoption of this statement to have a
material impact on our audited consolidated financial statements.
A-42
In December 1999, the SEC issued staff accounting Bulletin 101 ("SAB 101"),
"Revenue Recognition in Financial Statement" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
which have been presented on a basis that is consistent with the provisions of
SAB 101 for all periods presented. The implementation of SAB 101 had no effect
on our audited consolidated financial statements.
Item 6. Directors, Senior Management and Employees.
Board of Directors and Executive Officers
Our board of directors is responsible for the management of our business.
Our by-laws (estatutos sociales) provide that the board of directors will
consist of the number of directors and alternate directors elected by our
stockholders at the annual ordinary general meeting, each of whom is elected for
a term of one year.
Pursuant to our by-laws, alternate directors are appointed by our
stockholders to serve on the board of directors in place of directors who are
unable to attend meetings. If a member of our board is absent from a meeting,
one of our alternate directors is called to serve as a director for such meeting
in the order provided by the stockholders. If the stockholders do not provide an
order, the alternate director is chosen indistinctly by the board. Even when
alternate directors are not substituting for a director, they are invited to
attend all board meetings.
Our board of directors includes 10 directors, of whom four are independent
directors, and 10 alternate directors.
Our executive officers are appointed by the board of directors and serve
until their successors have been appointed and take office.
The table below sets forth the members of our board of directors and our
executive officers:
Name Current Title
Since
---- -------------
-----
Miguel Rincon....................... Chairman of the Board and Chief Executive
Officer 1982
Jose Antonio Rincon................. Vice-Chairman and Chief Operating Officer
1982
Mayela Rincon de Velasco............ Vice-President and Chief Financial Officer
1986
Jesus Rincon........................ Director
1998
Wilfrido Rincon..................... Director
1999
Ignacio Rincon...................... Director
1999
Angel Del Palacio................... Director
2001
Alfonso Fernandez De Castro......... Director
2001
Buenaventura G. Saravia............. Director
2001
Roberto Isaac Hernandez............. Director
2001
Alternate Directors:
Prudencio Calderon.................. Alternate Director
2001
U.S. Managing Director
1997
Jesus Romo Carrasco................. Alternate Director
2001
Controller
1988
Martin Rincon Arredondo............. Alternate Director
2001
A-43
Arturo Diaz Medina.................. Alternate Director
2001
Financial Manager
1998
Gustavo Peyro Medina................ Alternate Director
2001
Audit and Systems Manager
1996
Raul Catano......................... Alternate Director
2001
General Manager-Titan Central Division
1993
Victor Manuel Sanchez............... Alternate Director
2001
Financial Manager-Titan Group
1993
Juan Montufar....................... Alternate Director
2001
General Manager-Industrias Centauro
1995
Javier Bermea....................... Alternate Director
2001
General Manager-Titan North Division
1993
Ignacio Parra Rivera................ Alternate Director
2001
General Manager-Titan West Division
2001
Executive Officers:
Gustavo Peyro Medina................ Audit and Systems Manager
1996
Arturo Diaz Medina.................. Financial Manager
1998
Jesus Romo Carrasco................. Controller
1988
Gabriel Villegas.................... Secretary of the Board and Legal Counsel
1987
Miguel Rincon, Jose A. Rincon, Jesus Rincon, Ignacio Rincon, Wilfrido
Rincon, Mayela R. de Velasco and Martin Rincon are siblings.
Miguel Rincon has been Chairman of the Board and Chief Executive
Officer of our company since 1982. He has been an active member of a number of
organizations in Mexico related to our industry, such as the National Chamber
for the Pulp and Paper Industry, the Por Mexico Group, an association of
business leaders from all sectors, and the National Commission on Commercial
Agriculture (Comision Nacional Agropecuaria y Comercial). He currently serves on
a number of corporate boards in the United States and Mexico, including Banamex,
one of the largest Mexican banks, and The Chase Manhattan Bank de Mexico, S.A.
de C.V.
Jose Antonio Rincon has been Vice-Chairman and Chief Operating Officer
of our company since 1982. Since 1988, he has been a member of the National
Chamber for the Pulp and Paper Industry. From 1990 to 1998, he served as
director of Banco Santander, S.A. de C.V.
Mayela Rincon de Velasco has been Vice-President and Chief Financial
Officer of our company since 1982. From 1987 to 1994, she worked as a professor
of international finance in the Durango State University (Universidad Juarez del
Estado de Durango). She is a member of the Association of Public Accountants
(Colegio de Contadores Publicos). She is also a member of the philanthropic
board of the General Hospital of Durango (Hospital General de Durango).
A-44
Jesus Rincon has been a director of our company since 1987. Since
1997, he has worked as the general manager of Porteadores de Durango as well as
the general manager of Ponderosa. From 1995 to 1997, he served as the
development manager of our company. He is an active member of the National
Association of Particleboard Manufacturers and the Forest Industry Association.
Wilfrido Rincon has been a director of our company since 1987. Since
1998, he has been the general manager of the paper division of Pamex. From 1997
to 1998, he served as general manager of Ponderosa. From 1994 to 1996 he worked
as development manager of our company. He also serves as president of the
National Chamber of the Forestry Industry and vice-president of National Chamber
for the Pulp and Paper Industry. He is an active member of the National Council
for Forestry (Consejo Consultivo Forestal Nacional).
Ignacio Rincon has been a director of our company since 1987. Since
1998, he has been the general manager of Empresas Titan. From 1998 to 1999, he
worked as the marketing manager of Empresas Titan. From 1994 to 1997, he worked
as the planning manager of our company. He is currently an active member of the
Association of Technicians in Pulp and Paper (Asociacion de Tecnicos de la
Celulosa y del Papel).
Martin Rincon has been a director of our company since 1989. Since
1998, he has been a commercial manager of Grupo Pipsamex. From 1997 to 1998, he
worked for McKinley Paper as financial manager. From 1995 to 1997, he served as
supply manager of the Corporacion de Papeles Mexicanos. He served as vice-
president for the National Chamber for the Pulp and Paper Industry in 1999. He
currently serves on the board of directors of the National Association of Paper
Distributors (Asociacion Nacional de Distribuidores de Papel) and the National
Book Association (Asociacion Nacional del Libro).
Jesus Romo has been the Controller of our company since 1988. He is a
professor of accounting and statistics at Durango State University (Universidad
Juarez del Estado de Durango). Since 1978 he has been an active member of the
Association of Public Accountants (Colegio de Contadores Publicos).
Gustavo Peyro Medina was Manager of the Controller and Audit Department of
our company from 1992 to 1999. He has also been Audit and IT manager of our
company since 1996. From 1985 to 1989 he was professor at Durango State
University (Universidad Juarez del Estado de Durango). Since 1983 he has been an
active member of the Mexican Institute of Public Acountants (Instituto Mexicano
de Contadores Publicos) and also of the Association of Public Accountants
(Colegio de Contadores Publicos). He is an active member of the Institute of
Internal Auditors, Inc.
Arturo Diaz Medina has been the Finance and Planning Managing Director of
our company since 1998. He had been involved in other finance and operation
positions from 1994 to 1998 in two of our paper mills. Prior to joining our
company he was head of the finance and commercial areas of an autoparts company
based in Durango, Mexico. Since 1990 he has been an active member of the
Association of Public Accountants (Colegio de Contadores Publicos).
Gabriel Villegas has been Secretary of the Board and Legal Counsel of our
company since 1987. As Legal Counsel he was involved in corporate and labor
matters of our company. In 1993 he was appointed General Counsel and has
participated in every share or asset acquisition made by us, in the issuance of
shares and debt both in Mexico and in the United States, and in the preparation
and execution of financial and other material agreements. He served as member of
the Legal Committee of the National Chamber for the Pulp and Paper Industry.
A-45
Independent Members of the Board
Alfonso Fernandez de Castro Mr. Fernandez de Castro is one of the most
experienced entrepreneurs in the Mexican Forest Industry. He is the founder and
General Manager of Grupo Forestal Alfa, one of the main companies in the Mexican
forest industry.
Buenaventura G. Saravia Mr. Saravia is a cattle breed entrepreneur and the
General Manager of Empresas la Punta, one of the principal exporters of cattle
from Mexico to the United States. He has a bachelors degree in business from
the Monterrey Institute of Technology (ITESM).
Angel Del Palacio Mr. Del Palalcio is a services sector entrepreneur and
the General Manager of several automobile dealers in the north of Mexico. He has
a bachelors degree in business and an MBA from the Monterrey Institute of
Technology (ITESM).
Roberto Isaac Hernandez Mr. Isaac Hernandez is a services sector
entrepreneur and the General Manager of a chain of gas stations and supermarkets
in the north of Mexico. He has a bachelors degree in economics from the
Monterrey Institute of Technology (ITESM) and an MBA from the Notre Dame
University in France.
There are no service contracts providing for benefits upon
termination of employment of any of our directors.
Statutory Auditor
Under our by-laws in accordance with Mexican law, our annual
stockholders' meeting has to elect at least one statutory auditor (comisario)
and a corresponding alternate statutory auditor. The primary role of a statutory
auditor is to report to our stockholders at the annual ordinary general meeting
of stockholders regarding the accuracy of the financial information presented to
our stockholders by our board of directors. Subject to terms and conditions, a
statutory auditor is also authorized (i) to call ordinary or extraordinary
general meetings, (ii) to place items on the agenda for meetings of stockholders
or our board of directors, (iii) to attend meetings of stockholders and of our
board of directors and (iv) generally to inspect the affairs of the Company.
Since 2000, the statutory auditor is Raul Guerra Rodriguez, and the alternate
statutory auditor is Carlos Orozco Renteria.
Compensation of Directors and Officers
Directors receive no compensation in their capacity as directors. The
aggregate amount of compensation paid by us to our officers during 2000 was Ps
10.6 million. In 2001, we expect that the aggregate amount of compensation paid
to this group will total approximately Ps 11.7 million.
We have established a bonus plan for the key management of our company
and our subsidiaries. For this purpose, a trust controlled by members of the
Rincon family was established in 1994 to purchase 100,000 Series A Shares,
representing approximately 0.2% of the total number of Series A Shares
outstanding. From 1995 to 1996, some individuals received a share-based bonus
of Series A Shares pursuant to this plan. After five years, each individual can
elect to retain the Series A Shares or can exercise the option to sell the
Series A Shares in the open market. The holders of our 1995 assignment of
Series A Shares under this plan will make their election this year. The exercise
price will be the higher of the book value of the Series A Shares or the market
price of the Series A Shares at the time the options are exercised. The other
terms of the options will be established by the controlling committee of the
trust at the time the options are exercised. As of June 15, 2001, 65,563 options
have been granted pursuant to this plan.
Remuneration Committee
We have established a remuneration committee whose main functions are to:
(i) recommend individuals to serve as chairman of our board of directors and as
main officers of our company; (ii) suggest criteria to evaluate officers in
accordance with general outlines prepared by the board of directors; and (iii)
analyze and submit to the board of directors the remuneration structure for the
main officers of our company.
A-46
The remuneration committee may be comprised of three to seven members of
the board of directors designated by the shareholders. The current members of
the remuneration committee are Angel Del Palacio, Buenaventura G. Saravia and
Mayela R. de Velasco.
The remuneration committee must report to the board of directors at least
twice a year and at any other time the committee finds appropriate or becomes
aware of any material information. The remuneration committee acts and adopts
all resolutions by majority vote.
Our company's statutory auditor is invited to each meeting of the
remuneration committee but has no voting power.
Audit Committee
We have established an audit committee whose main functions are to: (i)
recommend external auditors to the board of directors; (ii) recommend the terms
and conditions of the services provided by the external auditors; (iii)
supervise the work of external auditors; (iv) make sure that the external
auditors are independent; (v) serve as an intermediary between the board of
directors and the external auditors; (vi) review and submit to the board of
directors the basis for financial information; (vii) review the working plan,
communications and audit reports and inform the board of directors of the
results; (viii) help implement and evaluate the effectiveness of the internal
control system and annual internal audit programs; (ix) coordinate internal,
external and statutory auditing; and (x) verify compliance with statutes and
regulations applicable to our company.
The audit committee may be comprised of three to seven members of the board
of directors designated by the shareholders. The current members of the audit
committee are Alfonso Fernandez De Castro, Roberto Isaac Hernandez and Mayela R.
de Velasco.
The audit committee must report to the board of directors at least twice a
year and at any other time the committee finds appropriate or becomes aware of
any material information. The audit committee acts and adopts all resolutions
by majority vote.
Our company's statutory auditor is invited to each meeting of the audit
committee but has no voting power.
Our Employees
At December 31, 2000, we had approximately 7,769 employees (7,429 in Mexico
and 340 in the United States) and approximately 70% of our work force was
unionized. We have not experienced any work stoppages in our facilities or those
of our subsidiaries, other than a strike at our Atenquique mill which lasted
nine days in July 1998 and was resolved by contract renegotiations. We currently
have good relations with our employees at all our facilities.
On April 26, 2001, we temporarily shut down one of the Pamex mills in
Atenquique. The plant represented 1.3% of our third party sales and 1.2% of our
operating income in 2000. We took this step in order to modify the plant's
expensive and non-productive labor contract which has caused us to have twice
the labor cost per ton at that plant than at our other similar linerboard mills
in Mexico. Based on our current negotiations with the labor union, we expect
the mill will be reopened by the third quarter of 2001.
The following chart shows the number of employees in Mexico and
the United States for the periods indicated:
A-47
Employees at the end of the period
----------------------------------
1998 1999
2000
7,614 8,717
7,769
Employees in Mexico
-------------------
1998 1999
2000
7,334 8,395
429
Employees in United States
---------------------------
1998 1999
2000
280 322
340
TEMPORARY
---------
1998 1999
2000
1,219 1,251
1,046
Item 7. Major Shareholders and Related Party Transactions.
General
We have a single class of common stock, represented by the Series A Shares.
The shareholders who are presently part of our management (the "Management
Shareholders") currently own, directly or indirectly, through their ownership in
Corporacion Durango and Administradora Corporativa y Mercantil, approximately
87.19% of the issued and outstanding Series A Shares and have the power to elect
substantially all directors and control the Company. In early 2000, the
Management Shareholders voted to elect ten directors of which four are
independent directors and ten alternate directors.
Our total authorized and issued share capital as of December 31, 2000
consisted of Ps 808.14 million. Currently, we have authorized and issued
53,832,867 Series A shares, with no par value and having one vote per share.
The following table sets forth current information with respect to the
beneficial ownership of our common stock as of June 15, 2001 by:
. each person known by us to beneficially own more than 5%, in the
aggregate, of the outstanding shares of our common stock; and
. all board members and executive officers as a group.
Owner
Shares Owned Percent of Class(1)
-----
------------ -------------------
Corporacion Durango, S.A. de C.V. (2)...................................
31,866,945 59.20%
Administradora Corporativa y Mercantil, S.A. de C.V (2).................
15,068,000 27.99%
Nacional Financiera, S.N.C., as Trustee (3).............................
4,203,738 7.81%
Stock Option Trust (4)..................................................
58,784 0.11%
Others (5)..............................................................
2,635,400 4.89%
---------- ------
Total of members of board of directors and executive officers as a
group(6)...............................................................
11,499 0.02%
---------- ------
Total...................................................................
53,832,867 100.00%
========== ======
A-48
_____________________________
(1) Percentages are based on 53,832,867 outstanding Series A Shares as of June
15, 2001.
(2) On March 28, 2000, Corporacion Durango acquired 31,807,700 Series A Shares
owned by the Management Shareholders and held in trust. On March 30, 2000,
Administradora Corporativa y Mercantil acquired 15,068,000 Series A Shares
in various transactions effectuated electronically through the Mexican
Stock Exchange. Corporacion Durango and Administradora Corporativa y
Mercantil are owned by the Management Shareholders.
(3) Nacional Financiera, S.N.C. ("NAFIN") acts as trustee of Series A Shares,
represented by CPOs which are, in turn, represented by ADSs. See "Item 10.
Additional Information."
(4) Stock option plan covering certain officers of our company. See "Item 6.
Directors, Senior Management and Employees."
(5) Primarily Mexican public holders. In July 1996, we issued 7,068,190 Series
A Shares to the minority public shareholders of GIA, in exchange for their
GIA shares. As a result of this transaction, we received approval from the
Mexican National Banking and Securities Commission ("CNBV") to delist GIA
from the Mexican Stock Exchange.
(6) This figure includes 11,323 shares which are counted as part of the Stock
Option Trust, referred to above, and 176 shares which are included in the
"Others" item, referred to above.
A-49
Except as set forth above, we are not aware of any person who, directly or
indirectly, owns 5% or more of outstanding Series A Shares.
There has been no significant change in percentage ownership by any major
shareholder in the last three years other than the March 28, 2000 acquisition by
Corporacion Durango of 31,807,700 Series A Shares and the March 30, 2000
acquisition by Administradora Corporativa y Mercantil of 15,068,000 Series A
Shares.
Voting Trust
In July 1994, immediately prior to our initial public offering of Series A
Shares, the Management Shareholders contributed 31,807,700 Series A Shares owned
by them to a voting trust (the "Trust"). Prior to March 28, 2000, Banamex, the
trustee of the Trust, was the record holder of the Series A Shares contained
therein. The Trust was scheduled to expire on July 19, 2019. Under the Trust
agreement, Banamex exercised voting rights pertaining to the Series A Shares
contained therein according to the instructions of a technical committee
comprised of the Management Shareholders. The instructions to Banamex were
decided by members of the technical committee representing a majority of the
interest in such Series A Shares.
On March 28, 2000, the 31,807,700 Series A Shares owned by the Management
Shareholders and held in the Trust were acquired by Corporacion Durango. As a
result of the sale of the entire Series A Shares formerly held by the Management
Shareholders in the Trust, the Trust was terminated.
Related Party Transactions
From time to time, we enter into arm's length transactions with Grupo
Pipsamex, DPC and Lineas Aereas Ejecutivas de Durango, S.A. de C.V., owned and
controlled by the Rincon family, which are not considered material.
A-50
Item 8. Financial Information.
See Item 18. Financial Statements.
Legal Proceedings
We are party to various legal proceedings in the ordinary course of our
business. We do not expect any proceeding, if determined adversely against us,
individually or in the aggregate, to have a material adverse effect on the
results of our operations or our financial condition.
Dividend Policy
We do not intend to pay dividends on our capital stock, including the
Series A Shares. We have not paid any dividends in the past five years. The
declaration, amount and payment of dividends are determined by a majority vote
of the shareholders, including holders of the Series A Shares, at our annual
ordinary shareholders' meeting, generally on the recommendation of the board of
directors, and will depend on our results of operations, financial condition,
cash requirements, the ability of our subsidiaries to pay cash dividends to us,
future prospects and other factors deemed relevant by our shareholders. Our
ability to declare and pay dividends is presently restricted under the terms of
our long-term notes, which mature in 2003.
Significant Changes
No significant change has occurred since the date of the audited
consolidated financial statements included in the annual report.
Item 9. The Offer and Listing.
The Series A Shares are listed on the Mexican Stock Exchange. Since July
21, 1994, our American Depositary Shares ("ADSs") have been listed on the New
York Stock Exchange. The ADSs are issued by The Bank of New York, as depositary
(the "Depositary"). Each ADS represents two CPOs issued by NAFIN as trustee
(the "CPO Trustee") for a Mexican trust (the "CPO Trust"). Each CPO represents
a financial interest in one Series A Share held in the CPO Trust. The ADSs are
also quoted through the Stock Exchange Automated Quotation System ("SEAQ
International") of the London Stock Exchange.
It is not practicable for us to determine the proportion of ADSs
beneficially owned by U.S. persons.
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, located in Mexico City, is the only stock
exchange in Mexico. Founded in 1894, it ceased operation in the early 1900s and
was reestablished in 1907. The Mexican Stock Exchange is organized as a
corporation, the shares of which are held by 27 brokerage firms. The firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.
Trading on the Mexican Stock Exchange takes place principally through an
automated system called "Sistema Electronico de Negociacion de Transacciones,
Registro y Asignacion" (Electronic Exchange System for Registered or Assigned
Transactions, or "SENTRA"), between the hours of 8:30 a.m. and 3:00 p.m., Mexico
City time. Trades in securities listed on the Mexican Stock Exchange may,
subject to certain requirements, also be effected off the Mexican Stock
Exchange. Due primarily to tax considerations, however, most transactions in
listed Mexican securities are effected through the Mexican Stock Exchange. The
Mexican Stock Exchange operates a system of automatic suspension of trading in
shares of a particular issuer as a means of controlling excessive price
volatility. Under current regulations, such suspension procedures do not apply
to securities, such as the Series A Shares, that are directly or indirectly (for
example, through ADSs) quoted on a stock exchange or market quotation system
outside Mexico.
A-51
Settlement takes place two business days after a transaction involving the
purchase or sale of shares is completed on the Mexican Stock Exchange. Deferred
settlement, even if by mutual agreement, is not permitted without the approval
of the CNBV. Most securities traded on the Mexican Stock Exchange are on
deposit with S.D. Indeval, S.A. de C.V., Institucion para el Deposito de Valores
("Indeval"), a privately-owned central securities depositary that acts as a
clearinghouse, depositary, custodian, settlement, transfer and registration
institution for Mexican Stock Exchange transactions, thereby eliminating the
need for physical transfer of securities.
The Mexican Stock Exchange is one of Latin America's two largest exchanges
by market capitalization, but it remains relatively small and illiquid compared
to major world markets. In December 2000, the five largest traded equity issues
(measured by market capitalization) represented approximately 41% of the total
value of equity issues traded on the Mexican Stock Exchange. Although there is
substantial participation by the public in the trading of securities, a major
part of the activity of the Mexican Stock Exchange reflects transactions by
approximately 60 institutional investors. There is no formal over-the-counter
market for securities in Mexico.
Holders of ADSs have no voting rights with respect to the underlying CPOs
or Series A Shares. Voting rights with respect to the Series A Shares held in
the CPO Trust will be exercised by the CPO Trustee, which is required to vote
the underlying Series A Shares in the same manner as the majority of the Series
A Shares that are not so held and that are voted at the relevant shareholders'
meeting.
Our ADSs were listed on the New York Stock Exchange on July 21, 1994. The
following table sets forth the annual high and low market prices (in nominal
Pesos) for the Series A Shares as reported by the Mexican Stock Exchange for our
five most recent financial years:
High Low
---- ---
1996 48.50 38.80
1997 69.00 51.20
1998 30.00 22.00
1999 58.00 38.00
2000 48.00 31.00
The following table shows the annual high and low market prices per ADS (in
U.S. Dollars) as reported by the New York Stock Exchange for our five most
recent financial years:
High Low
---- ---
1996 12.875 9.750
1997 17.750 12.000
1998 5.500 4.060
1999 11.875 7.000
2000 6.063 5.938
A-52
The following table sets forth the quarterly high and low market prices (in
nominal Pesos) for the Series A Shares as reported by the Mexican Stock Exchange
for our two most recent full financial years and for the first quarter of 2001:
High Low
---- ---
1999
First Quarter 37.00 23.00
Second Quarter 51.00 36.00
Third Quarter 53.50 32.90
Fourth Quarter 58.00 38.00
2000
First Quarter 60.00 47.00
Second Quarter 51.00 38.00
Third Quarter 48.00 33.00
Fourth Quarter 48.00 31.00
2001
First Quarter 50.00 29.00
The following table shows the quarterly high and low market prices per ADS
(in U.S. Dollars) as reported by the New York Stock Exchange for our two most
recent full financial years and for the first quarter of 2001:
High Low
---- ---
1999
First Quarter 7.880 4.130
Second Quarter 10.688 7.375
Third Quarter 11.563 6.750
Fourth Quarter 11.875 7.000
2000
First Quarter 13.250 9.250
Second Quarter 9.500 9.375
Third Quarter 6.875 6.750
Fourth Quarter 6.063 5.938
2001
First Quarter 6.203 6.109
A-53
The following table sets forth the monthly high and low market prices (in
nominal Pesos) for the Series A Shares as reported by the Mexican Stock Exchange
for the most recent six months:
High Low
---- ---
May 2001 27.60 20.45
April 2001 26.00 21.10
March 2001 50.00 29.00
February 2001 50.00 29.20
January 2001 48.00 29.10
December 2000 48.00 31.00
The following table shows the monthly high and low market prices per ADS
(in U.S. Dollars) as reported by the New York Stock Exchange for the most recent
six months:
High Low
---- ---
May 2001 5.047 4.953
April 2001 5.297 5.156
March 2001 6.203 6.109
February 2001 6.250 6.047
January 2001 6.000 5.875
December 2000 6.063 5.938
Item 10. Additional Information.
Limitations Affecting ADS Holders
Holders of ADSs and CPOs have no voting rights with respect to the
underlying Series A Shares. Voting rights with respect to the Series A Shares
held in the CPO Trust are exercised by the CPO Trustee, which is required to
vote the underlying Series A Shares in the same manner as the majority of the
Series A Shares that are not so held and that are voted at the relevant meeting.
Mexican law places certain restrictions on non-Mexican ownership of the
common stock of Mexican companies. Our by-laws prohibit ownership of Series A
Shares by foreign investors. Any acquisition of Series A Shares in violation of
such provision would be null and void under Mexican law and such Series A Shares
would be canceled and our share capital accordingly reduced. Non-Mexican
nationals may, however, hold financial interests in shares through the CPOs
issued under the CPO Trust.
Whenever a shareholders' meeting approves a change of corporate purpose,
change of nationality or restructuring from one type of corporate form to
another, any shareholder who has voted against such change or restructuring has
the right to withdraw from the Company and receive an amount equal to the book
value of its shares (in accordance with our latest balance sheet approved by the
annual ordinary general meeting), provided such shareholder exercises its right
to withdraw during the 15-day period following the meeting at which such change
or restructuring was approved. Because the CPO Trustee is required to vote the
Series A Shares held in the CPO Trust in the same manner as the holders of a
majority of the Series A Shares that are not held in the CPO Trust and that are
voted at the relevant meeting, appraisal rights will not be available to holders
of CPOs or ADSs.
A-54
Exchange Controls
The Mexican government does not currently restrict the ability of Mexican
or foreign persons or entities to convert Pesos into U.S. Dollars or other
currencies, and vice versa. However, prior to 1991 some forms of exchange
control were in effect, and there can be no assurance that the Mexican
government will not reinstate a restrictive exchange control policy in the
future. The imposition of such a policy in the future might impair our ability
to obtain or transfer U.S. Dollars in respect of any interest and principal
payments due on our indebtedness, and it could also have a material adverse
effect on our business and financial condition.
Mexican Income Taxation
The following general summary of material Mexican tax consequences of the
purchase, ownership and disposition of Series A Shares, ADSs and CPOs is based
on the advice of White & Case, LLP. The tax treatment of a holder of the Series
A Shares or the Series A Shares represented by ADSs and CPOs may vary depending
upon the particular situation of the holder.
The following summary of the principal consequences under Mexican law, as
currently in effect, and of the Treaty (defined below) is limited to an
investment in CPOs and ADSs by a holder who is not a resident of Mexico and who
will not hold CPOs or ADSs or a beneficial interest therein in connection with
the conduct of a trade or business through a permanent establishment or fixed
base in Mexico (a "Foreign Holder"). For purposes of Mexican taxation, an
individual is a resident of Mexico if such person has established his or her
home in Mexico, unless such person has resided in another country for more than
183 days, whether consecutive or not, during a fiscal year and can demonstrate
that such person has become a resident of that country for tax purposes. A
legal entity is a resident of Mexico if its principal administrative office is
located in Mexico. A Mexican citizen or legal entity with its domicile in
Mexico and established under Mexican law is presumed to be a resident of Mexico
unless such person or entity can demonstrate the contrary. A permanent
establishment or fixed base of a non-Mexican person will be regarded as a
resident of Mexico, and such permanent establishment or fixed base will be
required to pay taxes in Mexico with respect to income attributable to such
permanent establishment or fixed base in accordance with applicable law.
This summary is based upon the tax laws and treaty obligations of Mexico as
in effect on the date of this annual report, which are subject to change.
Prospective purchasers of ADSs are urged to consult their own tax advisors as to
the Mexican or other tax consequences of the purchase, ownership and disposition
of Series A Shares or Series A Shares represented by ADSs and CPOs, including,
in particular, the effect of any foreign, state or local tax laws.
The United States and Mexico are parties to an income tax treaty and
accompanying protocol (the "Treaty") that generally became effective on January
1, 1994. In general, the Treaty does not have adverse effects on holders of
ADSs, Series A Shares or CPOs.
Taxation of Dividends
Under Mexico's Income Tax Law, dividends, either in cash or in kind, paid
with respect to Series A Shares underlying the CPOs and ADSs to a Foreign Holder
will be subject to a 5% Mexican withholding tax based on the amount of the
distributed dividend, multiplied by a factor of 1.5385, which produces a net
effect of approximately 7.7%. In accordance with rules issued by the Ministry
of Finance and Public Credit (Secretaria de Hacienda y Credito Publico), the
applicable factor is 1.515 for profits resulting from the previously tax net
earnings account (cuenta de utilidad fiscal neta or CUFIN) at December 31, 1999.
A Mexican corporation will not be subject to any tax if the amount maintained in
its previously reinvested taxed net earnings account (cuenta de utilidad fiscal
neta reinvertida or CUFINRE, required for corporations that have elected to
defect a portion of their income taxes) and CUFIN exceeds the dividend payment
to be made. However, corporations that have elected to defer their income taxes
are required to pay such deferred taxes by applying the rate of 5% (3% during
1999) to the amount of the dividend multiplied by a factor of 1.5385. Mexican
corporations must first exhaust the balance in their CUFINRE before they can
utilize CUFIN balances.
A-55
Taxation of Capital Gains
The sale or other disposition of ADSs by a Foreign Holder will not be
subject to Mexican tax. Deposits of CPOs in exchange for ADSs and withdrawals of
CPOs in exchange for ADSs will not give rise to Mexican tax or transfer duties.
The sale or other disposition of Series A Shares or CPOs by a Foreign
Holder will not be subject to any Mexican tax if the sale is carried out through
the Mexican Stock Exchange or other securities market approved by the Ministry
of Finance and Public Credit (Secretaria de Hacienda y Credito Publico). Sales
or other dispositions of Series A Shares or CPOs made in other circumstances
would be subject to Mexican tax, regardless of the nationality or residence of
the transferor. However, under the Treaty, a Foreign Holder that is eligible to
claim the benefits of the Treaty will be exempt from Mexican tax on gains
realized on a sale or other disposition of Series A Shares or CPOs in a
transaction that is not carried out through the Mexican Stock Exchange or such
other approved securities markets, so long as such holder did not own, directly
or indirectly, 25% or more of the outstanding shares of the Company (including
ADSs) within the 12-month period preceding such sale or other disposition.
Other Mexican Taxes
A Foreign Holder will not be liable for estate, gift, inheritance or
similar taxes with respect to its holdings of CPOs or ADSs; provided, however,
that gratuitous transfers of CPOs may in certain circumstances result in the
imposition of a Mexican federal gift tax upon the recipient. There are no
Mexican stamp, issue, registration or similar taxes payable by a Foreign Holder
with respect to the CPOs or ADSs.
United States Federal Income Taxation
The following is a summary of the principal United States federal income tax
consequences that may be relevant with respect to the acquisition, ownership and
disposition of Series A Shares or ADSs. This summary addresses only the United
States federal income tax considerations of holders that will hold Series A
Shares or ADSs as capital assets. This summary does not address tax
considerations applicable to holders that may be subject to special tax rules,
such as financial institutions, insurance companies, real estate investment
trusts, regulated investment companies, grantor trusts, dealers or traders in
securities or currencies, tax-exempt entities, persons that received Series A
Shares or ADSs as compensation for the performance of services, persons that
will hold Series A Shares or ADSs as part of a "hedging" or "conversion"
transaction or as a position in a "straddle" for United States federal income
tax purposes, persons that have a "functional currency" other than the U.S.
Dollar or holders that own (or are deemed to own) 10% or more (by voting power
or value) of the stock of the Company. Moreover, this summary does not address
the U.S. federal estate and gift or alternative minimum tax consequences of the
acquisition, ownership and disposition of Series A Shares or ADSs. This summary
(i) is based on the Internal Revenue Code of 1986, as amended (the "Code"),
United States Treasury Regulations and judicial and administrative
interpretations thereof, in each case as in effect and available on the date of
this annual report and (ii) is based in part on the representations of the
Depositary and the assumption that each obligation in the Deposit Agreement and
any related agreement will be performed in accordance with its terms. All of
the foregoing are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
The United States Treasury Department has expressed concern that depositaries
for American depositary receipts, or other intermediaries between the holders of
shares of an issuer and the issuer, may be taking actions that are inconsistent
with the claiming of United States foreign tax credits by United States holders
of such receipts or shares. Accordingly, the analysis regarding the sourcing
rules described below for United States foreign tax credit purposes could be
affected by future actions that may be taken by the United States Treasury
Department.
For purposes of this summary, a "United States Holder" is a beneficial owner
of Series A Shares or ADSs that, for United States federal income tax purposes,
is: (i) a citizen or resident of the United States, (ii) a partnership or
corporation created or organized in or under the laws of the United States or
any state thereof (including the District of Columbia), (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source or (iv) a trust if such trust validly elects to be treated as a
United States person for United States federal income tax purposes or if (x) a
court within the United States is able to exercise primary supervision
A-56
over its administration and (y) one or more United States persons have the
authority to control all of the substantial decisions of such trust. A
"Non-United States Holder" is a beneficial owner of Series A Shares or ADSs that
is not a United States Holder.
Each prospective purchaser should consult its own tax advisor with respect to
the United States federal, state, local and foreign tax consequences of
acquiring, owning or disposing of Series A Shares or ADSs.
Ownership of ADSs in General
For United States federal income tax purposes, a holder of ADSs generally
will be treated as the owner of the Series A Shares represented by such ADSs.
Distributions
Subject to the discussion below under "Passive Foreign Investment Company
Considerations", the gross amount of any distribution by the Company of cash or
property (other than certain distributions, if any, of Series A Shares
distributed pro rata to all shareholders of the Company, including holders of
ADSs) with respect to Series A Shares or ADSs, before reduction for any Mexican
taxes withheld therefrom, will be includible in income by a United States Holder
as dividend income to the extent such distributions are paid out of the current
or accumulated earnings and profits of the Company as determined under United
States federal income tax principles. Such dividends will not be eligible for
the dividends received deduction generally allowed to corporate United States
Holders. Subject to the discussion below under "Passive Foreign Investment
Company Considerations", to the extent, if any, that the amount of any
distribution by us exceeds our current and accumulated earnings and profits as
determined under United States federal income tax principles, it will be treated
first as a tax-free return of the United States Holder's adjusted tax basis in
the Series A Shares or ADSs and thereafter as capital gain. We do not maintain
calculations of our earnings and profits under United States federal income tax
principles.
Any such dividend paid in Pesos will be included in the gross income of a
United States Holder in an amount equal to the U.S. Dollar value of the Pesos on
the date of receipt. The amount of any distribution of property other than cash
will be the fair market value of such property on the date of distribution.
Dividends received by a United States Holder with respect to Series A Shares
or ADSs will be treated as foreign source income, which may be relevant in
calculating such holder's foreign tax credit limitation. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by us
generally will constitute "passive income", or, in the case of certain United
States Holders, "financial services income".
Subject to the discussion below under "Backup Withholding Tax and
Information Reporting Requirements," a Non-United States Holder of Series A
Shares or ADSs generally will not be subject to United States federal income or
withholding tax on dividends received on Series A Shares or ADSs, unless such
income is effectively connected with the conduct by such Non-United States
Holder of a trade or business in the United States.
Sale or Exchange of Series A Shares or ADSs
Subject to the discussion below under "Passive Foreign Investment Company
Considerations", a United States Holder generally will recognize gain or loss on
the sale or exchange of Series A Shares or ADSs equal to the difference between
the amount realized on such sale or exchange and the United States Holder's
adjusted tax basis in the Series A Shares or ADSs. Such gain or loss will be
capital gain or loss. In the case of a noncorporate United States Holder, the
maximum marginal United States federal income tax rate applicable to such gain
will be lower than the maximum marginal United States federal income tax rate
applicable to ordinary income if such United States Holder's holding period for
such Series A Shares or ADSs exceeds one year and will be further reduced if
such holding period exceeds five years. Gain or loss, if any, recognized by a
United States Holder generally will be treated as United States source income or
loss for United States foreign tax credit purposes. The deductibility of
capital losses is subject to limitations.
A-57
The initial tax basis of Series A Shares to a United States Holder will be
the U.S. Dollar value of any Peso-denominated purchase price determined on the
date of purchase. If the Series A Shares are treated as traded on an
"established securities market," a cash basis United States Holder (or, if it
elects, an accrual basis United States Holder) will determine the dollar value
of the cost of such Series A Shares by translating the amount paid at the spot
rate of exchange on the settlement date of the purchase. The conversion of U.S.
Dollars to Pesos and the immediate use of that currency to purchase Series A
Shares generally will not result in taxable gain or loss for a United States
Holder.
With respect to the sale or exchange of Series A Shares, the amount
realized generally will be the U.S. Dollar value of the payment received
determined on (i) the date of receipt of payment in the case of a cash basis
United States Holder and (ii) the date of disposition in the case of an accrual
basis United States Holder. If the Series A Shares are treated as traded on an
"established securities market," a cash basis taxpayer (or, if it elects, an
accrual basis taxpayer) will determine the U.S. Dollar value of the amount
realized by translating the amount received at the spot rate of exchange on the
settlement date of the sale.
Subject to the discussion below under "Backup Withholding Tax and Information
Reporting Requirements," a Non-United States Holder of Series A Shares or ADSs
generally will not be subject to United States federal income or withholding tax
on any gain realized on the sale or exchange of such Series A Shares or ADSs
unless (i) such gain is effectively connected with the conduct by such Non-
United States Holder of a trade or business in the United States or (ii) in the
case of any gain realized by an individual Non-United States Holder, such holder
is present in the United States for 183 days or more in the taxable year of such
sale or exchange and certain other conditions are met.
Passive Foreign Investment Company Considerations
A Non-United States corporation will be classified as a "passive foreign
investment company" (a "PFIC") for U.S. federal income tax purposes in any
taxable year in which, after applying certain look-through rules, either (i) at
least 75% of its gross income is "passive income" or (ii) at least 50% of the
gross value of its assets is attributable to assets that produce "passive
income" or are held for the production of passive income. Passive income for
this purpose generally includes dividends, interest, royalties, rents and gains
from commodities and securities transactions.
Based on certain estimates of our gross income and gross assets and the
nature of our business, we believe that we will not be classified as a PFIC for
the taxable year ended December 31, 2000. Our status in future years will
depend on our assets and activities in those years. We have no reason to
believe that our assets or activities will change in a manner that would cause
us to be classified as a PFIC. If we were a PFIC, a United States Holder of
Series A Shares or ADSs generally would be subject to imputed interest charges
and other disadvantageous tax treatment with respect to any gain from the sale
or exchange of, and certain distributions with respect to, the Series A Shares
or ADSs.
If we were a PFIC, a United States Holder of Series A Shares or ADSs could
make a variety of elections that may alleviate the tax consequences referred to
above, and one of these elections may be made retroactively. However, it is
expected that the conditions necessary for making certain of such elections will
not apply in the case of the Series A Shares or ADSs. United States Holders
should consult their own tax advisors regarding the tax consequences that would
arise if we were treated as a PFIC.
A-58
Backup Withholding Tax and Information Reporting Requirements
United States backup withholding tax and information reporting requirements
generally apply to certain payments to certain noncorporate holders of stock.
Information reporting generally will apply to payments of dividends on, and to
proceeds from the sale or redemption of, Series A Shares or ADSs made within the
United States to a holder of Series A Shares or ADSs (other than an "exempt
recipient", including a corporation, a payee that is not a United States person
that provides an appropriate certification and certain other persons). A payor
will be required to withhold 31% of any payments of dividends on, or the
proceeds from the sale or redemption of, Series A Shares or ADSs within the
United States to a holder (other than an "exempt recipient") if such holder
fails to furnish its correct taxpayer identification number or otherwise fails
to comply with, or establish an exemption from, such backup withholding tax
requirements. Under recently enacted legislation, the backup withholding tax
rate of 31% will be reduced as of August 7, 2001 to 30.5%. Such rate will be
further reduced to 30% for years 2002 and 2003, 29% for years 2004 and 2005 and
28% for 2006 and thereafter.
In the case of such payments made within the United States to a foreign
simple trust, a foreign grantor trust or a foreign partnership (other than
payments to a foreign simple trust, a foreign grantor trust or a foreign
partnership that qualifies as a "withholding foreign trust" or a "withholding
foreign partnership" within the meaning of such United States Treasury
Regulations and payments to a foreign simple trust, a foreign grantor trust or a
foreign partnership that are effectively connected with the conduct of a trade
or business in the United States), the beneficiaries of the foreign simple
trust, the persons treated as the owners of the foreign grantor trust or the
partners of the foreign partnership, as the case may be, will be required to
provide the certification discussed above in order to establish an exemption
from backup withholding tax and information reporting requirements. Moreover, a
payor may rely on a certification provided by a payee that is not a United
States person only if such payor does not have actual knowledge or a reason to
know that any information or certification stated in such certificate is
incorrect.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL
TAX CONSEQUENCES RELATING TO ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
SERIES A SHARES OR ADSs. PROSPECTIVE PURCHASERS OF SHARES OR ADSs SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF THEIR
PARTICULAR SITUATIONS.
Documents on Display
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file reports
and other information with the United States Securities and Exchange Commission.
These materials, including this annual report and the exhibits thereto, may be
inspected and copied at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, New York, New York 10048. Copies of the materials may be obtained from
the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information
on the operation of the Commission's Public Reference Room by calling the
Commission in the United States at 1-800-SEC-0330. The Commission also
maintains a web site at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission. In addition, material submitted by us can be inspected at
the offices of the New York Stock Exchange at 20 Broad Street, New York, New
York 10005.
Our by-laws (estatutos sociales), duly translated into English, were filed
with the United States Securities and Exchange Commission with our Form F-1
Registration Statement (Registration No. 33-80148) filed on July 8, 1994. A
summary of the material provisions of our by-laws may be found in the
aforementioned Form F-1 Registration Statement. Except for an amendment adopted
on April 26, 2001 regarding our Audit Committee, Compensation and Evaluation
Committee and our Finance and Planning Committee, there have been no changes to
our by-laws since our F-1 filing of July 8, 1994. A duly translated copy of the
April 26, 2001 Amendment to our by-laws is included herein as Exhibit 1.1.
A-59
Material Contracts
Asset and Inventory Purchase Agreement and Lease in the amount of
US$7,659,000 plus value added tax, by and between Celulosa Avicola de
Tepatitlan, S.A. de C.V. and Envases y Empaques de Mexico, S.A. de C.V., dated
as of July 31, 2000. Under the terms of the agreement, we acquired a corrugated
container plant in Jalisco having an aggregate capacity of 50,000 short tons,
which has allowed us to expand our packaging segment.
Enforceability of Civil Liabilities
We are a corporation organized under the laws of Mexico. In addition, most of
our directors, officers and controlling persons, as well as experts named in
this annual report reside outside the United States, and all or a substantial
portion of their assets and the assets of our company are located in Mexico. As
a result, it may be difficult for investors to effect service of process within
the United States upon these persons or to enforce against them, either inside
or outside the United States, judgments obtained against these persons in U.S.
courts, or to enforce in U.S. courts judgments obtained against these persons in
courts in jurisdictions outside the United States, in each case, in any action
predicated upon civil liabilities under the U.S. federal securities laws. Based
on the opinion of White & Case S.C., our Mexican counsel, there is doubt as to
the enforceability against these persons in Mexico, whether in original actions
or in terms for enforcement of judgments of U.S. courts, of liabilities
predicated solely upon the U.S. federal securities laws.
Item 11. Quantitative and Qualitative Disclosure about Market Risk.
We periodically review our exposure to risks arising from fluctuations in
interest rates and foreign exchange and determine at the senior management level
how to manage these risks. We do not have a derivatives trading portfolio. We
have not entered into market risk sensitive instruments for speculative
purposes. See Note 10 to our audited consolidated financial statements.
Interest Rate Risk
We face primary market risk exposure mostly due to interest rate risk. Of
our long-term interest-bearing debt at December 31, 2000, 82% was fixed rate and
18% was variable rate. Substantially all of the long-term debt is denominated in
U.S. Dollars. As a result, depreciation of the Peso will result in increases in
our interest expense in Peso terms. Variable rate long-term debt denominated in
U.S. Dollars bears interest at rates tied to the London interbank offered rate,
or "LIBOR", the rate that banks in the London interbank market offer for U.S.
Dollar deposits of varying maturities. In the past, we have entered into
derivatives contracts for the purpose of hedging interest rate risk on this
long-term debt, yet at December 31, 2000 we had no open contracts of this
nature.
The following table summarizes our debt obligations, which include capital
market bonds, bank loans and leasings, and derivative instruments held by us at
December 31, 2000. The table presents payment obligations in thousands of Pesos
by maturity date and the related weighted-average interest rates. U.S. Dollar-
denominated liabilities and notional amounts have been converted to Pesos based
on the exchange rate at December 31, 2000, which was US$1.00 = Ps 9.6098.
A-60
Liabilities 2001 2002 2003
2004 Thereafter Total Fair Value
----------------------------------------- ------- ------- ---------
------- ---------- --------- ----------
Long-Term Debt
Fixed Rate:
$-denominated........................ -- 48,783 2,467,494
65,044 1,474,014 4,055,335 3,967,542
Weighted-average interest rate....... -- 12.82% 12.85%
12.50% 12.62%
Variable Rate:
$-denominated........................ -- 411,556 234,640
230,801 116,653 993,650 1,201,101
Weighted-average interest rate....... -- 8.45% 8.36%
8.27% 8.24%
Short-Term Debt
Variable Rate:
$-denominated........................ 383,402
383,402 383,402
Weighted-average interest rate....... 8.73%
Foreign Currency Exchange Rate Risk
Since substantially all of our long-term interest-bearing debt is denominated
in U.S. Dollars, the interest expense varies with exchange rate movements
between the Peso and the U.S. Dollar. We have not entered into any derivative
contracts to limit the exposure to exchange rate fluctuations. Although prices
for our products in Mexico are quoted in Pesos, prices are linked to U.S.
Dollars. We believe that this link mitigates in part the effect of exchange rate
fluctuations between the U.S. Dollar and the Peso.
The table set forth above summarizes our debt obligations which are sensitive
to foreign currency exchange rates at December 31, 2000. The table presents
principal payment obligations in thousands of Pesos by maturity date for U.S.
Dollar-denominated debt.
Equity Derivative Contract
During 1997, we entered into an equity share swap transaction relating to our
ADSs with a major U.S. bank at an average price of $11.79 per ADS. We pay a
rate of LIBOR plus 2.95% semiannually on the swap and recognize gains or losses
to the extent that the gain or loss in ADS price is above or below the initial
purchase price. As a result of the drop in the per share price of our ADSs,
during 2000, we had a book loss of Ps 75.5 million on the equity swap. At May
31, 2001, we had recognized a loss of Ps 11.7 million due to the drop in the per
share price of our ADSs, from US$6.062 per ADS at December 31, 2000 to US$5.000
per ADS at May 31, 2001.
At December 31, 2000, the swap agreement had a notional amount of Ps 127
million, a weighted-average price paid of US$11.79 per ADS and a weighted-
average price received of US$11.875 per ADS.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
None.
Item 15. [Reserved].
A-61
Item 16. [Reserved].
PART III
Item 17. Financial Statements.
Not applicable.
Item 18. Financial Statements.
See pages F-1 to F-52, incorporated herein by reference.
A-62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Grupo Industrial Durango, S.A. de C.V.
Page
----
Reports of independent accountants
F-2
Consolidated balance sheets as of December 31, 1999 and 2000
F-3
Consolidated statements of income for the years ended December 31, 1998, 1999,
and 2000........................................................................
F-4
Consolidated statements of changes in stockholders' equity for the years ended
December 31, 1998, 1999 and 2000................................................
F-5
Consolidated statements of changes in financial position for the years ended
December 31, 1998, 1999 and 2000................................................
F-6
Notes to the consolidated financial statements..................................
F-7
A-63
Report of Independent Accountants
To the Board of Directors and Stockholders of
Grupo Industrial Durango, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Grupo Industrial
Durango, S.A. de C.V. and its subsidiaries (collectively, the "Company") as of
December 31, 1999 and 2000, and the related consolidated statements of income,
of changes in stockholders' equity and of changes in financial position for each
of the three years then ended which, as described in Note 2, have been prepared
on the basis of accounting principles generally accepted in Mexico. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico and the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As mentioned in Note 3n, to the financial statements, effective on January 1,
2000, the Company adopted the guidelines of amended Bulletin D-4, "Accounting
Treatment for Income Tax, Tax on Assets and Employee Statutory Profit-Sharing."
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grupo Industrial
Durango, S.A. de C.V. and its subsidiaries at December 31, 1999 and 2000, and
the consolidated results of their operations, the changes in their stockholders'
equity and in their financial position for the years then ended in conformity
with accounting principles generally accepted in Mexico.
Generally accepted accounting principles in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles generally accepted in the
United States of America would have affected the determination of consolidated
net income for the years ended December 31, 1998, 1999 and 2000 and the
determination of consolidated stockholders' equity as of December 31, 1999 and
2000, to the extent summarized in Note 20 to the consolidated financial
statements.
PricewaterhouseCoopers
/S/Rafael Maya
Rafael Maya U., C.P.
Mexico, D.F.
April 16, 2001, except for Note 20,
as to which the date is June 22, 2001
A-64
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
-------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1999 AND 2000
--------------------------------
(Notes 1, 2 and 3)
------------------
(Thousands of constant pesos in purchasing power as of December 31, 2000)
-------------------------------------------------------------------------
ASSETS
1999
2000
--------------------- --------------------
CURRENT ASSETS:
Cash and temporary investments $ 693,036
$ 620,120
Accounts receivable, net (Note 5) 1,322,513
1,234,041
Affiliated companies (Note 16) 12,445
56,106
Taxes recoverable and other assets 49,007
6,804
Inventories, net (Note 6) 1,197,078
1,050,879
Prepaids 6,320
4,636
--------------------- --------------------
TOTAL CURRENT ASSETS 3,280,399
2,972,586
PROPERTY, PLANT AND EQUIPMENT,
net (Note 7) 9,532,677
9,300,698
OTHER ASSETS (Note 8) 325,856
336,286
--------------------- --------------------
TOTAL ASSETS $ 13,138,932
$ 12,609,570
===================== ====================
LIABILITIES
1999 2000
--------------------- ----------------------
CURRENT LIABILITIES:
Bank loans and debt
$ 3,122 $ 6,439
Short-terms debt (Note 9)
144,147
Interest payable
339,605 256,029
Current portion of
long-term debt (Note 9)
144,914 232,816
Trade accounts payable
730,371 582,667
Notes payable
232,334 26,285
Affiliated companies (Note 16)
3,755 5,570
Accrued liabilities and other payables
183,487 217,797
Employee profit-sharing
5,715 7,242
===================== ======================
TOTAL CURRENT LIABILITIES
1,643,303 1,478,992
LONG-TERM LIABILITIES:
Long -term debt (Note 9)
5,621,185 5,048,985
Notes payable
17,119 37,485
Derivate instruments (Note 10)
467 64,043
Deferred tax (Note 15)
- 2,390,589
Pension plans and senority
premiums (Note 11)
198,371 206,121
Contingencies and commitments (Nota 12)
- -
--------------------- ----------------------
TOTAL LIABILITIES
7,480,445 9,226,215
--------------------- ----------------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (NOTE 13)
808,741 808,142
RESTATEMENT OF CAPITAL STOCK
2,878,430 2,878,430
--------------------- ----------------------
3,687,171 3,686,572
--------------------- ----------------------
ADDITIONAL PAID-IN CAPITAL
1,227,998 1,152,476
--------------------- ----------------------
RETAINED EARNINGS (Notes 13 and 14):
3,411,504 3,801,102
--------------------- ----------------------
DEFICIT FROM RESTATEMENT
(2,736,302) (3,057,793)
--------------------- ----------------------
DEFFERED TAX
- (2,239,034)
--------------------- ----------------------
CUMULATIVE TRANSLATION ADJUSTMENT
OF FOREIGN SUBSIDIARIES
4,788 5,138
--------------------- ----------------------
TOTAL MAJORITY INTEREST
5,595,159 3,348,461
TOTAL MINORITY INTEREST
63,328 34,894
--------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY
5,658,487 3,383,355
--------------------- ----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 13,138,932 $ 12,609,570
===================== ======================
The accompanying notes are an integral part of these financial statements.
A-65
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
-------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
----------------------------------------------------
(Notes 1, 2 and 3)
------------------
(Thousands of constant pesos in purchasing power as of December 31, 2000, except
--------------------------------------------------------------------------------
shares and per share amount)
----------------------------
1998
1999 2000
-----------
----------- -----------
NET SALES $ 6,036,360 $
5,832,004 $ 6,075,007
COSTS OF SALES 4,487,144
4,308,025 4,552,961
-----------
----------- -----------
GROSS PROFIT 1,549,216
1,523,979 1,522,046
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 421,107
431,363 437,407
-----------
----------- -----------
OPERATING INCOME 1,128,109
1,092,616 1,084,639
-----------
----------- -----------
OTHER INCOME (EXPENSE), Net 67,244
(56,210) (31,890)
-----------
----------- -----------
FINANCING COST (RESULT):
Interest expense 859,215
766,142 700,367
Interest income (114,693)
(86,016) (94,146)
Foreign exchange loss (gain), net 1,190,612
(264,013) 74,477
Gain from monetary position (857,472)
(617,039) (414,226)
-----------
----------- -----------
1,077,662
(200,926) 266,472
-----------
----------- -----------
INCOME BEFORE PROVISIONS FOR INCOME
AND ASSET TAXES, EMPLOYEE PROFIT
SHARING TAX LOSS CARRY FORWARDS
AND MINORITY INTEREST 117,691
1,237,332 786,277
-----------
----------- -----------
INCOME AND ASSET TAXES (Note 15) (15,151)
(161,708) (229,487)
EMPLOYEE PROFIT SHARING (11,621)
(5,802) (6,884)
DEFFERED TAX (Note 15 )
(161,821)
-----------
----------- -----------
(26,772)
(167,510) (398,192)
TAX LOSS CARRY FORWARDS (Note 15) 7,341
32,510 --
-----------
----------- -----------
NET INCOME BEFORE MINORITY
INTEREST 98,260
1,102,332 388,085
MINORITY INTEREST (10,979)
2,994 (1,513)
-----------
----------- -----------
NET INCOME $ 109,239 $
1,099,338 $ 389,598
===========
=========== ===========
Net income per share $ 2.04
20.41 7.23
===========
=========== ===========
Weighted average shares
outstanding (000's) 53,679
53,858 53,875
===========
=========== ===========
The accompanying notes are an integral part of these financial statements.
A-66
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
-------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
----------------------------------------------------
(Notes 1 ,2 and 3)
------------------
(Thousands of constant pesos in purchasing power as of December 31, 2000)
-------------------------------------------------------------------------
Additional
Capital
stock (Note13): paid-in
------------------------------------------------
Nominal
Restatement capital
-----------------------
--------------------- ---------------------
Balances at January 1, 1998 $805,830
$2,877,865 $1,275,016
Appropriation of 1997 net income
Cumulative translation adjustment of
foreign subsidiaries
Loss on operations on own shares
(116,930)
Recognition of the efects of inflation
in financial information
Net income
-----------------------
--------------------- ---------------------
Balances as of December 31, 1998 $805,830
$2,877,865 $1,158,086
Increase in capital 2,911
565
Increase in legal reserve
Appropriation of 1998 net income
Cumulative translation adjustment of
foreign subsidiaries
Gain on operations on own shares
69,912
Recognition of the efects of inflation
in financial information
Net income
-----------------------
--------------------- ---------------------
Balances as of December 31, 1999 $808,741
$2,878,430 $1,227,998
Decrease in capital (599)
Increase in legal reserve
Appropriation of 1999 net income
Cumulative translation adjustment of
foreign subsidiaries
Loss on operations on own shares
(75,522)
Recognition of the efects of inflation
in financial information
Deferred tax
Net income
-----------------------
--------------------- ---------------------
Balances as of December 31, 2000 $808,142
$2,878,430 $1,152,476
=======================
===================== =====================
Retained earnings (Notes 13 and 14):
------------------------------------------------------------------------
Legal
Prior Current
reserve
years year
-------------------
---------------------- -----------------------
Balances at January 1, 1998 $145,847
$1,075,182 $981,898
Appropriation of 1997 net income
981,898 (981,898)
Cumulative translation adjustment of
foreign subsidiaries
Gain on operations on own shares
Recognition of the efects of inflation
in financial information
Net income
109,239
-------------------
---------------------- -----------------------
Balances as of December 31, 1998 $145,847
$2,057,080 $109,239
Increase in capital
Increase in legal reserve 6,460
(6,460)
Appropriation of 1998 net income
102,779 (102,779)
Cumulative translation adjustment of
foreign subsidiaries
Gain on operations on own shares
Recognition of the efects of inflation
in financial information
Net income
1,099,338
-------------------
---------------------- -----------------------
Balances as of December 31, 1999 $152,307
$2,159,859 $1,099,338
Decrease in capital
Increase in legal reserve 19,255
(19,255)
Appropriation of 1999 net income
1,080,083 (1,080,083)
Cumulative translation adjustment of
foreign subsidiaries
Loss on operations on own shares
Recognition of the efects of inflation
in financial information
Deferred tax
Net income
389,598
-------------------
---------------------- -----------------------
Balances as of December 31, 2000 $171,562
$3,239,942 $389,598
===================
====================== =======================
Cumulative
translation
adjustment
Deficit from
Deferred of foreign
restatement
Tax subsidiaries
-------------------------- --------------------- -------------------
Balances at January 1, 1998
($1,613,764) $ - $101,764
Appropriation of 1997 net income
Cumulative translation adjustment of
foreign subsidiaries
(97,969)
Gain on operations on own shares
Recognition of the efects of inflation
in financial information
150,788
Net income
-------------------------- --------------------- -------------------
Balances as of December 31, 1998
($1,462,976) $ - $3,795
Increase in capital
Increase in legal reserve
Appropriation of 1998 net income
Cumulative translation adjustment of
foreign subsidiaries
993
Gain on operations on own shares
Recognition of the efects of inflation
in financial information
(1,273,326)
Net income
-------------------------- --------------------- -------------------
Balances as of December 31, 1999
($2,736,302) $ - $4,788
Decrease in capital
Increase in legal reserve
Appropriation of 1999 net income
Cumulative translation adjustment of
foreign subsidiaries
350
Loss on operations on own shares
Recognition of the efects of inflation
in financial information
(277,519)
Deferred tax
(43,972) (2,239,034)
Net income
-------------------------- --------------------- -------------------
Balances as of December 31, 2000
($3,057,793) ($2,239,034) $5,138
========================== ===================== ===================
Total
Total
majority
Minority stockholder's
interest
interest equity
---------------------
---------------------- --------------------------
Balances at January 1, 1998 5,649,638
$113,062 $5,762,700
Appropriation of 1997 net income
Cumulative translation adjustment of
foreign subsidiaries (97,969)
(97,969)
Gain on operations on own shares (116,930)
(116,930)
Recognition of the efects of inflation
in financial information 150,788
24,945 175,733
Net income 109,239
(10,973) 98,266
---------------------
---------------------- --------------------------
Balances as of December 31, 1998 $5,694,766
$127,034 $5,821,800
Increase in capital 3,476
3,476
Increase in legal reserve
Appropriation of 1998 net income
Cumulative translation adjustment of
foreign subsidiaries 993
993
Gain on operations on own shares 69,912
69,912
Recognition of the efects of inflation
in financial information (1,273,326)
(66,700) (1,340,026)
Net income 1,099,338
2,994 1,102,332
---------------------
---------------------- --------------------------
Balances as of December 31, 1999 $5,595,159
$63,328 $5,658,487
Decrease in capital (599)
(599)
Increase in legal reserve
Appropriation of 1999 net income
Cumulative translation adjustment of
foreign subsidiaries 350
350
Loss on operations on own shares (75,522)
(75,522)
Recognition of the efects of inflation
in financial information (277,519)
(26,921) (304,440)
Deferred tax (2,283,006)
(2,283,006)
Net income 389,598
(1,513) 388,085
---------------------
---------------------- --------------------------
Balances as of December 31, 2000 $3,348,461
$34,894 $3,383,355
=====================
====================== ==========================
The accompanying notes are an integral part of
these consolidated financial statements.
A-67
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
-------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
--------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
----------------------------------------------------
(Notes 1, 2 and 3)
------------------
(thousands of constant pesos in purchasing power as of December 31, 2000 )
--------------------------------------------------------------------------
1998 1999 2000
----------- ----------- -----------
OPERATING ACTIVITIES:
Net income before minority interest
$ 98,260 $ 1,102,332 $ 388,085
Items recognized in income
not (generating) or requiring
the use of resources:
Depreciation and amortization
334,107 323,878 295,139
Amortization of negative goodwill
(272,501) -- --
Deferred tax
-- -- 161,821
Other
265,783 88,965 77,930
----------- ----------- -----------
425,649 1,515,175 922,975
Changes in operating assets and liabilities:
(Increase) decrease in account receivables
(224,581) (49,836) 119,827
Decrease (increase) in inventories
65,092 (377,963) 146,199
Decrease (increase) in other assets
-- 18,424 (31,129)
Increase (decrease) in other accounts payable and
21,423 226,860 (210,605)
accrued expenses
----------- ----------- -----------
Resources generated by
operating activities
287,583 1,332,660 947,267
----------- ----------- -----------
FINANCING ACTIVITIES:
Bank loans
516,650 -- 214,733
Payment of bank loans
-- (481,248) (96,098)
Long term debt, net
515,005 (1,113,806) (732,047)
Paid in capital
-- 3,476 (599)
Derivative instruments
116,936 14,611 (12,514)
----------- ----------- -----------
Resources generated by (used in)
financing activities
1,148,591 (1,576,967) (626,525)
----------- ----------- -----------
INVESTING ACTIVITIES:
Property, plant and equipment, net
(962,376) (107,319) (327,837)
Investment in subsidiaries
(8,758) -- --
Other assets
(21,941) (6,220) (65,821)
Decrease in minority interest
(13,968) (63,695) --
----------- ----------- -----------
Resources used in
investing activities
(1,007,043) (177,234) (393,658)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND TEMPORARY INVESTMENTS
429,131 (421,541) (72,916)
CASH AND TEMPORARY INVESTMENTS
AT THE BEGINNING OF THE YEAR
685,446 1,114,577 693,036
----------- ----------- -----------
CASH AND TEMPORARY INVESTMENTS
AT THE END OF THE YEAR
1,114,577 $ 693,036 $ 620,120
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
A-68
GRUPO INDUSTRIAL DURANGO, S. A. DE C. V. AND SUBSIDIARIES
---------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
AT DECEMBER 31, 1999 AND 2000
-----------------------------
Thousands of constant Mexican pesos as of December 31, 2000
------------------------------------------------------------
NOTE 1 - ENTITY AND CORPORATE PURPOSE
-------------------------------------
Since March 31, 2000, Grupo Industrial Durango, S. A. de C. V. ("GIDUSA" or
the "Group") is a majority-owned subsidiary of Corporacion Durango, S.A. de
C.V. as a result of a series of acquisition of its Series "A" shares. GIDUSA
is a Mexican corporation whose subsidiaries are engaged in the manufacturing,
distribution and marketing of packaging material (corrugated containers,
molded pulp and multi-wall sacks and bags), paper (kraft and semi-kraft) and
forest products (plywood, particleboard and lumber) in Mexico and in the
United States of America. GIDUSA and its subsidiaries are herein referred to
as the Group.
NOTE 2 - BASES FOR PRESENTATION AND CONSOLIDATION
--------------------------------------------------
a. Monetary Unit
Amounts in the consolidated financial statements and footnotes thereto are
stated in thousands of Mexican pesos (except shares and per share amounts),
the currency in which the Group keeps its accounting records, in conformity
with corresponding laws . In these financial statements, references to "$"
are to Mexican pesos and references to "US$" are to U.S. dollars.
b. Basis of presentation
The consolidated financial statements of the Group have been prepared in
conformity with generally accepted accounting principles in Mexico "Mexican
GAAP", as promulgated by issued by the Mexican Institute of Public
Accountants "MIPA". A reconciliation from Mexican GAAP to generally accepted
accounting principles in the United States of America (US GAAP) is included
in Note 20.
Additionally, Bulletin A-8, " Supplementary Application of International
Accounting Standards" states that where Mexican GAAP does not provide
guidance, International Accounting Standards must be applied.
A-69
c. Consolidated financial statements
The consolidated financial statements include the assets, liabilities and
results of the subsidiaries in which the Group holds over 51% of common stock
and exercises control over operating and financial activities.
The audited financial statements of subsidiaries were used as the basis for
consolidation.
Intercompany balances and transactions have been eliminated for purposes of
consolidation.
The following is a list of the operating segments and principal subsidiaries
along with the activities in which they are engaged:
Packaging
---------
Manufacturing and marketing of corrugated container, molded pulp and multi-wall
sacks and bags
Empaques de Carton Titan, S. A. de C. V. and subsidiaries
Durango International, Inc. and subsidiaries
Paper
-----
Manufacturing and marketing of kraft and semi-kraft paper, produced from natural
or recycled fiber
Compania Industrial de Atenquique, S. A. de C. V.
Industrias Centauro, S.A. de C.V.
Forest products
---------------
Manufacturing and selling of lumber, plywood and particleboard
Ponderosa Industrial de Mexico, S. A. de C. V.
d. Corporate re-organization
During 1999, in order to optimize its corporate, legal, operational and
administrative structure, GIDUSA merged some of its subsidiaries. These
subsidiaries had been under common control; and therefore , there were no
changes in the amounts recorded for assets and liabilities.
NOTE 3 - ACCOUNTING POLICIES
----------------------------
A-70
The significant accounting policies followed by the Group and used in the
preparation of these consolidated financial statements are summarized below:
a. Use of estimates
The preparation of the financial statements in conformity with Mexican GAAP
requires that the Group's management make estimates and assumptions which
affect the amounts recorded for assets and liabilities; and disclose the
contingencies for assets and liabilities at the date of the financial
statements and the amounts for income and expenses during these years.
However, actual results may differ from those estimates.
b. Recognition of the effects of inflation
The consolidated financial statements of the Group's have been prepared in
accordance conformity with Bulletin B-10 ,"Effects of Inflation on
Financial Information" and its amendments thereof, issued by the MIPA.
Bulletin B-10 requires restatement of all financial statements items to
Mexican pesos of the most current purchasing power.
For comparative purposes, the consolidated financial statements presented
herein have been restated to Mexican pesos with purchasing power as of
December 31, 2000, as follows:
. The financial statements of Mexican holding companies and subsidiaries
have been restated to pesos as of December 31, 2000 by applying to the
year-end balances of constant pesos an inflation factor of 8.95%, for
the year ended 1999. The Inflation factor is derived from the National
Consumer Price Index ("NCPI"), published by Banco de Mexico (the
Central Bank of Mexico).
. The financial statements for the years ended December 31, 1998 and
1999 of foreign subsidiaries have been restated to pesos as of
December 31, 2000, by applying to the year-end foreign currency
balances the General Consumer Price Index ("GCPI") of the foreign
country in which the subsidiary operates and by applying the exchange
rate as of December 31, 2000.
A-71
The following items are the results of the recognition of the effects of
inflation on the financial information:
i) Financing cost:
Represents the cost (result) of financing in periods of inflation,
consisting of net interest costs, net exchange gains or losses and
gain or loss from monetary position, which represents the effects of
inflation, as measured by the NCPI, on the Group's monetary assets
and liabilities at the beginning of each month. If monetary
liabilities are exceed monetary assets, there is a resulting loss
from monetary position.
Foreign exchange gains or losses are calculated by translating
assets and liabilities denominated in foreign currencies at the
exchange rates in effect at each balance sheet date and are credited
or charged to income.
ii) Deficit from restatement:
An element of stockholders' equity, which through December 31, 1996,
includes the excess (deficit) from holding non-monetary assets, as
measured by the increase or decrease in the replacement cost of such
assets in excess or below the increase attributable to inflation as
measured by the NCPI. Effective January 1, 1997, the balance in the
excess (deficit) from the restatement account is restated by
applying the NCPI and is increased or decreased to the extent that
the specific index restatement of non-monetary assets is greater, or
less, than the increase attributable to inflation as measured by the
NCPI.
iii) Restatement of non-monetary assets:
- Property, plant, equipment and depreciation are restated by
applying factors derived from the NCPI to the historical cost,
except for machinery and equipment of foreign origin, which are
restated by applying factors derived from the general inflation
index of the country of origin to the corresponding foreign
currency amounts and translating those amounts to Mexican pesos at
the prevailing exchange rate at the balance-sheet date (i.e.
"Specific Index" method). Historical cost is the replacement cost
as determined by independent appraisers as of December 31, 1996.
- Comprehensive integral results are capitalized on qualifying assets
under construction. During 1998,1999 and 2000, the Group did not
capitalize comprehensive integral results.
- Depreciation is calculated based on the assets' estimated useful
lives and production capacity according to the estimates made by
management.
A-72
- Inventories are valued at average cost, which does not exceed
market value. The average cost approximates the last purchase price
or production cost.
- Cost of sales is determined on the estimated replacement value as
of the date on which sales were made.
iv) Restatement of stockholders' equity:
The capital stock, retained earnings and additional paid-in-capital
accounts include the effect from restatement, determined by applying
the NCPI factor from the date when capital was contributed and from
the year in which the results were determined, respectively. The
restatements represent the amount required to maintain the
contributions and accumulated results in constant Mexican pesos as
of December 31, 2000.
v) Statements of changes in financial position:
Bulletin B-12, "Statement of Changes in Financial Position"
("Bulletin B-12"), issued by the MIPA, addresses the appropriate
presentation of the statement of changes in financial position where
financial statements have been restated to constant Mexican pesos as
of the latest balance sheet date. Bulletin B-12 identifies the
generation and application of resources representing differences
between beginning and ending balances of the balance sheets in
constant Mexican pesos, excluding the effect from holding non-
monetary assets. Bulletin B-12 also requires that monetary position
and foreign exchange gains (losses) are excluded from non-cash items
in the determination of resources provided by (used in) operating
activities.
c) Translation of foreign subsidiaries
The translation of foreign subsidiaries is in accordance with Bulletin B-
15, "Foreign Currency Transactions and Translation of Financial Statements
of Foreign Operations"("Bulletin B-15"). In accordance with Bulletin B-15,
this conversion is performed under the "foreign entity method" applying the
following procedures:
- Foreign subsidiaries apply the restatement provisions of Bulletin
B-10 and its amendments using the GCPI, which reflects the changes
in the purchasing power of the monetary unit of the country in
which the subsidiary operates.
- After the financial statements of the foreign subsidiary are
restated to constant purchasing power, all assets and liabilities
are translated to Mexican pesos by applying the exchange rate in
effect as of the balance sheet date. Income and expenses are
translated using the average exchange rate for the reporting
period.
- The translation effects are recorded as part of the stockholders'
equity in the cumulative translation adjustment of foreign
subsidiaries.
A-73
- In 1998, the Company designated certain of its U.S. dollar
denominated debt as an economic hedge of a net investment in its
U.S. subsidiaries and, consequently, Ps.200,235 of foreign
exchange loss for the year were reflected in stockholders' equity
as a component of the cumulative translation adjustment of foreign
subsidiaries. Hedge accounting was discontinued in 1999 since the
Company paid off the related debt.
d. Temporary investments
Short-term investments consist of marketable securities with maturities of
less than 3 months and are carried at market value. Unrealized gains (losses)
are included in income.
e. Investments in affiliated companies
Investments in shares of affiliated companies in which the percentage of
ownership is less than 10% are recorded at cost and restated in Mexican Pesos
of December 31, 2000 purchasing power by applying factors derived from the
NCPI.
f. Property, plant and equipment
Property, plant and equipment are recorded at their acquisition cost and are
restated by applying factors derived from the NCPI to the historical cost,
except for machinery and equipment of foreign origin which are restated by
applying factors derived from the GCPI and translating those amounts to
Mexican Pesos at the prevailing exchange rate at the balance-sheet date.
g. Depreciation
Depreciation of machinery and equipment is based upon the restated carrying
value of the assets and calculated by the method of units produced, based on
their useful lives and the estimated production capacity of the assets as
shown below:
Years
-----
Building 25-50
Machinery and equipment 23-40
Office equipment 5-10
Transportation equipment 1-5
Computer equipment 1-3
h. Debt issuance cost
A-74
Debt issuance cost is capitalized and amortized over the outstanding term
of the debt on a straight line basis, which does not materially differ from
the interest method.
i. Goodwill and negative goodwill
Acquired companies are recorded at their restated value; goodwill is the
difference between the fair value of the net assets of the acquired company
and the purchase price paid. If the purchase price paid exceeds the fair
value of the net assets acquired, the excess is recorded as goodwill. If
the fair value of the net assets acquired exceeds the purchase price paid,
the excess is recorded as negative goodwill. Both goodwill and negative
goodwill are restated, and amortized under the straight-line method over a
period not to exceed two years which, in management's opinion, approximates
the period in which the acquired subsidiaries are integrated into the
Group. The benefit recorded in income resulting from the amortization of
negative goodwill amounted to Ps. 272,403 in 1998.
j. Pension plans, seniority premiums and indemnities
In accordance with Mexican Labor Law, the Group's Mexican employees are
entitled to seniority premiums after 15 years of service or upon dismissal,
disability or death. Under Bulletin D-3, "Labor Obligations", the
actuarially determined projected benefit obligation is computed using
estimates of salaries that would be in effect at the time of payment.
Employees not yet eligible for seniority premiums are also included in the
determination of the obligation with necessary adjustments made in
accordance with the probability that these employees will reach the
required seniority. The cost of past service is amortized over the average
period required for workers to reach their retirement age.
The cost of the employee retirement plans (pension and seniority premiums),
both formal and informal, is recognized as expenses in the years in which
the services are rendered, in accordance with studies performed by
independent actuaries using the projected unit credit method.
In accordance with Mexican Federal Labor Law, other compensation, based on
length of service, to which employees may be entitled in the event of
dismissal or death, is charged to income in the year in which it becomes
payable.
A defined contribution pension plan has been established for U.S.
subsidiaries covering all employees who meet certain eligibility
requirements. The benefits of such plan are based mainly on the employees'
years of service and compensation.
k. Severance payments for dismissal
Payments for retirement and terminations are changed to income in the
period in which they occur.
l. Derivative financial instruments
Derivative financial instruments are used by the Group primarily to manage
its (i) interest rate risk, and (ii) foreign exchange rate risk. Interest
rate swaps are employed to achieve the Group's interest
A-75
rate objectives. The interest differential to be paid or received under the
related interest rate swap agreement is recognized over the life of the
related contract and is included in interest expense or income. At December
31, 2000, there were no outstanding interest rate swap agreements.
Additionally, the Group has entered into several equity share swap
agreements ("Equity Swap") related to its American Depositary Receipts. The
difference between the fair value and the acquisition cost of those shares
(including purchase expenses and premiums or discounts), as well as
financing cost are recorder directly to stockholder's equity (See Note 10).
m. Revenue recognition
Sales are recognized upon delivery of products and customer acceptance.
Revenues are recognized only when the Group has transferred to the buyer
the significant risks and rewards of ownership of the goods, and when the
amount of revenues and the costs incurred or to be incurred in respect of
the transaction can be measured reliably.
n. Income tax and employee profit sharing
Through December 31, 1999, income tax expense was recognized in the period
in which a current liability was incurred an revenues and expenses were
realized. (i.e. partial liability method).
Effective January 1, 2000, the Group adopted the guidelines established in
the new Bulletin D-4, "Accounting Treatment of Income Tax, Asset Tax and
Employee Profit Sharing" issued by the MIPA. As a result, for the
recognition of deferred income tax, the Group switched from the partial
liability method to the comprehensive asset and liability method, which
consists of determining deferred income tax by applying the respective
income tax rate to the differences between the accounting and tax values of
assets and liabilities -temporary differences- at the date of the financial
statements. The cumulative effect at the beginning of the year resulting
from the aforementioned change increased the deferred tax liability by
$2,239,034 and decreased stockholders' equity by the same amount; while the
effect in the year 2000 increased the liability by $ 341,041 at December
31, 2000 and decreased the result from holding non-monetary assets and
income for the year by $ 43,972 and $ 161,821, respectively. In addition,
the monetary position gain was decreased by $ 135,248.
o. Foreign currency transactions
Transactions denominated in foreign currency are recorded at the exchange rate
in effect at the date they are translated. Assets and liabilities denominated
in foreign currency are translated into Mexican pesos, at the exchange rate in
effect as of the balance sheet date. Exchange differences resulting from such
translations are applied to income for the year.
A-76
p. Long-lived assets
The Group evaluates potential impairment losses to long-lived assets by
assessing whether the unamortized carrying amount can be recovered over the
remaining life of the assets through undiscounted future expected cash flow
generated by the assets and without interest charges. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of the
assets, a loss is recognized for the difference between the fair value and
carrying value of the assets. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Long-lived assets, for which management has committed
to a plan of disposal, are recorded at the lower of the unamortized carrying
amount or fair value less disposal costs.
q. Earnings per share
Earnings per share computation is based on the net income attributable to the
majority interest divided by the weighted average number of shares outstanding
during year. The weighted average number of shares were 53,678,812, 53,857,931
and 53,874,979 in 1998, 1999 and 2000, respectively. For the periods
presented, there were no dilutive instruments.
r. Segment reporting
In August 1997, the International Accounting Standards Committee issued
revised International Accounting Standards No. 14, "Segment Reporting" ("IAS
14"), which is applicable to Mexican companies under Bulletin A-8. IAS 14,
which is effective for years beginning after June 30, 1998, requires that
companies look to their internal organizational structure and internal
reporting system for the purpose of identifying segments. (See Note 17).
A-77
NOTE 4 - FOREIGN CURRENCY POSITION
----------------------------------
At December 31, 1999 and 2000, the Mexican peso and the U.S. dollar, French
Franc and Danish Krones were as follows:
US French Danish
dollar franc krones
------ ------ ------
2000 9.6098 6.5422 7.4144
1999 9.4986 6.9535 7.9158
At December 31, 1999 and 2000, GIDUSA had the following monetary assets and
liabilities denominated in a foreign currency:
As of December 31, 1999
-----------------------
(thousands)
---------
U.S. French Danish
dollars francs krones
Assets US$ 74,364 FF$ - DK$ -
----------- ---------- ---------
Short-term liabilities 103,799 6,958 1,367
Long-term liabilities 543,993 5,081 1,230
----------- ---------- ---------
647,792 12,039 2,597
----------- ---------- ---------
Net monetary position US$(573,428) FF$(12,039) DK$(2,597)
=========== ========== =========
As of December 31, 2000
-----------------------
(thousands)
---------
U.S. French Danish
dollars francs krones
Assets US$ 65,683 FF$ - DK$ -
----------- ---------- ----------
Short-term liabilities 106,055 10,985 866
Long-term liabilities 529,204 9,793 805
----------- ---------- ----------
635,259 20,778 (1,671)
----------- ---------- ----------
Net monetary position US$(569,576) FF$(20,778) DK $(1,671)
=========== ========== ==========
Additionally, at December 31, 1999 and 2000, the Group had non-monetary assets
of foreign origin with a carrying value of US$415 and US$627 million,
respectively.
Foreign currency transactions carried out by the Group are summarized as
follows:
A-78
December 31,
------------
In thousands of US dollars
--------------------------
1998 1999 2000
---- ---- ----
Sales US$ 177,731 187,316 US$ 206,904
Interest income 959 1,096 1,901
Imports of fixed assets and
inventories (143,476) (166,108) (183,999)
Interest expense (62,872) (66,511) (70,197)
Other (22,502) (4,299) (2,496)
------------ ------------ ------------
(US$ 50,160) (US$ 48,506) (US$ 47,887)
============ ============ ============
NOTE 5 - ACCOUNTS RECEIVABLE
----------------------------
Accounts receivable consists of the following:
December 31,
------------
1999
2000
----
----
Trade $ 1,297,239 $
1,173,966
Other 112,102
143,457
-----------
-----------
1,409,341
1,317,423
Less - Allowance for doubtful
accounts 86,828
83,382
-----------
-----------
$1,322,513 $
1,234,041
===========
===========
NOTE 6 - INVENTORIES
--------------------
Inventory consist of the following:
December 31,
------------
1999
2000
----
----
Finished product $ 351,516 $
192,068
Work in process 2,641
3,280
Raw materials 291,845
314,441
Direct materials and spare parts for immediate use 239,605
202,205
Molds and dies 47,002
47,437
Merchandise in transit 200,967
228,060
Advance payments to suppliers 47,708
57,027
Other 28,373
18,806
-----------
-----------
1,209,657
1,063,324
Less - Reserve for obsolete inventories 12,579
12,445
-----------
-----------
$ 1,197,078 $
1,050,879
===========
===========
A-79
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------
Property, plant and equipment consist of the following:
December 31,
------------
1999
2000
----
----
Buildings $ 2,354,079 $
2,210,810
Machinery and equipment 12,413,645
12,055,843
Transportation and computer equipment,
fixtures and others 1,181,251
1,360,411
-----------
-----------
15,948,975
15,627,064
Less - Accumulated depreciation 7,105,094
7,183,976
-----------
-----------
8,843,881
8,443,088
Land 660,610
672,073
Construction in progress 28,186
185,537
-----------
-----------
$ 9,532,677 $
9,300,698
===========
===========
Depreciation expense for the years ended December 31, 1998, 1999 and 2000 was
$320,353, $307,349 and $282,271, respectively.
NOTE 8 - OTHER ASSETS
---------------------
Other assets consist of the following:
December 31,
------------
1999 2000
---- ----
Other investments (shares) $ 34,487 $
31,173
Intangible asset - labor obligations 121,687
110,093
Debt issuance cost 87,619
89,325
Other 82,063
105,695
--------
--------
$325,856
$336,286
========
========
Amortization expense for the years ended December 31, 1998, 1999 and 2000 was
$22,283, $16,529 and $12,868, respectively.
A-80
NOTE 9 - BANK LOANS AND OTHER FUNDING
-------------------------------------
a. Short term notes payable:
At December 3l, 1999 and 2000, short-term bank loans was comprised as follows:
1999
2000
---------
---------
Bank loan for US$0.3 million, with Banco Bilbao
Viscaya payable in a lump sum and maturing on
October 19, 2000 bearing interest at LIBOR. $3,122
Bank loan for US$0.7 million, with California
Commerce Bank payable in a lump sum and maturing
on November 5, 2001, bearing interest at LIBOR
plus 5.15%
$ 6,439
Bank loans for US$15 million, with California
Commerce Bank payable in a lump sum and maturing
on July 2001, bearing interest at an annual
rate of LIBOR plus 1.65%.
$144,147
---------
---------
Total short-term debt $3,122
$150,586
=========
=========
b. Long term debt:
At December 31, 1999 and 2000, long-term bank loans were comprised as follows:
1999
2000
---------
---------
Bonds registered with the Securities and
Exchange Commission (Yankee Bonds) , for
US$150 million, bearing interest at a fixed
rate of 12% annually, payable in semi-annual
installments (See Note 18) $1,552,308
$1,441,470
Direct loan for U$22 million, with Banamex,
bearing interest at 10.15%, payable in a lump
sum (See Note 18)
211,416
Bonds registered with the Securities and
Exchange Commission, for US$250 million,
payable in a lump sum and maturing on August
1, 2003, bearing interest at a fixed rate
(12.625% annual rate), payable semiannually. 2,587,181
2,402,450
Bank loan with the Chase Manhattan Bank for
US$50 million, payable in five semiannual
installments beginning December 5, 2000,
bearing interest at LIBOR plus 1.50 % (8.05%
A-81
at December 31, 2000). 517,437
384,392
Financial lease agreement for the acquisition
of contract for the acquisition of machinery
for US$10.7 million, with several financial
institutions payable in 14 semi-annual
installments beginning in August 1998,
bearing interest at LIBOR plus 3.5% (10.05%
at December 31, 2000) 110,666
82,547
Bank loan for US$38 million, with Banamex
payable in a lump sum and maturing on January
12, 2001, bearing interest at LIBOR plus
1.65% annually (8.19% at December 31, 2000). 393,252
365,172
Bank loan for US$30 million, with Banamex
payable in a lump sum and maturing on June
11, 2001, bearing interest at LIBOR plus
1.90% annually (8.44% at December 31, 2000). 310,462
288,294
Bank loan for US$4 million, with Banamex,
payable in a lump sum on July 9, 2001,
bearing interest at LIBOR plus 2% payable
annually (8.54% at December 31, 2000). 41,395
38,439
Bank loan for US$15 million, with California
Commerce Bank payable in a lump sum and
maturing on July 5, 2001, bearing interest at
LIBOR plus 1.65% 153,990
Other long-term debt 99,408
67,621
----------
----------
Total long-term debt 5,766,099
5,281,801
Current portion of long-term debt 144,914
232,816
----------
----------
Total bank loans and long-term debt $5,621,185
$5,048,985
==========
==========
A-82
At December 31, 2000, the maturities of long-term debt were as follows:
2002 $ 460,339
2003 2,702,134
2004 295,845
2005 148,642
2006 and thereafter 1,442,025
----------
$5,048,985
==========
The other long-term loans are denominated mainly in U.S. dollars, and at
December 31, 1999 and 2000 totaled $99,408 and $67,621, respectively.
The Yankee Bonds, bank loans and financial lease agreements contain certain
covenants, obligations and restrictions which the Group and/or its
subsidiaries must comply, mainly in respect of contracting other credit lines,
payment of dividends and decrease in capital stock, restrictions in
transactions with related parties and the maintenance of certain financial
ratios. As of December 31, 2000, the Group and its subsidiaries were in
compliance with their financial covenants.
c. In January 1999, the Group paid approximately US$40 million in short- term
bank loans.
d. In 1997, the Group acquired machinery and equipment through capital leases
that bear interest at LIBOR plus 3.5% and 4% annually, payable in 14
semi-annual installments.
The following is an analysis of the equipment acquired through capital leases:
December 31,
------------
1999 2000
---- ----
Machinery and equipment $276,762 $260,586
Less: accumulated depreciation (34,739) (38,935)
-------- --------
$242,023 $221,651
======== ========
A-83
At December 31, 2000, the capital leases were due as follows:
2001 $ 30,641
2002 25,735
2003 19,712
2004 19,572
2005 1,744
2006 and thereafter 8,200
--------
$105,604
Less: amount representing interest 23,057
--------
Present value of minimum lease payments $ 82,547
========
NOTE 10 - FINANCIAL DERIVATIVES INSTRUMENTS AND TRANSACTIONS
------------------------------------------------------------
a) International Accounting Standard No. 32, "Disclosures About Fair Value of
Financial Instruments" ("IAS 32") requires disclosures of the fair value of
certain financial instruments for which it is practicable to estimate such
value. For purpose of IAS 32, the estimated fair value of a financial instrument
is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The fair amounts disclosed represent management's best estimates of fair value.
The following methods and assumptions were used by the Group in estimating
fair value disclosures for financial instruments:
As of December 31, 1999 and 2000, the carrying amount of cash and temporary
investments, accounts receivable, trade accounts payable and accrued liabilities
and other accounts payable approximate their fair value because of their short
maturity. The net value of accounts receivable represents the cash flow expected
to be received by the Company.
As of December 31, 1999 and 2000, the carrying amount of short-term debt
approximates its fair value due to the variable rate used in such instruments
and its short-maturity term.
A-84
At December 31, the estimated fair value of the long-term debt was as follows:
1999 2000
----------------------
----------------------
Book Fair Book
Fair
Value Value Value
Value
---------- ---------- ----------
----------
Publicly traded bonds(1) $4,139,489 $4,110,600 $3,843,920
$3,756,390
Long-term debt (2):
Variables rate notes:
Libor plus 1.5% 517,437 486,688 384,392
357,747
Libor plus 1.65% 547,242 522,155 365,172
364,163
Libor plus 1.90% 310,462 292,034 288,294
288,161
Libor plus 2.0% 41,395 39,052 38,439
38,457
Financial lease agreements bearing
interest LIBOR plus 3.5% 110,666 235,956 82,547
82,547
Other loans 99,408 106,662 67,621
69,762
Fixed rate notes (2):
Bank loan bearing interest at 10.15% 211,416
211,416
----------
----------
$5,766,099 $5,793,147 $5,281,801
$5,168,643
========== ========== ==========
==========
(1) The fair value of the Yankee Bonds is estimated, based on quoted market
prices bearing interest LIBOR plus 3.5%.
(2) Rates currently available to the Group for debt with similar terms and
remaining maturities are used to estimate fair value of the existing debt.
b) At December 31, 2000, the estimated fair values of the Group's financial
derivatives are as follows:
1999 2000
----------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Interest rate swap (1) $ - $ - $ - $ -
Equity swap (2) $ 467 $ 467 $63,475 $63,475
== ===== ===== ======= =======
(1) In 1997, the Group entered into an interest rate swap transaction pursuant
to which it has exchanged its floating rate interest obligation on US$50
million notional principal amount for a fixed rate payment obligation of
7.5% per annum for the three-year period beginning December 5, 1997. There
are no outstanding contracts as of December 31, 2000.
(2) GIDUSA entered into several equity swap agreements with respect to its
American Depositary Receipts.
A-85
The carrying value of these contracts is as follows:
December 31,
------------
1999 2000
---- ----
Gain (loss) from instrument valuation $ 902 $ (61,723)
Less - Financial cost for the year (10,798) (12,665)
Less - Financial cost in prior years (17,833) (26,586)
Plus - Accumulated paid financial cost 27,262 37,499
-------- ---------
($ 467) ($63,475)
Other - 568
-------- ---------
($ 467) ($64,043)
========= ========
The balances at December 31, 1999 and 2000 of ($467) and ($63,475),
respectively, were recorded in other long-term liabilities, with the respective
adjustment to stockholders' equity.
The fair value of the equity swap is estimated based on its quoted market price.
Concentration of credit risk
The financial instruments which potentially are subject to a concentration of
credit risk, are principally cash and temporary investments and trade accounts
receivable. The Group 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 a large number of customers comprising
the Group's customer base and their dispersion across different locations in
Mexico and the U.S. There were no customers exceeding 10% of net sales for any
of the periods presented.
A-86
NOTE 11 - PENSION PLANS AND SENIORITY PREMIUMS
----------------------------------------------
The valuation of labor obligations for retirement pensions and seniority
premiums covers all Mexican employees. The principal financial data related to
these obligatios is as follows:
December 31,
------------
1999 2000
---- ----
Current benefit obligation $ 198,371 $ 206,121
--------- ---------
Net current liability 198,371 206,121
========= =========
Projected benefit obligations 258,019 256,015
Unamortized transition asset (149,337) (134,222)
Unamortized prior service cost - -
Unamortized differences in assumptions
and experience adjustment (31,998) (25,765)
--------- ---------
Projected net liability 76,684 96,028
========= =========
Additional minimum liability 121,687 110,093
Intangible pension asset- Labor obligation 121,687 110,093
Net cost for the period 33,841 33,558
Amortization period:
--------------------
Transition asset 20 20
Prior services cost and experience adjustments 24 24
Prior service costs (transition asset), plan amendment cost and actuarial losses
are recorder through charges to income using straight line method over the
average remaining service life over which employees are expected to receive the
benefits.
The following actuarial assumption were used to determine the present value of
accumulated plan benefits for pension plans and seniority premiums (excluding
inflation effects).
December 31,
------------
1998 1999 2000
---- ---- ----
Discount rate 5% 5% 5%
Salary increase rate 2% 2% 2%
Return on plan assets 5% 5% 5%
The net cost for the year consisted of the following:
A-87
Year ended December 31,
---------------------------
1998 1999 2000
---- ---- ----
Service cost 9,054 $ 8,347 $ 8,934
Amortization of prior service cost 11,880 12,381 12,424
Financial cost for the year 10,592 13,113 12,200
------- ------- -------
$31,526 $33,841 $33,558
======= ======= =======
The subsidiaries in the United States of America have the following employee
benefit plans: a 401(k) retirement savings plan, money purchase and defined
benefit plans, health insurance plan, disability plan and a life insurance plan.
For the years ended December 31, 1998, 1999 and 2000, the charge to results for
these plans totaled $24,638 $19,611, and $17,346 , respectively.
NOTE 12 - CONTINGENCIES AND COMMITMENTS
----------------------------------------
The Group has the following contingencies liabilities:
a. The Group is contingently liable for indemnities payable to personnel in case
of dismissal under certain circumstances as provided by the Mexican Labor
Law. As of December 31, 2000, no obligations were recognized in the financial
statements.
b. The Group and its subsidiaries have several lawsuits filed by the Mexican
Ministry of Finance and Public Credit for presumed differences in tax
calculations, for an amount of approximately $6,897, in nominal terms. The
Group management and its legal advisors believe that these matters will be
settled without a significant impact on its financial position or results of
operations.
c. The Group may be subject to a contingent liability for additional taxes
resulting from reviews of the tax returns filed by the Group should its
interpretation criteria differ from that of the Mexican Tax authorities as of
December 31, 2000, there are no outstanding tax reviews from the Tax
authorities.
d. As of December 31, 2000, the Mexican subsidiaries lease certain equipment
under noncancelable operating leases. Rental expense under these leases was
approximately $33,135, $35,422 and $55,713 for the years ended December 1998,
1999 and 2000, respectively.
A-88
At December 31, 2000, estimated future minimum lease payments under
noncancelable operating leases were as follows:
Year ended December, 31
2001 $19,176
2002 19,176
2003 19,176
2004 19,176
2005 19,176
-------
$95,880
=======
e. As of December 31, 2000, the US subsidiaries lease certain equipment under
noncancelable operating leases that cannot be canceled. The rental totaled
expense approximately $7,313, $13,261 and $ 8,533, for the years ended
December 31, 1998, 1999 and 2000, respectively.
At December 31, 2000, estimated future minimum lease payments were under
noncancelable operating leases were as follows:
Year ended December, 31
2001 $ 6,045
2002 4,334
2003 3,844
2004 3,046
2005 2,518
2006 and thereafter 43,080
-------
$62,867
=======
NOTE 13 - CAPITAL STOCK AND RETAINED EARNINGS
---------------------------------------------
Historical amounts of capital stock and retained earnings have been restated to
pesos as of December 31, 2000, as follows:
Historical Restatement Restated
amounts effect amounts
---------- ----------- ----------
Capital stock $ 808,142 $2,878,430 $3,686,572
Additional paid in capital 768,768 383,708 1,152,476
Retained earnings:
Legal reserve 134,820 36,742 171,562
Prior year retained earnings 2,394,425 845,517 3,239,942
Current earning 377,212 12,386 389,598
---------- ---------- ----------
$4,483,367 $4,156,783 $8,640,150
========== ========== ==========
A-89
As of December 31, 2000, nominal capital stock amounted $808,142, of which the
minimum fixed portion without withdrawal amounted $699,714, represented by
46,610,100 Series "A" shares, all common, nominative shares, without par value.
The variable portion of capital stock is established at the amount of $108,428,
represented by 7,222,767 Series "A" shares, all common, nominative shares,
without par value.
NOTE 14 - RETAINED EARNINGS
---------------------------
a. In conformity with the provisions of Mexican Corporate Law, a company's net
profits are subject to the shareholders' approval at the General Stockholders'
Meeting.
b. Mexican Corporate Law requires appropriation of 5% of annual net income to
the legal reserve until the reserve equals 20% of a company's restated capital
stock. This reserve is not available for dividends, but may be used to reduce a
deficit or may be transferred to contributed capital.Pursuant to the General
Corporate Law, the legal reserve must be increased by 5% of net annual income,
until it reaches 20% of restated common stock. Dividends cannot be paid out of
this reserve, but it can be used to decrease a possible deficit or it may be
capitalized. Stockholders are entitled to approve any other reserve for income.
c. At the Ordinary Stockholders' Meeting held on April 28, 2000,
stockholders resolved to increase the legal reserve by $19,255 (nominal).
d. Retained earnings are subject to income tax, in the event that dividends are
paid (either in cash or in-kind). Tax payments made by the Group are
considered paid when:
. Those earnings are neither paid out of the net taxable income nor
reinvestment accounts, triggering a 35% tax rate.
. Dividends are paid out of the reinvested net taxable income account,
resulting in a 5% tax rate. The tax rate for reinvested taxable income
generated in 2000 is 3%.
. No tax is due on any dividends paid out of the net taxable income account
(up to the total balance). In order to accomplish this; dividends must
first be paid out of the reinvested net taxable income account until that
account is exhausted.
e. Additionally, dividends paid to individuals or nonresidents, regardless of
their origin, are subject to withholding tax in accordance with the applicable
tax legislation.
f. At the date December 31, the balances of the net taxable income accounts are:
December
--------
1999 2000
---- ----
Net tax income account $2,699,749 $2,940,406
Reinvested net tax income account 165,451 599,780
========== ==========
In 1999, the income tax rate was increased from 34% to 35%. In addition, the tax
law established a deferment plan for the re-investment of earnings, by applying
a 30% tax rate to re-invested taxable income. In the year in which earnings are
declared as dividends, the remaining 5% tax will be paid.
A-90
The applicable tax rate for re-invested earnings was 32% and 3% in 1999 instead
of 30% and 5%, respectively.
The Group is not permitted to declare or pay dividends if the dividends from its
subsidiaries are not first received under Mexican corporate law. Additionally
neither the Group nor its subsidiaries are permitted to declare or pay dividends
as a result of the negative covenants established in the issuance of debt placed
in the Mexican and international markets.
NOTE 15 - PROVISION FOR INCOME AND ASSET TAXES
----------------------------------------------
The income tax (ISR) for the years at December 31, is comprised as follows:
1998
1999 2000
-----------
----------- -----------
ISR current $ 15,151
$ 161,708 $ 229,487
ISR deferred
161,821
Tax loss carryforwards (7,341)
(32,510)
-----------
----------- -----------
Total income tax provision $ 7,810
$ 129,198 $ 391,308
===========
=========== ===========
The reconciliation between the statutory and effective income
tax rate at is shown as follows:
1998
1999 2000
-----------
----------- -----------
ISR at the statutory rate 34.00%
35.00% 35.00%
Increase (decrease) in ISR effective
rate due to:
Purchases 1.80
(6.07) (2.10)
Depreciation 0.70
0.07 (0.01)
Net effect of the comprehensive financing cost 6.60
0.06 (1.60)
Reserves 15.50
(19.80) 0.80
Non-deductibles expenses 13.70
(15.00) 1.60
Tax loss carryforwards (8.00)
(0.01) (8.00)
Amortization of negative woodwill (62.30)
Other (0.20)
5.85 3.60
-----------
----------- -----------
Effective tax rate 1.8%
10% 29.2%
===========
=========== ===========
A-91
At December 31, 2000, the principal temporary differences on which deferred
income tax is recognized are shown as follows:
Inventories $1,086,866
Property, plant and equipment, net 6,904,136
Other assets 239,727
Liabilities provisions (704,768)
Tax loss carryforwards (571,058)
----------
Total temporary differences $6,954,903
Statutory income tax rate 35%
----------
Deferred income tax liability $2,434,216
Asset tax to credits (43,627)
----------
Deferred tax income liability $2,390,589
==========
During 2000, the Group charged directly to the deficit from restatement $43,972
of the deferred tax liability related to fixed assets of foreign origin and
inventory due to specific index and specific cost restatements, respectively.
For the year ended December 31, 1999, tax losses carryforwards totaling $92,887,
were utilized resulting in a tax benefit of $32,510.
At December 31, 2000, tax loss carryforwards of Mexican companies of the Group
and their expiration date are comprised as follows:
Tax
Expiration date losses
--------------- ------
2004 $ 5,067
2005 41,565
2006 62,942
2007 16,747
2008 33,976
2009 53,428
2010 54,625
2011 21,436
--------
$289,786
========
A-92
The Group an its Mexican subsidiaries are authorized by the Ministry of Finance
and Public Credit to file income tax returns on a consolidated basis. Effective
January 1, 1999, as a result of the change in the income tax law, consolidated
taxable income or loss rules have changed, the most significant modifications
are the following:
. Recognizing taxable income or loss in subsidiaries to the extent of
taking the ownership percentage of the holding company in the subsidiaries and
multiplying the amount by a factor of 0.60. Controlled companies with prior-
years-tax-loss carryforwards, shall be considered at the total percentage of
direct or indirect equity participation share.
. Eliminating the concept of effective control of subsidiaries. Companies in
which a direct or indirect equity interest of less than 50% is held should not
be included in the consolidated tax return.
. The tax losses corresponding to the controlling or controlled companies,
which originated as individual entities, and those which cannot be offset under
the tax terms in effect must be added to income or deducted from the
consolidated tax loss in the year in which the right expires
Asset tax is calculated imposed at a 1.8% rate on the net value of certain
assets and liabilities and is due only when the asset tax exceeds the income tax
amount payable. The asset tax paid can be recovered over the following 10 years,
if and when income taxes exceed asset tax during such years.
For the year ended December 31, 1998, 1999 and 2000, the Group incurred asset
tax totaling $29,790, $2,242 and $ 1,579 , respectively, which was recognized in
results for the year.
Employee profit sharing is determined at a 10% rate on the taxable income of the
companies, adjusted accordingly to what is established in the Mexican Income Tax
Law. The amortization of tax losses and asset tax credits is not applicable for
employee profit sharing purposes.
NOTE 16 - SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
-------------------------------------------------------
The balances of advances, deposits receivables and payables between the Company
and associated companies and to related parties at December 31, 2000 and 1999
are as follows:
1999 2000
---- ----
Accounts receivable:
--------------------
Grupo Pipsamex, S.A. de C.V. $ 3,132 $17,720
Fabrica Mexicana de Papel, S.A. de C.V. 273 4,483
Fibras de Durango, S.A. de C.V. 2,538 17,193
Corporacion Durango, S.A. de C.V. 6,502 9,269
Administradora Corporativa Mercantil, S.A. de C.V. 26
Chapas Finas Ponderosa, S.A. de C.V. 6
Fabrica de Papel Tuxtepec, S.A. de C.V. 1,392
Productora Nacional de Papel, S.A. de C.V. 1,802
A-93
Lineas Aereas Ejecutivas de Durango, S.A. de C.V. 3,984
Durango Georgia Paper Company 231
------- -------
$12,445 $56,106
======= =======
Accounts payable: 1999 2000
----------------- ---- ----
Fabrica de Papel Tuxtepec, S.A. de C.V. $ 66
Grupo Pipsamex, S.A. de C.V. $ 749
Fibras de Durango, S.A. de C.V. 300
Productora Nacional de Papel, S.A. de C.V. 672 4,504
Lineas Aereas Ejecutivas de Durango, S.A. de C.V. 2,998
Industrializadora de Madera de Durango, S.A. de C.V. 11 10
Industria Extractiva Forestal de Durango, S.A. de C.V. 8 7
------- -------
$ 3,755 $ 5,570
======= =======
The Group entered into the transactions with its associated companies which
primarily include Lineas Aereas Ejecutivas de Durango, S.A. de C.V. and Fibras
de Durango, S.A. de C.V. shareholders and entities under common control as
follows:
Years ended
December 31,
--------------------------
1998 1999 2000
---- ---- ----
Income
------
Administrative services $ 61 $ - $ -
Sales - 1,469 3,193
Interest income 185 258 1,206
Leases 266 6,236
Land 11,013
Costs
-----
Interest expense (248) (269) (75)
Purchases (1,964) (78) (350)
Services (453) -
======= ====== ======
NOTE 17 - FINANCIAL INFORMATION BY BUSINESS SEGMENTS
----------------------------------------------------
The Group is managed on a product basis and its reportable segments are as
follows:
- Packaging
Manufacturing and selling of corrugated containers, molded pulp and multi-wall
sacks and bags
- Paper
Manufacturing and selling of kraft and semi-kraft paper made from natural or
recycled fibers.
A-94
- Forest products
Manufacturing and selling of plywood, particleboard and lumber.
Prices between segments are based on market prices. The Group evaluates each
business segment according to its operating income before depreciation and
amortization. The accounting policies of the segments are the same as those
described in Note 3.
For the years ended December 31, the financial information by business segment
is as follows:
Operating
income (loss)
before
depreciation
Depreciation Operating
Sales to Inter-segment Total and
and income
third parties Sales sales amortization
amortization (loss)
------------- ----- ----- ------------
------------ ------
1998
----
Packaging $4,223,143 $ 106,457 $ 4,329,600 $ 871,983
$126,469 $ 745,514
Paper 1,139,377 1,588,583 2,727,960 460,385
166,665 293,720
Forest products 673,840 124,187 798,027 129,848
40,973 88,875
Eliminations (1,819,227) (1,819,227)
---------- ----------- ----------- ----------
-------- ----------
$6,036,360 $ $ 6,036,360 $1,462,216
$334,107 $1,128,109
========== =========== =========== ==========
======== ==========
1999
----
Packaging $4,082,059 $ 56,571 $ 4,138,630 $ 743,681
$108,078 $ 635,603
Paper 1,125,163 1,621,084 2,746,247 537,594
180,324 357,270
Forest products 624,782 57,646 682,428 135,219
35,476 99,743
Eliminations (1,735,301) (1,735,301)
---------- ----------- ----------- ----------
-------- ----------
$5,832,004 $ $ 5,832,004 $1,416,494
$323,878 $1,092,616
========== =========== =========== ==========
======== ==========
2000
----
Packaging $4,389,137 $ 68,939 $ 4,458,076 $ 788,059 $
97,704 $ 690,355
Paper 1,179,575 1,744,400 2,923,975 517,024
166,641 350,383
Forest products 506,295 49,777 556,072 74,695
30,794 43,901
Eliminations (1,863,116) (1,863,116)
---------- ----------- ----------- ----------
-------- ----------
$6,075,007 $ $ 6,075,007 $1,379,778
$295,139 $1,084,639
========== =========== =========== ==========
======== ==========
A-95
As of December 31, segment information related to assets, liabilities and
additions to property, plant and equipment is as follows:
Additions to
Segment Segment property, plant
assets liabilities and equipment
------------- ------------ ---------------
1998
----
Packaging $ 20,561,580 $11,740,785 $413,335
Paper 14,847,577 4,151,404 546,940
Forest products 3,488,801 565,328 8,362
Eliminations (24,329,244) (7,641,188)
------------ ----------- --------
$ 14,568,714 $ 8,816,329 $968,637
============ =========== ========
1999
----
Packaging $ 18,424,525 $10,023,809 $ 86,634
Paper 8,510,643 2,361,757 23,168
Forest products 1,213,493 312,359 13,697
Eliminations (15,009,729) (5,217,480)
------------ ----------- --------
$ 13,138,932 $ 7,480,445 $123,499
============ =========== ========
2000
----
Packaging $ 16,169,700 $11,088,612 $187,991
Paper 8,629,075 3,692,143 182,891
Forest products 1,555,641 991,294 8,763
Eliminations (13,744,846) (6,545,834)
------------ ----------- --------
$ 12,609,570 $ 9,226,215 $379,645
============ =========== ========
The geographical segment information is as follows:
Additions to
Segment property, plant
Net Sales fixed assets and equipment
--------- ------------ -------------
1998
----
Mexico $ 6,549,680 $ 9,420,218 $864,078
United States 1,305,907 1,549,955 104,559
Eliminations (1,819,227)
------------ ----------- --------
$ 6,036,360 $10,970,173 $968,637
=========== =========== ========
1999
----
Mexico $ 6,095,323 $ 8,123,135 $117,974
A-96
United States 1,471,982 1,409,542 5,525
Eliminations (1,735,301)
----------- ----------- --------
$ 5,832,004 $ 9,532,677 $123,499
=========== =========== ========
2000
----
Mexico $ 6,293,016 $ 7,925,238 $353,228
United States 1,645,107 1,375,460 26,417
Eliminations (1,863,116)
----------- ----------- --------
$ 6,075,007 $ 9,300,698 $379,645
=========== =========== ========
NOTE 18 - SUBSEQUENT EVENTS
---------------------------
In the first quarter of 2001, the Group restructured a portion of its debts
which consisted of the following:
a) In February 2001, CODUSA (Holding company) made a public offering of Yankee
bonds amounting to US$180 million maturing on August 1, 2006 bearing an annual
interest rate of 13 1/8% payable semiannually in February and August (the
"Senior Notes 2006"). The Proceeds received from the Senior Notes 2006 were used
to pay certain indebtedness outstanding of GIDUSA at December 31, 2000. A total
of US$111.2 million was utilized to partially pay prior to the scheduled
maturity GIDUSA US$150 million Yankee bond maturing on July 15, 2001. Some of
the bondholders elected not to accept the offer of the anticipated payment. As a
result, CODUSA placed US$43.5 million in a trust, representing the estimated
funds necessary to liquidate the principal and interest of the nontendered bonds
at its original maturity date. In addition, the Group used the remaining net
proceeds from the Senior Notes 2006 to pay two short-term loans totaling US$30
million (US$22 million with Banamex and US$8 million with The Chase Manhattan
Bank). On February 5, 2001, GIDUSA issued a US$180 million unsubordinated
promissory note to CODUSA to evidence indebtedness of GIDUSA arising from the
purchase and cancellation, on behalf of GIDUSA, of GIDUSA's US $150 million
Yankee bond, US$22 million indebtedness owed to Banamex and US$9 million
indebtedness owed to the Chase Manhattan Bank.
b) In early 2001, the Company renegotiated two short term loans with Banamex
totaling US$94 million. Pursuant to the new agreement, the new loans bear an
annual interest rate of LIBOR plus 2.80 with quarterly payments and are due on
2005.
In accordance with Bulletin B-13, "Subsequent Events" and Circular 46, "Short-
term Liabilities Refinanced to Long-Term Subsequent to the Date of the Financial
Statements" and as a result of transactions described above, the Company
reclassified US$294 million of debt maturing in 2001 to long-term debt.
NOTE 19 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In August 2000, the MIPA issued Bulletin B-4, "Comprehensive Income", to become
effective January 1, 2001. This Bulletin sets forth new guidelines for reporting
and disclosing comprehensive income
A-97
and its components. Based on this Bulletin, comprehensive income will include
net income of the year and other items which, in accordance with other
bulletins, are recorded directly in stockholders' equity and which are not
contributions, reductions, or distributions of capital.
Effective January 1, 2001, Bulletin C-2, "Financial Instruments", issued by the
MIPA gives new rules for recording those instruments in the accounting. It
requires recording assets or liabilities in the balance sheet, valued at their
fair value. In the opinion of the Group's Management, the most significant
effect derived from adopting this pronouncement is concerned with recording the
"Equity Swap Share" contracts in the balance sheet, as described in Note 10.
NOTE 20 - RECONCILIATION BETWEEN MEXICAN AND U.S. GAAP
------------------------------------------------------
The Group consolidated financial statements are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from U.S. GAAP. The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Bulletin B-10. The application of Bulletin B-10 represents
a comprehensive measure of the effects of price level changes in the Mexican
economy, and is considered to result in a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purposes. Therefore, the following reconciliations to U.S. GAAP do not include
the reversal of such inflationary effects.
The principal differences between Mexican GAAP and U.S. GAAP, other than
inflation accounting, are presented in the following pages with an explanation,
where appropriate, of the effects on consolidated net income and stockholders'
equity. Reconciling items are presented net of any gain or loss from monetary
position.
Reconciliation of consolidated net income:
Years ended
December 31,
------------------------
1998 1999
2000
---------
---------- ---------
Net income under Mexican-GAAP $ 109,239
$1,099,338 $ 389,598
Deferred income taxes 122,638
673,170 (308,389)
Deferred employee profit sharing (23,456)
116,374 8,397
Employee benefits 715
3,127 -
Purchase accounting adjustments:
. Amortization of negative goodwill (272,403)
- -
. Depreciation 41,738
41,738 41,738
Effect of fifth amendment to Bulletin B-10 (26,607)
(39,527) (51,378)
Effect of Bulletin B-15 on prior years 7,048
1,662 -
Equity swaps (116,930)
69,913 (75,522)
Effect of U.S. GAAP adjustments
on minority interest (1,542)
(40,136) 1,615
---------
---------- ---------
Net (loss) income $(159,560)
$1,925,659 $ 6,059
=========
========== =========
Basic and diluted (loss) earnings per share
under U.S. GAAP $(2.97)
$35.75 $0.11
=========
========== =========
Weighted average common shares outstanding
(thousands) 53,679
53,858 53,875
=========
========== =========
Reconciliation of consolidated stockholders' equity:
A-98
Year ended
December 31,
-----------------------
1998 1999
2000
---- ----
----
Total stockholders' equity corresponding to
majority interest under Mexican GAAP $ 5,694,766 $
5,595,159 $ 3,348,461
Deferred income taxes (2,719,470)
(2,046,300) (71,683)
Deferred employee profit sharing (906,585)
(790,211) (781,814)
Employee benefits (3,127)
- -
Purchase accounting adjustments:
. Accumulated negative
goodwill (1,238,460)
(1,238,460) (1,238,460)
. Accumulated depreciation 110,231
151,969 193,707
Effect of fifth amendment of Bulletin B-10:
. Fixed assets 728,310
1,182,602 1,675,075
. Accumulated depreciation (39,456)
(78,983) (130,361)
Effect of restatement of prior year amounts
per Bulletin B-15 242,418
61,786 -
Effect of U.S. GAAP adjustments on
minority interest 58,626
18,490 20,105
-----------
----------- -----------
Total U.S. GAAP stockholders' equity $ 1,927,253 $
2,856,052 $ 3,015,030
===========
=========== ===========
Provided below is an analysis of the changes in stockholders' equity under U.S.
GAAP:
Year ended December
31
----------------------
1999
2000
----
----
Balance at beginning of the year $ 1,927,253 $
2,856,052
Net income under U.S. GAAP 1,925,659
6,059
Deficit from restatement (1,273,327)
(277,519)
Cumulative translation adjustment 993
350
Effect of Bulletin B-15 on prior years (182,294)
(61,786)
Increase (decrease) in capital 3,476
(599)
Effect of fifth amendment of Bulletin B-10 454,292
492,473
-----------
------------
Balance at end of the year $ 2,856,052 $
3,015,030
===========
============
Comprehensive income
--------------------
Comprehensive income under Mexican GAAP is as follows:
A-99
Years ended
December 31,
------------------------
1998
1999 2000
----
---- ----
Mexican GAAP net income $ 109,239 $
1,099,338 $ 389,598
-----------
------------ -----------
Other comprehensive income, net:
Cumulative translation adjustment (97,969)
993 350
Effect of adoption of Bulletin D-4 -
- (2,239,034)
Deficit from restatement (1) 150,788
(1,273,326) (321,491)
-----------
------------ -----------
52,819
(1,272,333) (2,560,175)
Comprehensive income (loss) $ 162,058 $
(172,995) $(2,170,577)
===========
============ ===========
Accumulated comprehensive
loss (end of year) $(1,459,181)
($2,731,514) $(5,291,689)
===========
============ ===========
(1) For 2000, due to the adoption of Bulletin D-4, amount includes deferred tax
effect of $43,972.
The components of accumulated other comprehensive loss is as follows as of
December 31, 1998, 1999 and 2000:
Effect of Cumulative
Deficit Other
adoption of translation from
restatement accumulated
Bulletin D-4 adjustment
comprehensive
loss
Balances at December $ $3,795
$(1,462,976) $ (1,459,181)
31, 1998
Current period changes 993
(1,273,326) (1,272,333)
Balances at December
31, 1999 4,788
(2,736,302) (2,731,514)
Current period changes (2,239,034) 350
(321,491) (2,560,175)
Balances at December
31, 2000 $(2,239,034) $5,138
$(3,057,793) $(5,291,689)
=========== ======
=========== ===========
A-100
Effect of Bulletin B-15 on restatement to constant currency
-----------------------------------------------------------
As disclosed in Note 3, the Company adopted Bulletin B-15, during 1997, Bulletin
B-15 requires that the restatement of prior year amounts of foreign subsidiaries
be determined by first restating prior year foreign currency amounts by the
inflation of the foreign country and then retranslating such amounts at the
exchange rate as of the date of the latest balance sheet present (December 31,
2000). Under U.S. GAAP, the primary financial statements should be presented in
the same reporting constant currency for all periods. Prior to the adoption of
Bulletin B-15, prior year consolidated amounts were adjusted for the effects of
inflation in Mexico and such adjustments was considered to be an integral part
of preparing price level adjusted financial statements. The methodology
established by Bulletin B-15 separates the adjustment process for the effects of
inflation on prior year amounts for foreign and domestic subsidiaries, which
results in the presentation of amounts, which are not in a constant unit of
measure. The difference in the methodologies used to restate balances to
December 31, 2000 purchasing power is included as a one-line adjustment in the
reconciliation to U.S. GAAP of net income and stockholders' equity.
1998
1999
-----------
-----------
Net income:
As previously reported indexed for effects
of inflation in Mexico
$ 116,287
$ 1,101,000
As reported under Bulletin B-15 (109,239)
(1,099,338)
-----------
------------
$ 7,048
$ 1,662
===========
============
1998
1999
-----------
-----------
Stockholders' equity:
As previously reported indexed for effects $ 5,937,184
$ 5,656,945
As reported under Bulletin B-15 (5,694,766)
(5,595,159)
-----------
-----------
$ 242,418
$ 61,786
===========
===========
The following tables present the Group's condensed balance sheets as of December
31, 1999 and 2000 and statements of income for the three years ended December
31, 1998, 1999 and 2000, reflecting U.S. GAAP adjustments. All amounts have been
indexed to December 31, 2000 constant pesos using the Mexican NCPI factor.
CONDENSED BALANCE SHEETS:
-------------------------
December 31
-----------
Assets 1999 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 695,838 $ 620,120
Accounts receivable 1,397,280 1,234,041
Inventories and other 1,200,676 1,118,425
----------- -----------
Total current assets 3,293,794 2,972,586
Property, plant and equipment 9,608,560 9,800,659
Other assets 327,223 336,285
----------- -----------
Total assets $13,229,577 $13,109,530
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
A-101
Current liabilities:
Short - term debt, notes payable and current
portion of long - term debt $ 148,037 $ 383,402
Accrued liabilities and other payables 1,505,633 1,095,590
Deferred income tax and employee profit sharing 149,155 248,596
----------- -----------
Total current liabilities 1,802,825 1,727,588
----------- -----------
Long-term debt 5,639,667 5,086,470
Seniority premiums 198,372 206,121
Deferred income tax and employee profit sharing 2,687,356 2,995,490
Other 467 64,042
----------- -----------
Total long-term liabilities 8,525,862 8,352,123
----------- -----------
Total liabilities 10,328,687 10,079,711
----------- -----------
Minority interest 44,838 14,789
----------- -----------
Stockholders' equity 2,856,052 3,015,030
----------- -----------
Total liabilities and stockholders' equity $13,229,577 $13,109,530
=========== ===========
A-102
CONDENSED STATEMENTS OF INCOME:
Years ended December 31
-----------------------
1998 1999
2000
---- ----
----
Net sales $ 6,234,009 $5,878,519
$6,075,007
Cost of sales 4,667,681 4,349,767
4,552,961
----------- ----------
----------
Gross profit 1,566,328 1,528,752
1,522,046
Selling, general and administrative expenses 722,235 317,703
445,534
----------- ----------
----------
Operating income 844,093 1,211,049
1,076,512
----------- ----------
----------
Financing costs:
Interest expense 859,839 766,374
700,367
Interest income (115,041) ( 86,094)
(94,146)
Foreign loss (gain), net 1,190,612 (264,013)
74,477
Gain on monetary position (857,605) (617,039)
(359,988)
----------- ----------
----------
(1,077,805) 200,772
(320,710)
----------- ----------
----------
Other (expense) income, net (49,953) 13,292
(107,412)
----------- ----------
----------
(Loss) income before provision and minority
interest (283,665) 1,425,113
648,390
Income and asset tax benefit (expense) 114,670 543,676
(645,459)
Minority interest 9,435 (43,130)
3,128
----------- ----------
----------
Net (loss) income $ (159,560) $1,925,659 $
6,059
=========== ==========
==========
Effect of fifth amendment to Bulletin B-10 (Modified)
----------------------------------------------------
As mentioned in Note 2 (b), the Company elected, as a result of the adoption of
the Fifth Amendment to Bulletin B-10 (Modified), to restate its non-monetary
assets of foreign origin based on the change of the Mexican peso against the
foreign currencies and by applying inflation rates of the countries from which
the non-monetary assets originate. This methodology is not consistent with Rule
3-20 of Regulation S-X regarding the use of the same reporting currency for all
periods. Under U.S. GAAP, these assets which are used in Mexico would be
adjusted by the Mexican NCPI and depreciation would be calculated on this basis.
Deferred income tax and employee profit sharing
-----------------------------------------------
A-103
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes" "SFAS No. 109" requires an asset and liability approach for financial
accounting and reporting for income tax under the following basic principles:
(a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and tax loss and tax credit carryforwards,
(c) the measurement of current and deferred tax assets and liabilities is based
on provisions of the enacted tax law; the effects of future changes in tax laws
or rates are not anticipated, and (d) the measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits for which available
evidence indicates that it is more likely than not that the tax benefit will not
be realized. Under this method, deferred tax and employee profit sharing are
recognized with respect to all temporary differences, and the benefit from
utilizing tax loss carryforwards and asset tax credits is recognized in the year
in which the losses or credits arise (subject to a valuation allowance with
respect to any tax benefits which in management's opinion, are more likely than
not that they are not expected to be realized). The subsequent realization of
this benefit does not affect the income tax provision.
The significant components of income and asset tax expense under U.S. GAAP were
as follows:
Year ended December 31,
-----------------------
Income and assets tax expense:
1998 1999 2000
---- ---- ----
Current:
--------
Domestic $ 7,968 $ 129,494 $229,487
--------- --------- --------
Deferred:
---------
Domestic (122,638) (644,475) 355,598
Foreign (28,695) 60,374
--------- --------
(122,638) (673,170) 415,972
--------- --------- --------
Income and assets tax (benefit) provision $(114,670) $(543,676) $645,459
========= ========= ========
A-104
The income tax and profit sharing effects of significant items comprising the
Group's net deferred income tax and profit sharing assets and liabilities under
US GAAP are as follows:
1999 2000
----
-------------------------------------
SFAS No.109 SFAS 109
applied to applied
Mex-Subs Foreign-Subs
Total
-------- ------------
-----
Deferred income tax
(assets) liabilities:
Inventories $ 310,779 $ 271,984 $ -- $
271,984
Property, plant and equipment 2,173,837 2,294,738 134,230
2,428,968
Reserves (196,097) (76,995) --
(76,995)
Equity swaps agreements 163 (22,216)
(22,216)
Deferred costs 44,649 47,198 --
47,198
Tax loss carryforwards (228,608) (96,725) (42,014)
(138,739)
Other (58,423) (43,633) (4,295)
(47,928)
----------- ----------- -----------
-----------
Total net deferred income tax
liabilities $ 2,046,300 $ 2,374,351 $ 87,921 $
2,462,272
=========== =========== ===========
===========
Under U.S. GAAP, $149,155 and $248,596 of the deferred tax liability at December
31, 1999 and 2000, respectively, would have been reflected as a current
liability.
December 31,
------------
1999 2000
---- ----
Deferred employee profit sharing liabilities (assets):
Inventories $ 88,794 $ 73,210
Property, plant and equipment 725,559 724,054
Pre-operating expenses 12,757 4,306
Allowance for doubtful accounts (54,321) (19,603)
Exchange rate gains fluctuations 17,374 (153)
Equity swaps 48 -
-------- --------
Total net deferred employee profit
sharing liability $790,211 $781,814
======== ========
A-105
Under U.S. GAAP, employee profit sharing is recorded as an operating expense.
For the year ended December 31, 2000, the difference in net deferred tax
liabilities between Mexican and U.S. GAAP was as follows:
Deferred tax liabilitiy: Mexican
U.S.
GAAP
GAAP Difference
----
---- ----------
At December 31, 1999 $2,239,034
$2,046,300 $ 192,734
At December 31, 2000 2,390,589
2,462,272 71,683
----------
---------- ----------
Net change $ 151,555 $
415,972 $(264,417)
==========
========== ==========
The net change in the deferred tax liabilities
during 2000 was allocated to the following components:
Deferred tax liabilitiy: Mexican
U.S.
GAAP
GAAP Difference
----
---- ----------
Deferred tax expense $ 161,821 $
415,972 $(254,151)
Monetary gain on initial balance (189,486)
(189,486)
Monetary loss on current
period change 135,248
135,248
----------
---------- ----------
107,583
415,972 (308,389)
Deficit from restatement 43,972
43,972
----------
---------- ----------
$ 151,555 $
415,972 $(264,417)
==========
========== ==========
(1) In accordance with Bulletin D-4
Temporary differences under SFAS 109 are determined based on the difference
between the indexed tax-basis amount of the asset or liability and the related
restated amount reported in the financial statements. The deferred income tax
expense or benefit is calculated as the difference between (a) the deferred tax
assets and liabilities at the end of the current period, and (b) the deferred
tax assets and liabilities reported at the end of the prior period remeasured to
units of current general purchasing power at the end of the current period,
whereas, under Mexican GAAP Bulletin D-4 states that the change in the deferred
tax asset or liability is firts measured on a historical cost basis and the
components of the change including and monetary gains or losses are allocated
between tax provision, deficit from restatement and monetary gain or loss.
Employee benefits
-----------------
Liabilities and costs related to pension plans and seniority premiums are
recorded under Mexican GAAP according to Bulletin D-3 (Revised), "Labor
Liabilities", as described in Note 3 (j) Under U.S. GAAP, the requirements of
SFAS No. 87, "Employers' Accounting for Pensions", as amended by SFAS, No. 132,
"Employees Disclosures about Pensions and Other Postretirement Benefits", for
recording liabilities and costs relating to pension plans and seniority premiums
using actuarial computations are similar to those of Bulletin D-3. The
difference in the accrued pension liability between Mexican GAAP and U.S. GAAP
was to the adoption of the principles on different dates.
A-106
The following sets forth the changes in benefit obligations, and the funded
status of such plans for 1999 and 2000 reconciled with the amounts reported in
the consolidated balance sheets under U.S. GAAP. There were no plan assets at
December 31, 1999 and 2000.
The difference in the accrued pension liabilities between Mexican GAAP and U.S.
GAAP was due to the adoption of the principles on different dates
Year ended December 31,
-----------------------
1998 1999
2000
---- ----
----
Service cost 8,591 8,347
8,934
Interest cost 10,389 12,381
12,200
Amortization of unrecognized obligations 11,830 13,113
12,424
------- ---------
---------
Net cost under U.S. GAAP 30,810 33,841
33,558
Net cost under Mexican GAAP 31,526 33,841
33,558
------- ---------
---------
Additional income (expense) that would be
recognized under U.S. GAAP $ 716 $ - $
-
======= =========
=========
December 31
-----------
1999 2000
---- ----
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 217,336 $
230,436
Service cost 8,347
8,934
Interest cost 12,381
12,424
Actuarial loss 13,113
12,200
Benefits paid (20,741)
(18,234)
---------
---------
Projected benefit obligations, end of year $ 230,436 $
245,760
=========
=========
Unfunded liabilities $ 230,436 $
245,760
Unrecognized net prior service costs, net (4,415)
(15,510)
Unrecognized transition obligation and other (149,337)
(137,304)
---------
---------
Net recognized pension liability $ 76,684 $
92,946
=========
=========
Amounts recognized in balance sheets:
Accrued benefit liability $ 198,371 $
206,122
Intangible pension asset - Labor obligations 121,687
110,153
---------
---------
Net liability recognized under U.S. GAAP 76,684
95,969
Net liability recognized under Mexican GAAP 76,684
95,969
---------
---------
Additional minimum liability $ - $ -
=========
=========
The Company has no post-retirement health care insurance or other post-
employment benefit plans, other than the pensions plans mentioned above.
A-107
The following rates were used for the assumptions in determining the actuarial
present value of accumulated benefits for the Company's defined benefit plans:
Year ended December 31,
-----------------------
1998 1999 2000
---- ---- ----
Discount rate 5% 5% 5%
Salary increase rate 2% 2% 2%
Rate of return 5% 5% 5%
Acquisitions
------------
During the year ended December 31, 1998, the Group acquired what is now Mckinley
Container, Co. for US$ 23 million. Under Mexican GAAP, the Group has recorded
negative goodwill, representing the excess of the book value of the net assets
acquired over the purchase price. Such negative goodwill was amortized into
income over the period in which the Group expects to integrate these operations
into the Company.
Under U.S. GAAP this purchases has been accounted for under the purchase method
and consequently, the purchase price has been allocated to assets acquired and
liabilities assumed. As a result under U.S. GAAP, negative goodwill was recorded
as a reduction in the carrying value of the long-term assets (primarily fixed
assets), whereas under Mexican GAAP, it was recognized in earnings.
Equity Swaps agreements
-----------------------
As described in Note 10, the Group has entered into "Equity Share Swap
Transactions" (collective "Equity Swaps") with financial institutions , with
respect to its American Depository Receipts ("ADR's") at prices ranging from
US$10.4489 to US$14.2813. The Equity Swaps have notional amounts of US$11.88
and US$6.06 at December 31, 1999 and 2000, respectively, bearing interest at
LIBOR plus 2.95% payable semiannually and are due in 2002 and 2003. Under
Mexican GAAP, the Company has recorded the fair value of the Equity Swaps on the
balance sheet, with a corresponding adjustment to stockholders' equity. Under
US GAAP, the fair value of the Equity Swaps is recorded in income for the
period.
Minority interest
------------------
Under Mexican GAAP , the minority interest in consolidated subsidiaries is
presented as a separate component with stockholders equity in the consolidated
balance sheet. For U.S. GAAP purposes, the minority interest is not included in
stockholders equity.
A-108
SUPPLEMENTAL US GAAP DISCLOSURES
Cash flow information
---------------------
Under US GAAP pursuant to SFAS 95, "Statement of Cash Flows", a statement of
cash flows is a required component of a complete set of financial statements in
lieu of a statement of changes in financial position. SFAS 95 establishes
specific presentation requirements and additional disclosures but does not
provide guidance with respect to inflation adjusted financial statements. Based
on requirements of the Securities and Exchange Commission (the "SEC"), the
effect of inflation restatements and foreign exchange gains and losses on cash
flow related to financing and operating activities has been included in the line
item, "Monetary gain", and the effect of inflation on cash balances has been
included in a separate line item after cash flows from investing activities.
The U.S. GAAP statements of cash flow for the year ended December 31, 1998, 1999
and 2000 are as follows:
Years ended December, 31
------------------------
1998 1999
2000
---------- ----------
---------
Operating activities:
U.S. GAAP Net (loss) income $ (159,560) $1,925,659
6,059
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 327,528 309,435
253,401
Minority interest (9,435) 43,130
(3,128)
Deferred income taxes (122,638) (673,170)
415,972
Deferred employee profit sharing 23,456 (116,374)
(8,397)
Allowance for doubtful accounts 34,860 38,127
28,479
Inventory obsolescence allowance - 2,741
907
Employee benefits 715 3,127
-
Monetary gain (857,605) (617,039)
(359,988)
Accrued interest 182,983 -
-
Equity Swap (116,930) (69,913)
75,522
Loss on sale of fixed assets - -
6,088
Foreign exchange loss, net 77,107 173,739
79,946
Other 63,224 (8,312)
(3,514)
---------- ----------
---------
(556,295) 1,011,150
491,347
Changes in operating assets and liabilities:
Accounts receivable, net (236,472) (181,260)
(696,348)
Inventories, net 65,088 (368,593)
19,031
Prepaid expenses - (145,688)
(60,980)
Other liabilities (10,432) 352,108
354,885
---------- ----------
---------
Cash flow (used in) provided by operating
0000activities: (738,111) 667,717
107,935
---------- ----------
---------
Financing activities:
Proceeds from (payments of) bank loans 2,170,390 (453,097)
214,733
Payments of long term debt 24,617 (512,435)
(96,096)
A-109
Payments of debt issuance cost - -
(13,825)
Paid in capital - 3,476
(599)
Derivative instruments - -
(12,514)
---------- ----------
---------
Cash flow provided by (used in)
financing activities: 2,195,007 (962,056)
91,699
---------- ----------
---------
Investing activities:
Acquisitions of fixed assets (887,786) (125,523)
(380,542)
Proceeds on sale of fixed assets
4,497
Acquisitions of minority interest (28,319) (23,561)
-
---------- ----------
---------
Cash flow used in investing activities (916,105) (149,084)
(376,045)
---------- ----------
---------
Effect of inflation and exchange rate changes
on cash and cash equivalents (27,129) 24,684
100,693
Net increase (decrease) in cash and cash
equivalents 513,662 (418,739)
(75,718)
Cash and cash equivalents at beginning of year 600,915 1,114,577
695,838
---------- ----------
---------
Cash and cash equivalents at end of year $1,114,577 $ 695,838 $
620,120
========== ==========
=========
Supplemental cash flow disclosures:
-----------------------------------
Years ended December 31,
------------------------
1998 1999
2000
---------- ----------
---------
Cash paid during the year for:
Interest $ 668,930 $ 680,595 $
729,138
Income and asset tax 8,519 122,451
116,624
Supplemental balance sheet information
--------------------------------------
. Other current liabilities:
--------------------------
Included within accrued liabilities and other payables as of December 31, 1999
and 2000 are customers' advances ($613 and $153, respectively) and accrued
freight costs ($5,449 and $16,394, respectively).
. Segment disclosures
-------------------
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS 131 establishes guidelines for the way that public
enterprises report information about operating segments in financial
statements periods. This statement also established guidelines for related
disclosures about products and services, geographic areas, and major
customers. See Note 19 for the Company's segment disclosures in accordance
with IAS 14 and SFAS No 131.
A-110
. Valuation and qualifying accounts:
----------------------------------
The following table presents the rollforward of the allowance for doubtful
accounts for the years ended December 31, 1998, 1999 and 2000:
Years ended December 31,
------------------------
1998 1999 2000
---- ---- ----
Balance at the beginning of the period $(63,503) $(88,921) $(86,828)
Increase in the allowance (34,860) (38,127) (28,479)
Write-offs 3,276 33,499 25,001
Effects of inflation 6,166 6,721 6,924
-------- -------- --------
Balance at the end of the period $(88,921) $(86,828) $(83,382)
======== ======== ========
The following table presents the rollforward of the inventory obsolescence
allowance for the years ended December 31, 1998, 1999 and 2000:
Years ended December 31,
------------------------
1998 1999 2000
---- ---- ----
Balance at the beginning of the period $(17,467) $(11,050) (12,579)
Increase in the allowance - (2,741) (907)
Write-offs 4,503 - -
Effects of inflation 1,914 1,212 1,041
-------- -------- --------
Balance at the end of the period $(11,050) $(12,579) $(12,445)
======== ======== ========
Risks and uncertainties
------------------------
. Environmental matters
The Company's Mexican operations are subject to the Mexican General Law of
Ecological Stabilization and Environment Protection (Ley General el Equilibrio
Ecologico y la Proteccion al Ambiente) and the rules published thereunder (the
"Ecological Law"). In accordance with the Ecological Law, companies engaged in
industrial activities are subject to the regulatory jurisdiction of the Ministry
of Natural Resources, Environment and Fishing (Secretaria del Medio Ambiente,
Recursos Naturales y Pesca), which has broad discretion in carrying out its
statutory mandate.
In 1998, the Company agreed with Mexican environmental regulatory authorities to
bring its paper plants into compliance with wastewater discharge regulations.
The Company has since instituted new procedures, and management believes the
Company is currently in compliance with both the general standard established
under the Ecological Law and with specific standards promulgated by the
regulatory authorities. However, there can be no assurance that relevant
authorities will continue
A-111
finding the Company 's environmental procedures adequate, or that more stringent
environmental laws will not be enacted in the future.
New accounting pronouncements
-----------------------------
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
" Accounting for transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This Statement is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after March 31,
2001. The Company management does not expect the adoption of this statement to
have a material impact on financial statements.
In December 1999, the SEC issued staff accounting Bulleting 101 ("SAB 101"),
"Revenue Recognition in Financial Statement" which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements have
been presented on a basis that is consistent with the provisions of SAB 101 for
all periods presented. There was no effect with the implementation of SAB 101.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which requires that all derivatives instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as a part of a hedge transaction, and, if so, the type
or hedge transaction. This statement is effective for fiscal years beginning
after June 15, 2000. In June 2000, the FASB issued statement No. 138,
"Accounting for Derivative Instruments and Hedging Activities - an amendment of
SFAS 133." This amendment addresses certain issues causing implementation
difficulties for entities that have adopted or will adopt SFAS 133. The
adoption of SFAS 133 will not have a material impact on the Company's financial
position or results of operations.
- - - - - - - - - - - - - - - -
A-112
Item 19. Exhibits.
Documents filed as exhibits to this annual report:
1.1 English language translation of April 26, 2001 Amendment to our by-laws
(estatutos sociales).
A-113
Exhibit 1.1 to Form 20-F
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
AMENDMENT TO THE BY-LAWS
ADOPTED ON APRIL 26, 2001
ARTICLE ELEVEN. Provisional or definitive shares shall be represented by
certificates which must contain the text of Article Five of these by laws and
which must fulfill the requirements of Article 125 of the General Law of
Commercial Companies and Article Fifteen of the Foreign Investments Law. Such
certificates may comprise one or more shares and shall be handwritten or
facsimile signed by the Chairman and any other member of the Board of Directors,
subject to the condition that in the case of facsimile, the handwritten
signatures be deposited in the Public Registry of Commerce in which the Articles
of Incorporation and By-Laws are registered. The definitive certificates shall
include coupons numbered in sequence; the provisional certificates may or may
not contain coupons. The definitive or provisional certificate characteristics
shall be determined by the Board of Directors that may also determine on the
issuance of new certificates for substitution of those outstanding at the time
of the resolution. The definitive certificates shall be issued within 180 days
from the day of incorporation or the issuance or exchange resolution.
ARTICLE TWELVE. The management of the Company shall be vested in the Board
of Directors comprised of such number of members as may be determined by the
Shareholders, which shall not be less than five nor more than fifteen, which
Shareholders may designate such alternate members as it may deem appropriate. If
designations are made in order to substitute a determined regular member, then
the alternate member shall only substitute for the specific regular member
involved. Otherwise, the alternate members shall commence their functions in
accordance with the sequence in which they are designated. The mentioned
substitution rules shall not be apply for the Chairman substitution that always
shall be substituted by the Vice Chairman or if unavailable, by the first
alternate member in accordance with the sequence of designation.
Substitution shall take effect in case of resignation or incapacity of the
regular members. The alternate member shall continue to hold office until the
end of the incapacity of the regular member or, until the Shareholders makes a
new designation, as the case may be.
In order to divulge the regular activities of the Board of Directors, the
alternate members shall receive the same information that the regular members
obtain from time to time.
The Board of Directors shall designate from amongst its members one to hold
the office of the Chairman of the Board of Directors, the Vice Chairman, the
Secretary and the Assistant Secretary of the Board of Directors, provided that
the latter may or may not be members of the Board of Directors.
The Director General and such other officers appointed by the Board of
Directors shall enjoy those powers which are granted to them in the act which
designated them. The individuals holding those titles may be shareholders,
members of the Board of Directors, members of other administrative bodies of the
corporation, or individuals from outside of the corporation.
The Chairman of the Board of Directors shall have those powers and duties
which are granted to him or her by law and by these by-laws and, in particular,
he or she shall have the duty of complying with, and causing compliance with,
all laws and these by-laws and the resolutions of the Shareholders and of the
Board of Directors.
ARTICLE THIRTEEN. In order to support and guaranty the proper adoption of
management resolutions in the areas of auditing, remuneration and planning and
finance, there shall be committees in each of such areas. The Shareholders shall
have the power to designate between three and seven members of the Board of
Directors to be part of the audit, remuneration and finance and planning
committees. The Shareholders shall also designate the President of each such
committees.
The Shareholders may additionally designate other members of the Board of
Directors or alternates of such Board to act as alternate members of the
mentioned committees for temporary or definitive absentees, with the powers that
the Shareholders deem appropriate to develop their functions.
1
A-114
Exhibit 1.1 to Form 20-F
The audit, remuneration and finance and planning committees shall act and
adopt any resolution by majority vote. In case of conflict of interest the
members involved shall not participate. The committees shall have such powers
specifically granted by the Shareholders and shall participate in such studies,
advisement, and additional matters submitted by the Board of Directors in
addition to the following general functions:
The remuneration committee shall recommend designations of Director General
and main officers of the Company; suggest evaluation criteria in accordance with
the general outlines of the Board of Directors; and analyze and submit to the
Board of Directors the structure and remuneration of the main officers.
The audit committee shall recommend to the Board of Directors the external
auditors of the Company; suggest the terms and conditions of such auditors
service; supervise the auditors work; act as intermediate between the Board of
Directors and the external auditors, and guaranty the independence of said
auditors; review the working plan, communications and audit reports and inform
its results to the Board of Directors; submit to the Board of Directors the
financial information basis, review such financial information and its issuance
process; contribute in the determination of the general outline of the internal
control system and evaluate its effectiveness; support the Board of Directors in
the evaluation and coordination of the annual internal audit programs;
coordinate the internal, external and statutory auditing works; and verify the
compliance of such statutes and regulations applicable to the Company.
The finance and planning committee shall be responsible of evaluate and, if
applicable, suggest the investment and financing policy of the Company; evaluate
and, if applicable, suggest the general outline for the strategic planning of
the Company; submit opinions as of the annual budget; review the adequate use
and implementation of the budget and the strategic plan; and identify risk
factors to the Company and evaluate the policy for its management.
The audit, remuneration and finance and planning committees shall inform to
the Board of Directors of its activities at least twice a year or at any other
time when any committee deems appropriate or becomes aware of any material acts
or facts to the Company.
The audit, remuneration and finance and planning committees shall not
delegate any of its powers to anyone, but may request advise from experts to
resolve adequately such matters submitted to the mentioned committees and,
additionally, the President of each committee, may invite such experts and
officers involved with the particular committee's activities.
The Statutory Auditor must be duly invited to each committee meeting and
may participate in the discussions without voting power.
ARTICLE EIGHTEEN. The Board of Directors shall meet, at least, four times
a year, and whenever a Meeting is called by the Chairman or by two members of
the Board of Directors. The Statutory Auditor must be called for all of the
sessions of the Board of Directors and, when attending such sessions, he shall
have the right to participate, but not to vote. The sessions of the Board of
Directors shall be held in Mexico City, Federal District or in any other place,
which the Board of Directors may agree to.
The notices of meeting for such meetings must be sent to those who are to
attend, at least five days in advance of the date of the event.
The Agenda of Meeting or a report on the subjects to be deliberated and
resolved must be sent with the notice of meeting, except such information which
disclose may result in any breach of contract or against the Company's benefit.
Whenever a resolution of the Board of Directors is approved in lieu of
actual Meeting of the Board, such resolution shall have all legal consequences
when taken by unanimous vote, ratify by the members of the Board in writing.
2
A-115
ARTICLE TWENTY-TWO. In order to hold office, the members of the Board of
Directors and the members of the committees referred to in Article Thirteen of
these By-laws must guarantee performance of their duties in the terms determined
by the corporate body, which appoints them.
3
A-116
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F/A and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
By: /S/ GABRIEL VILLEGAS SALAZAR
-------------------------------------------------
Name: Lic. Gabriel Villegas Salazar
Title: Secretary of the Board and Legal Counsel
Date: July 30, 2001
A-117
CONFORMED COPY
--------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of April, 2001.
Grupo Industrial Durango, S.A. de C.V.
--------------------------------------
(Translation of registrant's name into English)
Potasio 150, Ciudad Industrial Durango, Durango, Mexico
-------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-________________.
A-118
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
By: /s/ Gabriel Villegas Salazar
--------------------------------------
Name: Lic. Gabriel Villegas Salazar
Title: Secretary of the Board and
Legal Counsel
Date: April 27, 2001
A-119
[GRUPO INDUSTRIAL DURANGO LOGO]
BMV: GIDUSA; NYSE: GID
DURANGO ANNOUNCES RESULTS FOR THE
FIRST QUARTER 2001
Durango, Mexico, April 26, 2001. - Grupo Industrial Durango, S.A. DE C.V.
("Durango" or the "Company"), the largest integrated paper-based packaging
company in Mexico and Latin America, today announced its results for the first
quarter ended on March 31, 2001. Figures were prepared in accordance with
generally accepted accounting principles in Mexico and have been restated in
constant Pesos ("Ps.") and converted into U.S. Dollars as of March 31, 2001.
HIGHLIGHTS
. Very tough international industry business environment
. Mexican economy growing one half of the previous year
. Capacity management to maintain prices
. Better performance than the industry average
. 1Q'01 EBITDA slightly better than 4Q'00
. Extraordinary EBITDA margin of 23.7%
. Successful $260MM refinancing of short term debt
. Positioned to benefit from next rebound
OPERATING RESULTS
NET SALES
For the first quarter of 2001, Durango's net sales of US$141.4 million decreased
by 12% compared to US$160.1 million compared to the same period of 2000. This
reduction reflects the US economy downturn effect in the domestic market.
Shipments of corrugated containers (core business) during the first quarter 2001
were down 6% compared with the same period in 2000. Average prices during the
first quarter of 2001 increased by 5% compared with first quarter of 2000.
A-120
Despite the effect of a strong peso on imports attractive, the company was able
to maintain its market share position in Mexico, as well as the maquiladora
market.
COST OF GOODS SOLD
Cost of goods sold per unit increased 3% in spite of the 8% decrease in raw
materials (mainly influenced by reductions in OCC), which represent 51% of the
total selling cost. Such decrease was absorbed by increases in energy of 13% and
increases in unit fixed costs of labor by 22% and maintenance by 13%, mainly due
to lower volumes.
EBIT
As a result of a reduction in volumes, operating income for the first quarter of
2001 decreased by US$4.6 million from US$30.5 million during the first quarter
of 2000 to US$26.0 million compared with the same period in 2001. Despite this
adverse effect, the 18.4% margin remains above the paper industry average.
EBITDA
The company's EBITDA during the first quarter of 2001 reached US$33.5 million a
decrease of 14% compared with US$38.8 million for the same period in 2000 but an
increase of 2% compared with US$32.9 million in the fourth quarter of 2000. The
decline in EBITDA was primarily attributable to lower shipments and higher
energy costs.
FIRST QUARTER 2001 OPERATING DATA SUMMARY
--------------------------------------------------------------------------------
----
Change
Change
1Q'01 1Q'00 4Q'00 1Q'01/1Q'00
1Q'01/4Q'00
--------------------------------------------------------------------------------
----
Net Sales (US million) 141.4 160.1 153.3 -11.7%
-7.7%
--------------------------------------------------------------------------------
----
EBIT (US million) 26.0 30.5 23.0 -14.7%
+13.0%
--------------------------------------------------------------------------------
----
EBIT Margin 18.4% 19.1% 15.1%
--------------------------------------------------------------------------------
----
EBITDA (US million) 33.5 38.8 32.9 -13.7%
+1.8%
--------------------------------------------------------------------------------
----
EBITDA Margin 23.7% 24.2% 21.5%
--------------------------------------------------------------------------------
----
DEBT FINANCIAL STRUCTURE
After having completed our debt refinancing strategy during the first quarter by
$US260 million, the company has maturities of US$25.6 million in 2001 and
US$24.6 million in 2002, providing sufficient financial flexibility.
A-121
--------------------------------------------------------------------------------
CEO's STATEMENT
Miguel Rincon, President and CEO of Durango said: "Our results reflect the
challenging market conditions we faced during the first quarter 2001. As a NAFTA
market oriented company, we are more sensitive to the US economy's ups and
downs. Also, we are very sensitive to appreciation of the peso, because we have
a majority of our revenues in dollars and a peso cost position. However, we are
excited about our NAFTA vision because we believe Mexico has a great opportunity
to become the number one trading partner of the US during the next ten years.
This will require a lot of paper and Grupo Industrial Durango, as a major NAFTA
company, is very well positioned to benefit from this trend. We are confident
about prospects for 2002 and beyond, because the macro fundamentals responsible
for the downturn -a strong US dollar and peso, high-energy costs and weak
demand- are unlikely to get worse and should show signs of improving by the
third quarter of 2001. Meanwhile, we are striving to achieve better results for
2Q'01 than for 1Q'01, as we did regarding of 4Q'00, despite a very tough
business environment".
--------------------------------------------------------------------------------
CONTACTS
MAYELA R. VELASCO ALEX CANCIO
J. ARTURO DIAZ MEDINA RICHARD HUBER
Thomson Financial/Carson
(52-18) 14-1658 (212) 701-1973
(52-18) 29-1014 (212) 701-1830
mrinconv@corpdgo.com.mx alex.cancio@tfn.com
adiaz@corpdgo.com.mx richard.huber@tfn.com
We invite you to visit our Web site: www.gidusa.com.mx
This release contains forward-looking statements that involve risks and
uncertainties. The actual results achieved by The Company may differ
significantly from the results discussed in the forward - looking statements.
Factors that may cause such differences includes general economic, market, or
business conditions; the opportunities (or lack thereof) that may be presented
to and pursued by The Company and its subsidiaries; the availability of raw
materials used by The Company and its subsidiaries; competitive actions by other
companies; changes in laws or regulations; and other factors, may of which are
beyond the control of The Company and its subsidiaries.
A-122
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
OPERATING STATISTICS
(Figures Restated as of March 31, 2001)
FINANCIAL
HIGHLIGHTS
PESOS AT
DOLLAR
THE END
TERMS
OF THE
PERIOD
1Q/00 1Q/01 1Q/00 vs Ac/00 Ac/01 Ac/00
vs 1Q/00 1Q/01 1Q/00 vs Ac/00 Ac/01 1Q/00 vs
1Q/01 Ac/01
1Q/01 1Q/01
SALES 1543.9 1342.6 -13% 1543.9 1342.6
-13% 160.1 141.4 -12% 160.1 141.4 -12%
OPERATING PROFIT 295.5 246.6 -17% 295.5 246.6
-17% 30.5 26.0 -15% 30.5 26.0 -15%
OPERATING MARGIN 19.1% 18.4% -4% 19.1% 18.4%
-4% 19.1% 18.4% -3% 19.1% 18.4% -3%
DEP., AMORTIZ. AND OTHER 79.7 71.1 -11% 79.7 71.1
-11% 8.3 7.5 -10% 8.3 7.5 -10%
EBITDA 375.2 317.7 -15% 375.2 317.7
-15% 38.8 33.5 -14% 38.8 33.5 -14%
EBITDA MARGIN 24.3% 23.7% -3% 24.3% 23.7%
-3% 24.2% 23.7% -2% 24.2% 23.7% -2%
INTEREST NET 157.6 165.0 5% 157.6 165.0
5% 16.3 17.4 7% 16.3 17.4 7%
Interest gross 176.0 182.5 4% 176.0 182.5
4% 18.2 19.2 5% 18.2 19.2 5%
Interest net 157.6 165.0 5% 157.6 165.0
5% 16.3 17.4 7% 16.3 17.4 7%
COVERAGE 2.4 1.9 -19% 2.4 1.9
-19% 2.4 1.9 -19% 2.4 1.9 -19%
EXCHANGE LOSS (GAIN) NET -132.3 -45.9 -132.3 -45.9
-13.7 -4.8 -13.7 -4.8
NET INCOME 293.8 135.1 -54% 293.8 135.1
-54% 30.4 14.2 -53% 30.4 14.2 -53%
MAJORITY 293.7 135.7 293.7 135.7
30.4 14.3 30.4 14.3
MINORITY 0.1 -0.6 0.1 -0.6
0.0 -0.1 0.0 -0.1
EARNINGS PER ADR (U.S.D.) 1.15 0.53 -54% 1.15 0.53
-54% 1.13 0.53 -53% 1.13 0.53 -53%
ACQUISITION CAPEX 0.0 0.0 #DIV/0! 0.0 0.0
#DIV/0! 0.0 0.0 #DIV/0! 0.0 0.0 #DIV/0!
INVESTMENT CAPEX 55.0 180.3 228% 55.0 180.3
228% 5.8 19.0 228% 5.8 19.0 228%
EXCHANGE RATE 9.4933 9.4933 0.0% 9.4933 9.4933
0.0%
RESTATEMENT RATIO 1.0717 1.0717
A-123
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND MARCH 31, 2001 (UNAUDITED)
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF MARCH 31, 2001
(Stated in thousands of Pesos and Dollars)
US$ DLLS.
December 31, March 31, March 31,
2000 2001 2001
---- ---- ----
(Audited) (Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................... $
624,293 $ 382,062 40,245
Accounts receivable-
Trade................................................................
1,100,850 960,751 101,203
Refundable income and asset taxes....................................
0 0 0
Other................................................................
213,298 236,838 24,948
------------------- ----------------- -------------
Net accounts receivable.............................................
1,314,148 1,197,589 126,151
Inventories, net........................................................
1,062,013 1,003,782 105,736
------------------- ----------------- -------------
Total current assets...............................................
3,000,454 2,583,433 272,132
INVESTMENT IN ASSOCIATED COMPANIES........................................
31,522 31,173 3,284
PROPERTY, PLANT AND EQUIPMENT, net........................................
9,386,780 9,336,145 983,446
OTHER ASSETS, net.........................................................
308,034 380,575 40,089
------------------- ----------------- -------------
Total assets....................................................... $
12,726,790 $ 12,331,326 1,298,950
=================== ================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank portion of long-term debt loans and current........................
387,316 243,340 25,633
Notes payable...........................................................
26,537 44,976 4,738
Accounts payable to suppliers...........................................
588,350 459,936 48,448
Other accounts payable and accrued liabilities..........................
490,274 260,476 27,438
------------------- ----------------- -------------
Total current liabilities..........................................
1,492,477 1,008,728 106,257
LONG-TERM DEBT............................................................
5,143,350 5,186,870 546,372
LIABILITY FOR EMPLOYEE BENEFITS...........................................
208,429 210,473 22,171
DEFERREDCREDITS..........................................................
64,760 143,015 15,065
LIABILITY FOR DEFERRED INCOME TAXES.......................................
2,414,686 2,406,616 253,507
------------------- ----------------- -------------
Total long term liabilities........................................
7,831,225 7,946,974 837,114
------------------- ----------------- -------------
Total liabilities..................................................
9,323,702 8,955,702 943,371
STOCKHOLDERS' EQUITY:
Majority interest.......................................................
3,367,804 3,340,156 351,844
Minority interest.......................................................
35,284 35,468 3,736
------------------- ----------------- -------------
Total stockholders' equity.........................................
3,403,088 3,375,624 355,580
------------------- ----------------- -------------
Total liabilities and stockholders' equity......................... $
12,726,790 $ 12,331,326 1,298,950
=================== ================= =============
Exchange rate: $ 9.4933 per Dollar
A-124
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN FINANCIAL POSITION
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF MARCH 31, 2001
(Stated in thousands of Pesos and Dollars)
*
Full Year Acum.Mar Acum.Mar
----------------------------------------------
2000 2001 US$ 2001
----------
(Audited) (Unaudited)
OPERATING ACTIVITIES:
Net income
(loss)................................................................... $
390,918 $ 135,081 14,229
Add (deduct)- Charges (credits) to income which do
not require (provide) cash-
Depreciation and amortization in
EBIT............................................ 275,108 59,527
6,270
Provision for employee
benefits.................................................. 25,003
4,369 460
Other...........................................................................
. 29,776 7,161 754
------------ ------------- -----------
Total items which do not require (provide) cash in
EBIT.......................... 329,887 71,057 7,485
Amortization of Financial
Comissions............................................. 24,022
18,433 1,942
Provision for deferred
taxes..................................................... 163,633
(10,262) (1,081)
Other...........................................................................
. 23,336 4,968 523
------------ ------------- -----------
Total items which do not require (provide)
cash.................................. 540,878 84,196
8,869
------------ ------------- -----------
Net resources generated from (applied to)
income................................ 931,796 219,277
23,098
Changes in:
------------ ------------- -----------
Net resources applied to working capital, except
treasury.......................... 24,564 (102,018)
(10,746)
------------ ------------- -----------
Net resources used in operating
activities......................................... 956,360
117,259 12,352
------------ ------------- -----------
INVESTMENT ACTIVITIES:
Acquisition of new
subsidiaries.................................................. 0
0 0
Additions to property, plant and
equipment....................................... (331,508) (180,261)
(18,988)
Increase in other
assets......................................................... (66,558)
(71,750) (7,558)
Minority
interest................................................................
0 0 0
------------ ------------- -----------
Net resources applied to investing
activities...................................... (398,066) (252,011)
(26,546)
------------ ------------- -----------
FINANCING ACTIVITIES:
Short term Bank
loans............................................................ 119,963
(1,689,111) (177,927)
Long term Bank
loans.............................................................
(565,137) 22,352 2,355
Notes
payable....................................................................
(187,762) 70,680 7,445
Long term other
liabilities...................................................... 0
1,488,600 156,805
Increase in
capital..............................................................
(605) 0 0
------------ ------------- -----------
Net resources generated from financing
activities.................................. (633,541) (107,479)
(11,322)
------------ ------------- -----------
INCREASE IN CASH AND CASH
EQUIVALENTS............................................... (75,247)
(242,231) (25,516)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD................................ 699,540 624,293
65,761
------------ ------------- -----------
CASH & CASH EQUIVALENTS AT END OF THE
PERIOD........................................ $ 624,293 $ 382,062
US$ 40,245
============ ============= ===========
* The exchange rate of 9.4933 was used for translation purposes.
A-125
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF MARCH 31, 2001
Thousands of Pesos
Thousands of Dollars
1Q 1Q
1Q 1Q
2000 2001 Var
2000 2001 Var
---- ---- ---
---- ---- ---
(Audited) (Unaudited)
(Audited) (Unaudited)
NET SALES................................. $ 1,543,938 $ 1,342,610
-13% 160,050 141,386 -12%
COST OF SALES............................. 1,142,397 988,356
-13% 118,529 104,075 -12%
------------- -------------
----- ------ -------- ------
Gross profit............................ 401,541 354,254
-12% 41,521 37,311 -10%
Selling and Administrative expenses..... 106,076 107,654
1% 10,972 11,339 3%
------------- -------------
----- ------ -------- ------
Operating income........................ 295,465 246,600
-17% 30,549 25,972 -15%
FINANCIAL EXPENSE:
Interest, net............................. 157,552 165,039
5% 16,258 17,385 7%
Exchange (gain) loss, net................. (132,291) (45,862)
-65% (13,652) (4,831) -65%
Gain on monetary position................. (149,594) (52,889)
-65% (15,438) (5,572) -64%
------------- -------------
----- ------ -------- ------
Total financial expense................. (124,333) 66,288
-153% (12,832) 6,982 -154%
------------- -------------
----- ------ -------- ------
OTHER INCOME (EXPENSES):
Other income (expense), net............... 4,758 848
-82% 492 89 -82%
------------- -------------
----- ------ -------- ------
Total other income (expense)............ 4,758 848
-82% 492 89 -82%
------------- -------------
----- ------ -------- ------
Income (loss) before income and
asset taxes.......................... 424,556 181,160
-57% 43,873 19,079 -57%
Provisions for income and asset taxes..... 111,560 56,341
-49% 11,513 5,934 -48%
Provision for deferred income taxes....... 19,183 (10,262) N/A
1,980 (1,086) N/A
------------- -------------
----- ------ -------- ------
NET INCOME................................ $ 293,813 $ 135,081
-54% 30,380 14,231 -53%
============= =============
===== ====== ======== ======
MAJORITY................................ 293,742 135,708
-54% 30,373 14,297 -53%
MINORITY................................ 71 (627) N/A
7 (66) N/A
------------- -------------
----- ------ -------- ------
$ 293,813 $ 135,081
-54% 30,380 14,231 -53%
============= =============
===== ====== ======== ======
A-126
CONFORMED COPY
--------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July , 2001.
----------------------
Grupo Industrial Durango, S.A. de C.V.
---------------------------------------------------------------------
(Translation of registrant's name into English)
Potasio 150, Ciudad Industrial Durango, Durango, Mexico
------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F Form 40-F
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934. Yes No
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-
--------------------.
A-127
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CORPORACION DURANGO, S.A. DE C.V.
By: /s/ Gabriel Villegas Salazar
----------------------------
Name: Lic. Gabriel Villegas Salazar
Title: Secretary of the Board and Legal
Counsel
Date: July 27, 2001
A-128
[GRUPO INDUSTRIAL DURANGO LOGO]
GRUPO INDUSTRIAL DURANGO ANNOUNCES RESULTS
FOR THE SECOND QUARTER 2001
Durango, Mexico, July 27, 2001. - Grupo Industrial Durango, S.A. de C.V. (The
"Company" or "GID" ; NYSE: GID ; BMV: Gidusa), the largest integrated
containerboard and packaging company in Mexico and Latin America, today
announced its results for the second quarter ended on June 30, 2001. Figures
were prepared in accordance with generally accepted accounting principles in
Mexico and have been restated in constant Pesos ("Ps.") and converted into U.S.
Dollars as of June 30, 2001.
--------------------------------------------------------------------------------
HIGHLIGHTS
. Tougher market and exchange rate conditions
. 2Q'01 EBITDA slightly better than 1Q'01
. 2Q'01 EBITDA declined only 7.6% versus 2Q'00
. Stronger EBITDA margin of 23.4%
. Stronger Net Income
. Consistently out performing the industry
. Poised to grow earning power in 2002
--------------------------------------------------------------------------------
-
2Q'001 1Q'01 2Q'00
2Q'01/1Q'01 2Q'01/2Q'00
--------------------------------------------------------------------------------
------------------------------
NET SALES 138.5 141.6 154.6
-2.2% -10.4%
--------------------------------------------------------------------------------
------------------------------
EBITDA 32.4 32.3 35.1
0.4% -7.6%
--------------------------------------------------------------------------------
------------------------------
EBITDA Margin 23.4% 22.8% 22.7%
2.6% 3.1%
--------------------------------------------------------------------------------
------------------------------
NET INCOME 34.2 14.2 -37.3
140.6% Na
--------------------------------------------------------------------------------
------------------------------
(In million of USD)
1
A-129
SECOND QUARTER 2001 COMPARED WITH SECOND QUARTER 2000
Net Sales
The continuation of a demand slow down due to a very weak Mexican and US economy
and the strong Peso and US dollar affected domestic profitability and export
competitiveness. The Company is taking actions to match production orders,
stabilize and reduce inventory levels and to focus on and reinforce
relationships with the Company's customers.
During the second quarter of 2001, the Company took approximately 34,000 metric
tons of market-related down time in the paper and packaging segment to match
customer orders and reduce inventories.
Total net sales decreased 10.4% to US$138.5 million for the second quarter of
2001 from US$154.6 million for the second quarter of 2000. This decrease was
primarily due to a 16.2% decrease in shipments to 207.3 thousand metric tons for
the second quarter of 2001 from 247.5 thousand metric tons for the second
quarter of 2000. However, a 7.0% increase in the average unit mix prices mainly
from paper and packaging prices helped mitigate the reduction in volume.
Cost of Sales
Cost of sales decreased 10.7% to US$103.2 million for the second quarter of 2001
from US$115.6 million for the second quarter of 2000. This decrease was
primarily due to lower shipments and lower costs in raw materials. In addition,
average prices of old corrugated container, or OCC, which account for
approximately 50% of our cost of sales, decreased by 34% in nominal terms to
US$106 per ton from US$161 per ton. Energy and labor costs, which represent
approximately 29% of our cost of goods sold, increased approximately by 15% in
nominal terms during the period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 8.6% to US$10.0 million
for the second quarter of 2001 from US$10.9 million for the second quarter of
2000.
EBITDA
Our raw material cost reductions, higher energy costs, lower volumes and
downward pressure on pricing all influenced earnings, leading to a decrease in
EBITDA of 7.6% to US$32.4 million for the second quarter of 2001 from US$35.1
million for the second quarter of 2000. The most significant negative effect was
from lower shipments in the
2
A-130
paper and packaging segments. EBITDA as a percentage of net sales was 23.4% for
the second quarter of 2001 higher than 22.7% for the second quarter of 2000.
Operating Income
Operating income decreased 9.7% to US$25.3 million for the second quarter of
2001 from US$28.0 million for the second quarter of 2000. This decrease was
primarily due to lower shipments in paper and packaging segments. Operating
income as a percentage of sales was 18.3% for the second quarter of 2001
compared with 18.1% for the second quarter of 2000.
Financing Cost
Financing cost was a gain of US$16.6 million for the second quarter of 2001 as
compared to an expense of US$35.6 million for the same period in 2000. Interest
expense increased to US$19.9 million for the second quarter of 2001 from US$17.5
million for the second quarter of 2000. Interest income reached US$2.7 million
for the second quarter of 2001 practically flat from US$2.8 million for the
second quarter of 2000.
Foreign exchange results were a gain of US$28.7 million for the second quarter
2001 as compared to an expense of US$33.4 million for the second quarter 2000.
This foreign exchange difference resulted from a higher appreciation of the Peso
in the second quarter of 2001 as compared to the same period of 2000. Gain from
the Company's monetary position decreased 58.5% to US$5.2 million for the second
quarter of 2001 from US$12.5 million for the second quarter of 2000. This
decrease reflected a lower inflation rate.
Provisions for Employee Profit Sharing and Income and Asset Taxes Including Tax
Loss Carry Forwards
Provisions for employee profit sharing and income and asset taxes net of tax
loss carry forwards increased 23.0% to US$10.0 million for the second quarter of
2001 from US$8.1 million for the second quarter of 2000. This increase resulted
primarily due to an increase of the Company's taxable income.
Net Income
Net income was to US$34.2 million for the second quarter of 2001 compared to a
loss of US$37.3 million for the second quarter of 2000.
Liquidity and Capital Resources
Sources and Uses of Cash:
At June 30, 2001, the Company had cash and cash equivalents of US$64.5 million.
Net resources generated from income were US$68.4 million in 2001. We had a
decrease in accounts receivable of US$24.6 million, a decrease in inventory of
US$4.1 million and a decrease in accounts payable of US$41.7 million. Accounting
resources generated by
3
A-131
operating activities were US$46.5 million after paying taxes, financial costs
and accounting for changes in net working capital.
Capital Expenditures
The resources used in investment activities for the first six months of the year
2001 totaled US$17.0 million, of which US$12.0 million were paid in cash. The
Company estimates total capex to reach US$21 million for the full year 2001.
First Half 2001 Results
Due to the many and well known negative factors affecting our industry and
markets, during the first half of 2001 our total shipments dropped 16.1% to
421.5 thousands of metric tons during the first six months of 2001 from 502.3
thousands of metric tons of the same period of 2000, our net sales dropped 11.2%
to US$280.1 million during first half of 2001 from US$315.6 million from the
same period of 2000 year and our EBITDA dropped 11.3% versus the first half of
2000.
Upcoming relevant events
On July 3, 2001, Corporacion Durango, S.A. de C.V. ("DURANGO"), our holding
company, filed a registration statement with the Securities and Exchange
Commission for an exchange offer of its senior notes that will mature in 2006 or
2008 for Grupo Industrial Durango's $250 million senior notes due 2003. The
senior notes will be secured by the pledge of intercompany notes from GID. This
exchange notes will be indebtedness of the group at holding company level. In
February 2001, DURANGO issued US$180 million of 131/8% senior notes due 2006,
the proceeds of which were used to purchase or defease US$150 million of GID
notes due 2001 and to repay other indebtedness in its other subsidiaries.
--------------------------------------------------------------------------------
GID - HIGHLIGHTS 2ND QUARTER AND FIRST SEMESTER OF 2001
--------------------------------------------------------------------------------
-----------------------------------------
FIRST QUARTER SECOND QUARTER
YEAR TO DATE
--------------------------------------------------------------------------------
-----------------------------------------
Actual 2000 Actual 2000
Actual 2000
--------------------------------------------------------------------------------
-----------------------------------------
214.1 254.9 207.3 247.5 SHIPMENTS
421.5 502.3
--------------------------------------------------------------------------------
-----------------------------------------
141.6 161.0 138.5 154.6 NET SALES
280.1 315.6
--------------------------------------------------------------------------------
-----------------------------------------
26.0 30.7 25.3 28.0 EBIT
51.3 58.7
--------------------------------------------------------------------------------
-----------------------------------------
18.4% 19.1% 18.3% 18.1% EBIT Margin
18.3% 18.6%
--------------------------------------------------------------------------------
-----------------------------------------
32.3 37.9 32.4 35.1 EBITDA
64.7 72.9
--------------------------------------------------------------------------------
-----------------------------------------
22.8% 23.5% 23.4% 22.7% EBITDA
Margin 23.1% 23.1%
--------------------------------------------------------------------------------
-----------------------------------------
1.9X 2.3X 1.9X 2.4X COVERAGE
1.9X 2.4X
--------------------------------------------------------------------------------
-----------------------------------------
14.2 30.5 34.2 -37.3 NET INCOME
48.4 -6.7
--------------------------------------------------------------------------------
-----------------------------------------
4
A-132
CEO'S STATEMENT
"Although results improved in the second quarter of fiscal 2001, weaker domestic
economic conditions and excessively strong peso led to reduced production
volumes in this quarter compared to the second quarter last fiscal year. Higher
energy, chemicals and labor costs partially offset the benefit of reduced
recovered fiber costs compared to the last year's quarter," said Miguel Rincon,
Chairman and CEO.
Looking ahead Rincon remarked: "We are encouraged that many of our corrugated
packaging customers appear to have reduced their inventories to levels
consistent with their demand. That should make it easier for Grupo Industrial
Durango to match its supply of containerboard to customer demand for mill and
converted products in the months ahead and suggests that box demand is set to
recover promptly when the US and Mexico's manufacturing sector emerges from its
current recession"
--------------------------------------------------------------------------------
CONTACTS:
---------
MAYELA R. VELASCO ALEX CANCIO
J. ARTURO DIAZ MEDINA RICHARD HUBER
Thomson Financial/Carson
(52-18) 14-1658 (212) 701-1973
(52-18) 29-1014 (212) 701-1830
mrinconv@corpdgo.com.mx alex.cancio@tfn.com
adiaz@corpdgo.com.mx richard.huber@tfn.com
We invite you to visit our Web site: www.corpdgo.com
This release contains forward-looking statements that involve risks and
uncertainties. The actual results achieved by The Company may differ
significantly from the results discussed in the forward - looking statements.
Factors that may cause such
5
A-133
differences includes general economic, market, or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by The
Company and its subsidiaries; the availability of raw materials used by The
Company and its subsidiaries; competitive actions by other companies; changes in
laws or regulations; and other factors; may of which are beyond the control of
The Company and its subsidiaries.
6
A-134
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND JUNE 30, 2001 (UNAUDITED)
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF JUNE 30, 2001
(Stated in thousands of Pesos and Dollars)
US$ DLLS.
December 31, June 30,
June 30,
2000 2001
2001
-------------- ------------
---------------------
(Audited) (Unaudited)
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 621,113 $ 584,706
64,460
Accounts receivable, net............... 1,251,225 1,145,152
126,246
Affiliated companies................... 57,284 7,614
839
Taxes recoverable and other assets..... 6,947 13,754
1,516
Inventories, net....................... 1,070,192 1,033,381
113,925
Prepaids............................... 4,733 11,025
1,215
-------------- ------------
---------------------
Total current assets............... 3,011,494 2,795,632
308,201
PROPERTY, PLANT AND EQUIPMENT, net........... 9,417,503 8,958,112
987,578
OTHER ASSETS, net............................ 341,202 384,969
42,440
-------------- ------------
---------------------
Total assets...................... $ 12,770,199 $ 12,138,713
1,338,219
============== ============
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans and current portion of
long-term debt........................ 389,807 120,140
13,245
Interest payable....................... 261,210 144,779
15,961
Trade accounts payable................. 591,247 475,544
52,426
Notes payable.......................... 26,658 35,278
3,889
Affiliated companies................... 5,686 17
2
Accrued liabilities and other
payables.......................... 214,699 72,546
7,998
Employee profit-sharing................ 7,394 8,880
979
-------------- ------------
---------------------
Total current liabilities.......... 1,496,701 857,184
94,500
LONG-TERM DEBT............................... 5,155,013 5,183,229
571,419
NOTES PAYABLE................................ 37,898 79,552
8,770
DEFERRED TAXES............................... 2,429,169 2,430,014
267,894
LIABILITY FOR EMPLOYEE BENEFITS.............. 210,449 214,873
23,688
DERIVATIVE INSTRUMENTS....................... 65,387 74,928
8,260
-------------- ------------
---------------------
Total long term liabilities........ 7,897,916 7,982,596
880,031
-------------- ------------
---------------------
Total liabilities.................. 9,394,617 8,839,780
974,531
STOCKHOLDERS' EQUITY:
Majority interest...................... 3,339,956 3,263,539
359,786
Minority interest...................... 35,626 35,394
3,902
-------------- ------------
---------------------
Total stockholders' equity......... 3,375,582 3,298,933
363,688
-------------- ------------
---------------------
Total liabilities and
stockholders' equity.................. $ 12,770,199 $ 12,138,713
1,338,219
============== ============
=====================
Exchange rate: $9.0708 per Dollar
7
A-135
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN FINANCIAL POSITION
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF JUNE 30, 2001
(Stated in thousands of Pesos and Dollars)
*
Full Year
Acum.Jun Acum.Jun
-----------------------------------------------
2000
2001 US$ 2001
(Audited)
(Unaudited) ----------
OPERATING ACTIVITIES:
Net income (loss).......................................... $ 389,668
$ 447,598 49,345
Add (deduct)- Charges (credits) to
income which do not require
(provide) cash-
Depreciation and amortization......................... 298,463
123,778 13,646
Provision for deferred taxes.......................... 165,517
(4,175) (460)
Other................................................. 79,405
53,395 5,886
------------
-------------- ----------
Total items which do not require (provide) cash....... 543,385
172,998 19,072
------------
-------------- ----------
Net resources generated from income............. 933,053
620,596 68,417
Changes in operating assets and liabilities:
Decrease (Increase) in inventories.................... 149,269
36,811 4,058
Decrease (Increase) in other assets................... (31,782)
(80,153) (8,836)
Decrease (increase) in account receivables, net....... 122,343
222,797 24,562
(Decrease) increase in other accounts
payable and accrued expenses......................... (215,027)
(378,470) (41,724)
------------
-------------- ----------
Net resources used in operating activities............ 957,856
421,581 46,477
------------
-------------- ----------
FINANCING ACTIVITIES:
Short term Bank loans................................. 121,126
(269,667) (29,729)
Long term debt, net................................... (764,177)
49,954 5,507
Increase in capital................................... (611)
0 0
------------
-------------- ----------
Net resources generated from financing activities..... (643,662)
(219,713) (24,222)
------------
-------------- ----------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment............ (334,398)
(153,855) (16,962)
Increase in other assets.............................. (67,110)
(84,420) (9,307)
------------
-------------- ----------
Net resources applied to investing activities......... (401,508)
(238,275) (26,268)
------------
-------------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS...................... (87,314)
(36,407) (4,014)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD....... 708,427
621,113 68,474
------------
-------------- ----------
CASH & CASH EQUIVALENTS AT END OF THE PERIOD............... $ 621,113
$ 584,706 US$ 64,460
============
============== ==========
* The exchange rate of 9.0708 was used for translation purposes.
8
A-136
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF JUNE 30, 2001
Thousands of Pesos
Thousands of Dollars
2Q 2Q
2Q 2Q
2000 2001
Var 2000 2001 Var
--------- ----------
------- -------- ------- ------
(Audited) (Unaudited)
(Audited) (Unaudited)
NET SALES..................................... $1,526,999 $1,256,592
-18% 154,593 138,531 -10%
COST OF SALES................................. 1,135,901 936,180
-18% 115,612 103,208 -11%
---------- ----------
------ -------- -------- ------
Gross profit................................ 391,098 320,412
-18% 38,981 35,323 -9%
Selling and Administrative expenses......... 109,845 90,765
-17% 10,944 10,006 -9%
---------- ----------
------ -------- -------- ------
Operating income............................ 281,253 229,647
-18% 28,037 25,317 -10%
FINANCIAL EXPENSE:
Interest, net................................. 149,593 156,292
4% 14,718 17,230 17%
Exchange (gain) loss, net..................... 339,139 (260,295)
N/A 33,386 (28,696) N/A
Gain on monetary position..................... (126,658) (46,983)
-63% (12,469) (5,180) -58%
---------- ----------
------ -------- -------- ------
Total financial expense..................... 362,074 (150,986)
N/A 35,635 (16,646) N/A
---------- ----------
------ -------- -------- ------
OTHER INCOME (EXPENSES):
Other income (expense), net................... (2,148) 28,208
N/A (209) 3,109 N/A
---------- ----------
------ -------- -------- ------
Total other income (expense)................ (2,148) 28,208
N/A (209) 3,109 N/A
---------- ----------
------ -------- -------- ------
Income (loss) before income and
asset taxes................................ (82,969) 408,841
N/A (7,807) 45,072 N/A
Provisions for income and asset taxes......... 82,090 90,424
10% 8,102 9,968 23%
Provision for deferred income taxes........... 216,896 8,062
-96% 21,353 888 -96%
---------- ----------
------ -------- -------- ------
NET INCOME.................................... $ (381,955) $ 310,355
N/A (37,262) 34,216 N/A
========== ==========
====== ======== ======== ======
MAJORITY.................................... (380,155) 307,321
N/A (37,087) 33,881 N/A
MINORITY.................................... (1,800) 3,034
N/A (175) 335 N/A
---------- ----------
------ -------- -------- ------
$ (381,955) $ 310,355
N/A (37,262) 34,216 N/A
A-137
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
EXPRESSED IN TERMS OF THE PURCHASING POWER OF MEXICAN PESOS
AS OF JUNE 30, 2001
Thousands of Pesos
Thousands of Dollars
Ac Ac
Ac Ac
2000 2001 Var
2000 2001 Var
---- ---- ---
---- ---- ---
(Audited) (Unaudited)
(Audited) (Unaudited)
NET SALES...................... $ 3,068,810 $ 2,597,689 -15%
315,578 280,126 -11%
COST OF SALES.................. 2,274,277 1,921,329 -16%
234,879 207,467 -12%
------------- ------------- --------
---------- ---------- ---------
Gross profit................. 794,533 676,360 -15%
80,699 72,659 -10%
Selling and Administrative
expenses.................... 216,332 199,010 -8%
21,970 21,351 -3%
------------- ------------- --------
---------- ---------- ---------
Operating income............. 578,201 477,350 -17%
58,729 51,308 -13%
FINANCIAL EXPENSE:
Interest, net.................. 308,682 323,040
5% 31,039 34,613 12%
Exchange (gain) loss, net...... 205,563 (306,602) N/A
19,682 (33,527) N/A
Gain on monetary position...... (277,704) (100,496)
-64% (27,965) (10,750) -62%
------------- ------------- --------
---------- ---------- ---------
Total financial expense...... 236,541 (84,058) N/A
22,756 (9,664) N/A
------------- ------------- --------
---------- ---------- ---------
OTHER INCOME (EXPENSES):
Other income (expense), net... 2,638 29,059 1002%
285 3,199 1022%
------------- ------------- --------
---------- ---------- ---------
Total other income
(expense)................... 2,638 29,059 1002%
285 3,199 1022%
------------- ------------- --------
---------- ---------- ---------
Income (loss) before income
and asset taxes............. 344,298 590,467 71%
36,258 64,171 77%
Provisions for income and
asset taxes................... 194,733 147,044 -24%
19,659 15,906 -19%
Provision for deferred income
taxes......................... 236,266 (4,175) N/A
23,341 (171) N/A
------------- ------------- --------
---------- ---------- ---------
NET INCOME..................... $ (86,701) $ 447,598 -616%
(6,742) 48,436 -818%
============= ============= ========
========== ========== =========
MAJORITY..................... (84,974) 445,198 N/A
(6,572) 48,166 N/A
MINORITY..................... (1,727) 2,400 N/A
(170) 270 N/A
------------- ------------- --------
---------- ---------- ---------
$ (86,701) $ 447,598 N/A
(6,742) 48,436 N/A
10
A-138
INDEX TO FINANCIAL STATEMENTS
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1999 and 2000 and for the years ended December 31, 1998,
1999 and 2000
Page
----
Reports of independent accountants........................................ F-3
Combined and consolidated balance sheets as of December 31, 1999 and
2000..................................................................... F-4
Combined and consolidated statements of income for the years ended
December 31, 1998, 1999 and 2000......................................... F-5
Combined and consolidated statements of changes in financial position for
the years ended December 31, 1998, 1999 and 2000......................... F-6
Combined and consolidated statements of changes in stockholders' equity
for the years ended December 31, 1998, 1999 and 2000..................... F-7
Notes to combined and consolidated financial statements................... F-8
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
as of and for the three months ended March 31, 2000 and 2001
Page
----
Unaudited condensed consolidated balance sheets as of March 31, 2000 and
2001.................................................................... F-49
Unaudited condensed consolidated statements of income for the three
months ended March 31, 2000 and 2001.................................... F-50
Unaudited condensed consolidated statements of changes in financial
position for the three months ended March 31, 2000 and 2001............. F-51
Notes to unaudited condensed consolidated financial statements........... F-52
GILMAN PULP AND PAPER GROUP
INDEX TO COMBINED FINANCIAL STATEMENTS
as of and for the eleven months and seventeen days ended December 17, 1999
Page
----
Report of independent certified public accountants....................... F-57
Combined statement of net assets as of December 17, 1999................. F-58
Combined statement of revenue and expenses for the eleven months and
seventeen days ended December 17, 1999.................................. F-59
Combined statement of changes in net assets for the eleven months and
seventeen days ended December 17, 1999.................................. F-60
Combined statement of cash flows for the eleven months and seventeen days
ended December 17, 1999................................................. F-61
Notes to combined financial statements................................... F-62
GILMAN PULP AND PAPER GROUP
(A DIVISION OF GILMAN INVESTMENT COMPANY)
INDEX TO COMBINED FINANCIAL STATEMENTS
as of and for the years ended December 31, 1997 and 1998
Page
----
Report of independent certified public accountants....................... F-76
Combined statements of net assets as of December 31, 1997 and 1998....... F-77
Combined statements of revenues and expenses for the years ended December
31, 1997 and 1998....................................................... F-78
Combined statements of changes in net assets for the years ended December
31, 1997 and 1998....................................................... F-79
Combined statements of cash flows for the years ended December 31, 1997
and 1998................................................................ F-80
Notes to combined financial statements................................... F-81
F-1
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
Combined and Consolidated Financial Statements
December 31, 1998, 1999 and 2000
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Corporacion Durango, S.A. De C.V. and Grupo Industrial Durango, S.A. de C.V.:
We have audited the accompanying combined and consolidated balance sheets of
Corporacion Durango, S.A. de C.V. and subsidiaries and Grupo Industrial
Durango, S.A. de C.V. and subsidiaries (collectively, the "Company"), as of
December 31, 1999 and 2000 and the related combined and consolidated
statements of income, of changes in stockholders' equity and of changes in
financial position for each of the three years then ended which, as described
in Note 2, have been prepared on the basis of accounting principles generally
accepted in Mexico. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Mexico and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As is mentioned in Note 3n, to the financial statements, effective on January
1, 2000, the Company adopted the guidelines of amended Bulletin D-4
"Accounting Treatment of Income Tax, Tax on Assets and Employee Statutory
Profit-Sharing".
In our opinion, the combined and consolidated financial statements referred to
above present fairly, in all material respects, the combined and consolidated
financial position of Corporacion Durango, S.A. de C.V. and subsidiaries and
Grupo Industrial Durango, S.A. de C.V. and subsidiaries, as of December 31,
1999 and 2000, and the combined and consolidated results of their operations,
the changes in their stockholders' equity and the changes in their financial
position for the years then ended, in conformity with accounting principles
generally accepted in Mexico.
Generally accepted accounting principles in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of accounting principles generally accepted in the
United States of America would have affected the determination of combined and
consolidated net income for the years ended December 31, 1998, 1999 and 2000
and the determination of combined and consolidated stockholders' equity as of
December 31, 1999 and 2000, to the extent summarized in Note 21 to the
combined and consolidated financial statements.
PricewaterhouseCoopers
/s/ Rafael Maya U., C.P.
Mexico, D.F.,
April 16, 2001, except for
Note 21, as to which the date
is June 22, 2001
F-3
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 2000
(Notes 1, 2, 3 and 4)
(thousands of constant Pesos restated as of December 31, 2000)
US dollars
(thousands)
1999 2000 2000
----------- ----------- ------------
ASSETS
Current Assets:
Cash and temporary investments....... $ 845,416 $ 730,086 US$ 75,973
Accounts receivable, net (Note 6).... 2,125,097 2,012,340 209,405
Affiliated companies (Note 17)....... -- 6,772 705
Taxes recoverable and other assets... 67,465 39,711 4,132
Inventories, net (Note 7)............ 2,149,883 2,210,357 230,011
Prepaids............................. 32,597 12,472 1,298
----------- ----------- ------------
Total current assets................. 5,220,458 5,011,738 521,524
Property, plant and equipment, net
(Note 8)............................. 15,649,463 15,822,864 1,646,534
Other assets (Note 9)................. 409,897 500,285 52,060
----------- ----------- ------------
Total assets......................... $21,279,818 $21,334,887 US$2,220,118
=========== =========== ============
LIABILITIES
Current Liabilities:
Bank loans and debt (Note 10)........ $ 883,018 $ 545,799 US$ 56,796
Interest payable..................... 384,247 347,617 36,173
Current portion of long term debt
(Note 10)........................... 144,914 232,816 24,227
Trade accounts payable............... 1,354,816 1,507,018 156,821
Notes payable........................ 232,334 26,285 2,735
Affiliated companies (Note 17)....... 3,016 17 2
Accrued liabilities and other
payable............................. 545,208 592,866 61,694
Employee profit sharing.............. 5,715 7,242 754
----------- ----------- ------------
Total current liabilities............ 3,553,268 3,259,660 339,202
Long-term debt (Note 10).............. 6,732,513 6,855,628 713,400
Notes payable......................... 22,623 44,231 4,603
Derivative instruments (Note 11b)..... 467 63,475 6,605
Other liabilities .................... -- 58,995 6,139
Deferred tax (Note 16)................ -- 3,016,414 313,889
Pension plans and seniority premiums
(Note 12)............................ 225,048 218,192 22,705
----------- ----------- ------------
Total long-term liabilities.......... 6,980,651 10,256,935 1,067,341
----------- ----------- ------------
Total liabilities.................... 10,533,919 13,516,595 1,406,543
----------- ----------- ------------
Negative goodwill (Note 4)............ 1,490,243 438,553 45,636
----------- ----------- ------------
Contingencies and commitments (Note
13)
STOCKHOLDERS' EQUITY
Capital stock (Note 14) ............. 527,041 1,901,816 197,904
Restatement of capital stock ........ 1,807,261 202,113 21,032
----------- ----------- ------------
2,334,302 2,103,929 218,936
----------- ----------- ------------
Additional paid-in capital............ 727,764 (44,482) (4,629)
----------- ----------- ------------
Retained earnings (Notes 14 and 15) .. 5,771,473 4,344,866 452,129
----------- ----------- ------------
Deficit from restatement.............. (1,940,520) 2,549 265
----------- ----------- ------------
Deferred tax.......................... -- (446,270) (46,439)
----------- ----------- ------------
Cumulative translation adjustment of
foreign subsidiaries................. 2,826 15,214 1,583
----------- ----------- ------------
Total majority interest.............. 6,895,845 5,975,806 621,845
Total minority interest.............. 2,359,811 1,403,933 146,094
Total stockholders' equity........... 9,255,656 7,379,739 767,939
----------- ----------- ------------
Total liabilities and stockholders'
equity............................ $21,279,818 $21,334,887 US$2,220,118
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-4
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1999 and 2000
(Notes 1, 2, 3 and 4)
(thousands of constant Pesos restated as of December 31, 2000, except shares
and per share amount)
US dollars
(thousands)
1998 1999 2000 2000
----------- ---------- ----------- ------------
Net sales.................. $ 6,034,257 $8,088,568 $11,603,916 US$1,207,509
Cost of sales.............. 4,485,068 6,109,753 9,556,467 994,450
----------- ---------- ----------- ------------
Gross profit........... 1,549,189 1,978,815 2,047,449 213,059
Selling, general and
administrative expenses... 422,152 633,092 723,530 75,291
----------- ---------- ----------- ------------
Operating income....... 1,127,037 1,345,723 1,323,919 137,768
----------- ---------- ----------- ------------
Other expense, net......... (209,435) (81,294) (15,222) (1,584)
Financing (cost) result:
Interest expense......... (849,867) (896,662) (986,048) (102,609)
Interest income.......... 113,701 106,038 111,544 11,607
Foreign exchange gain
(loss), net............. (1,135,581) 301,217 (92,096) (9,584)
Gain from monetary
position................ 821,355 726,751 543,756 56,583
----------- ---------- ----------- ------------
(1,050,392) 237,344 (422,844) (44,003)
----------- ---------- ----------- ------------
Amortization of negative
goodwill (Note 4)......... 3,386,408 87,712 1,347,290 140,200
----------- ---------- ----------- ------------
Income before provisions
for income and asset
taxes, employee profit
sharing, tax loss
carryforwards and minority
interest.................. 3,253,618 1,589,485 2,233,143 232,381
----------- ---------- ----------- ------------
Provision for:
Income and asset taxes
(Note 16)............... (15,457) (167,162) (262,080) (27,272)
Employee profit sharing.. (11,621) (5,802) (6,884) (716)
Deferred income tax (Note
16)..................... -- -- (347,485) (36,159)
----------- ---------- ----------- ------------
(27,078) (172,964) (616,449) (64,147)
Utilization of tax loss
carryforwards (Note 16)... 6,913 6,916 -- --
----------- ---------- ----------- ------------
Net income before minority
interest.................. 3,233,453 1,423,437 1,616,694 168,234
Minority interest.......... 33,525 453,971 157,771 16,418
----------- ---------- ----------- ------------
Net income................. $ 3,199,928 $ 969,466 $ 1,458,923 US$ 151,816
=========== ========== =========== ============
The accompanying notes are an integral part of these financial statements.
F-5
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
For the Years Ended December 31, 1998, 1999 and 2000
(Notes 1, 2 , 3 and 4)
(thousands of constant Pesos restated as of December 31, 2000)
US dollars
(thousands)
1998 1999 2000 2000
----------- ----------- ----------- -----------
Operating activities:
Net income before minority
interest................. $ 3,233,453 $ 1,423,437 $ 1,616,694 US$168,234
Items recognized in net
income not (generating)
or requiring the use of
resources:
Depreciation and
amortization......... 334,107 464,019 508,567 52,922
Amortization of
negative goodwill.... (3,386,408) (87,712) (1,347,290) (140,200)
Deferred income tax... -- -- 347,485 36,159
Other................. 265,783 103,370 88,597 9,219
----------- ----------- ----------- ----------
446,935 1,903,114 1,214,053 126,334
Changes in operating
assets and liabilities:
(Increase) decrease in
accounts receivable ... (402,570) (148,591) 165,750 17,248
(Increase) in
inventories............ (226,827) (578,402) (60,474) (6,293)
(Increase) in other
assets................. -- (15,386) (11,886) (1,237)
Increase (decrease) in
other accounts payable
and accrued expenses... 1,593,634 306,400 (44,291) (4,609)
----------- ----------- ----------- ----------
Resources generated by
operating
activities........... 1,411,172 1,467,135 1,263,152 131,443
----------- ----------- ----------- ----------
Financing activities:
Bank loans................ 516,650 875,938 (110,400) (11,488)
Payment of bank loans..... -- (481,248) (138,917) (14,456)
Long-term debt, net....... 515,005 (767,936) (9,824) (1,022)
Paid in capital........... -- 3,476 1,954,993 203,437
Derivative instruments.... 116,936 17,072 -- --
----------- ----------- ----------- ----------
Resources generated by
(used in) financing
activities........... 1,148,591 (352,698) 1,695,852 176,471
----------- ----------- ----------- ----------
Investing activities:
Property, plant and
equipment, net........... (962,376) (176,697) (1,006,335) (104,720)
Investment in
subsidiaries............. (1,094,109) (1,191,130) (1,954,993) (203,437)
Decrease in minority
interest................. (13,968) (6,220) -- --
Other assets.............. (21,941) (49,393) (113,006) (11,759)
----------- ----------- ----------- ----------
Resources used in
investing
activities........... (2,092,394) (1,423,440) (3,074,334) (319,916)
----------- ----------- ----------- ----------
Increase (decrease) in cash
and temporary investments.. 467,369 (309,003) (115,330) (12,002)
Cash and temporary
investments at the
beginning of the year...... 687,050 1,154,419 845,416 87,975
----------- ----------- ----------- ----------
Cash and temporary
investments at the end of
the year................... $ 1,154,419 $ 845,416 $ 730,086 US$ 75,973
=========== =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES AND
GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1999 and 2000
(Notes 1, 2, 3 and 4)
(thousands of constant Pesos restated as of December 31, 2000)
Retained earnings
Capital stock (Note 14):
(Notes 14 and 15):
---------------------------- Additional
---------------------------------- Deficit Deferred
paid-in Legal
Current from income
Nominal Restatement capital reserve
Prior years year restatement tax
------------ -------------- ---------- --------
----------- ----------- ----------- ---------
Combined
balances as of
January 1,
1998............ $ 524,884 $ 1,806,697 $ 755,472 $ 90,336
$ 836,538 $ 675,205 $ (906,604) $ --
Appropriation of
1997 net
income..........
675,205 (675,205)
Cumulative
translation
adjustment of
foreign
subsidiaries....
Loss on
operations on
own shares...... (68,859)
Recognition of
the effects of
inflation in
financial
information.....
37,728
Net income......
3,199,928
------------ ------------ --------- --------
----------- ----------- ----------- ---------
Combined
balances as of
December 31,
1998............ $ 524,884 $ 1,806,697 $ 686,613 $ 90,336
$ 1,511,743 $ 3,199,928 $ (868,876) $ --
Increase in
capital......... 2,157 564
Increase in
legal reserve... 12,946
(12,946)
Appropriation of
1998 net
income..........
3,186,982 (3,186,982)
Cumulative
translation
adjustment of
foreign
subsidiaries....
Gain on
operations on
own shares...... 41,151
Recognition of
the effects of
inflation in
financial
information.....
(1,071,644)
Net income......
969,466
------------ ------------ --------- --------
----------- ----------- ----------- ---------
Combined
balances as of December 31,
1999............ $ 527,041 $ 1,807,261 $ 727,764 $103,282
$ 4,698,725 $ 969,466 $(1,940,520) $ --
Paid-in
capital......... 1,844,846 110,147
Appropriation of
1999 net
income..........
337,945 (337,945)
Loss on
operation on
shares.......... (44,482)
Effect in
cumulative
translation
adjustment of
foreign
subsidiaries....
Recognition of
the effects of
inflation in
financial
information.....
(494,811)
Adjustment for
additional
pension
liability
related to
seniority
premiums........
(11,470)
Deferred income
tax.............
(8,545) (446,270)
Net income......
1,458,923
Cancellation of
GIDUSA
stockholders'
equity upon
acquisition
(Note 1)........ (470,071) (1,715,295) (727,764) (94,150)
(2,159,859) (631,521) 2,457,895
------------ ------------ --------- --------
----------- ----------- ----------- ---------
Consolidated
balances as of
December 31,
2000............ $ 1,901,816 $ 202,113 $ (44,482) $ 9,132
$ 2,876,811 $ 1,458,923 $ 2,549 $(446,270)
============ ============ ========= ========
=========== =========== =========== =========
Cumulative
translation
adjustment Total Total
of foreign Majority Minority stockholder'
subsidiaries interest interest equity
------------ ------------ ------------
-------------
Combined
balances as of
January 1,
1998............ $ 60,302 $ 3,842,830 $ 2,413,339 $ 6,256,169
Appropriation of
1997 net
income..........
Cumulative
translation
adjustment of
foreign
subsidiaries.... (58,053) (58,053) (39,151) (97,204)
Loss on
operations on
own shares...... (68,859) (48,050) (116,909)
Recognition of
the effects of
inflation in
financial
information..... 37,728 63,344 101,072
Net income...... 3,199,928 33,525 3,233,453
------------ ------------ ------------
-------------
Combined
balances as of
December 31,
1998............ $ 2,249 $ 6,953,574 $ 2,423,007 $ 9,376,581
Increase in
capital......... 2,721 742 3,463
Increase in
legal reserve...
Appropriation of
1998 net
income..........
Cumulative
translation
adjustment of
foreign
subsidiaries.... 577 577 409 986
Gain on
operations on
own shares...... 41,151 28,715 69,866
Recognition of
the effects of
inflation in
financial
information..... (1,071,644) (547,033) (1,618,677)
Net income...... 969,466 453,971 1,423,437
------------ ------------ ------------
-------------
Combined
balances as of December 31,
1999............ $ 2,826 $ 6,895,845 $ 2,359,811 $ 9,255,656
Paid-in
capital......... 1,954,993 1,954,993
Appropriation of
1999 net
income..........
Loss on
operation on
shares.......... (44,482) (31,040) (75,522)
Effect in
cumulative
translation
adjustment of
foreign
subsidiaries.... 10,130 10,130 143 10,273
Recognition of
the effects of
inflation in
financial
information..... (494,811) 1,219,199 724,388
Adjustment for
additional
pension
liability
related to
seniority
premiums........ (11,470) (11,470)
Deferred income
tax............. (454,815) 18,029 (436,786)
Net income...... 1,458,923 157,771 1,616,694
Cancellation of
GIDUSA
stockholders'
equity upon
acquisition
(Note 1)........ 2,258 (3,338,507) (2,319,980) (5,658,487)
------------ ------------ ------------
-------------
Consolidated
balances as of
December 31,
2000............ $ 15,214 $ 5,975,806 $ 1,403,933 $ 7,379,739
============ ============ ============
=============
The accompanying notes are an integral part of these combined financial
statements.
F-7
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 1--Entity and Nature of Business
The consolidated financial statements as of December 31, 2000 are those of
Corporacion Durango, S.A. de C.V. and subsidiaries (formerly Industrias de la
Celulosa, S. A. de C.V.) ("CODUSA"), collectively are herein referred as to
the "Company". The combined financial statements as of December 31, 1999,
consist of the accounts of Grupo Industrial Durango, S.A. de C.V. and
subsidiaries ("GIDUSA") and CODUSA. The Company is primarily engaged in the
manufacturing and selling of packaging (corrugated containers, molded pulp,
and multi-wall sacks and bags), paper (kraft and semikraft paper and paper to
be used in the manufacturing of newspaper, books and magazines) and other
business (plywood, particleboard and lumber) in Mexico and in the United
States of America ("U.S.").
In March 2000, CODUSA and affiliates undertook the following transactions to
acquire Series "A" shares of GIDUSA held by the Rincon Family:
a) On March 28, 2000, 31,807,700 GIDUSA shares owned by the Rincon family were
sold to CODUSA at a price of $58.00 per share.
b) On March 28, 2000, 7,000 GIDUSA shares were acquired at a price of $57.85
per share.
c) On March 30, 2000, 1,000 GIDUSA shares were acquired at a price of $60.00
per share.
d) On March 31, 2000, 9,000 GIDUSA shares were acquired at a price of $60.00
per share.
All purchases of GIDUSA's shares were acquired from the public market
through the Mexican Stock Exchange.
As a result of the share acquisitions mentioned above, CODUSA owns a 59% in
the Series "A" GIDUSA shares.
Prior to the above transactions, the Rincon family owned a controlling
interest in each of GIDUSA and CODUSA with ownership interests of 59% and
100%, respectively. Consequently, due to the common control and ownership, the
combined financial statements for 1998 and 1999 have been prepared on a
historical basis in a manner similar to a pooling of interest. The minority
interest reflected for these periods represent the interest held by third
parties in GIDUSA. The acquisition of the 59% interest was accounted for as a
purchase and consequently negative goodwill in the amount of $294,758 was
recognized in 2000 and fully amortized as the operations were integrated.
NOTE 2--Basis of Presentation
a) Monetary unit
Amounts in the consolidated and combined financial statements and footnotes
thereto are stated in thousands of Mexican Pesos (except for shares and per
share amounts) as are the records of the Company, in conformity with
corresponding laws. In these financial statements, references to "$" are to
Mexican Pesos and references to "US$" are to U.S. Dollars.
b) Basis of presentation
As a result of the acquisition of GIDUSA shares in March 2000 discussed in
Note 1, the financial statements at December 31, 2000 are presented on a
consolidated basis.
F-8
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The combined and consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Mexico ("Mexican
GAAP") as promulgated by the Mexican Institute of Public Accountants ("MIPA").
A reconciliation from Mexican to generally accepted accounting principles in
the United States of America ("U.S. GAAP") is included in Notes 21.
Additionally, Bulletin A-8, "Supplementary Application of International
Accounting Standards" states that where Mexican GAAP does not provide
guidance, International Accounting Standards must be applied.
c) Basis of combination and consolidation
All significant inter-company accounts and transactions have been eliminated
in the combination and consolidation.
The combination and consolidation were based on the audited individual
financial statements of the individual subsidiaries. The combined and
consolidated financial statements include the assets, liabilities and results
of the subsidiaries in which the Company holds over 50% of common stock and
exercises control over operating and financial activities.
The reportable segments and principal subsidiaries within those segments,
along with their main activities are the following:
Packaging
Manufacturing and selling of corrugated containers, molded pulp, and multi-
wall sacks and bags.
Empaques de Carton Titan, S. A. de C. V. and subsidiaries
Empaques y Envases de Mexico, S.A. de C.V.
McKinley Container Co.
Paper
Manufacturing and selling of kraft and semikraft paper and paper to be used
in the manufacturing of newspaper, books and magazines.
Compania Industrial Atenquique, S. A. de C. V. and subsidiary
Industrias Centauro, S.A. de C.V.
Grupo Pipsamex, S.A. de C.V. and subsidiaries
Durango Paper Company Inc. and subsidiaries
Mckinley Paper Co.
Durango International, Inc.
Other business
Manufacturing and selling of plywood, particleboard and lumber
Ponderosa Industrial de Mexico, S.A. de C.V.
F-9
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 3--Accounting Policies
A summary of the Company's significant accounting policies is as follows:
a) Use of estimates
The preparation of the financial statements in conformity with Mexican GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting years. Actual
results may differ from these estimates.
b) Recognition of the effects of inflation
The Company's consolidated and combined financial statements have been
prepared in accordance with Bulletin B-10, "Effects of Inflation on Financial
Information" and its amendments thereof, issued by the MIPA. Bulletin B-10
requires restatement of all financial statement items to pesos of the most
current purchasing power.
For comparative purposes, the consolidated and combined financial statements
presented herein have been restated to Mexican Pesos as of December 31, 2000
as follows:
. The financial statements of Mexican holding companies and subsidiaries have
been restated to pesos as of December 31, 2000 by applying to the year-end
balances of constant pesos an inflation factor of 1.0895%, for the year
ended 1999. The inflation factor is derived from the National Consumer
Price Index ("NCPI"), published by Banco de Mexico (the Central Bank of
Mexico).
. The financial statements for the years ended December 31, 1998 and 1999 of
foreign subsidiaries have been restated to pesos as of December 31, 2000,
by applying to the year-end foreign currency balances the General Consumer
Price Index ("GCPI") of the foreign country in which the subsidiary
operates and by applying the exchange rate as of December 31, 2000.
The following items are the result of the recognition of the effects of
inflation on the financial information:
i) Financing cost: (result)
Represents the cost (result) of financing in periods of inflation,
consisting of net interest costs, net exchange gains or losses and
gains or losses from monetary position. Gains (losses) from monetary
position represent the effects of inflation, as measured by the NCPI,
on the Company's monetary assets and liabilities at the beginning of
each month. If monetary liabilities exceed monetary assets, there is a
gain from monetary position. Conversely, if monetary liabilities are
less than monetary assets, there is a resulting loss from monetary
position.
Foreign exchange gains or losses are calculated by translating assets
and liabilities denominated in foreign currencies at the exchange rates
in effect at each balance sheet date and are credited or charged to
income.
ii) Deficit from restatement:
An element of stockholders' equity, which through December 31, 1996,
includes the excess (deficit) from holding non-monetary assets, as
measured by the increase or decrease in the replacement cost of such
assets in excess or below the increase attributable to inflation as
measured by the NCPI. Effective January 1, 1997, the balance in the
excess (deficit) from the restatement account is restated by applying
the NCPI and is increased or decreased to the extent that the specific
index restatement of non-monetary assets is greater, or less, than the
increase attributable to inflation as measured by the NCPI.
F-10
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
iii) Restatement of non-monetary assets:
. Property, plant, equipment and depreciation are restated by applying
factors derived from the NCPI to the historical cost, except for
machinery and equipment of foreign origin, which are restated by
applying factors derived from the general inflation index of the
country of origin to the corresponding foreign currency amounts and
translating those amounts to Mexican Pesos at the prevailing
exchange rate at the balance-sheet date (i.e. "Specific Index"
method). Historical cost is the replacement cost as determined by
independent appraisers as of December 31, 1996.
. Comprehensive integral results are capitalized on qualifying assets
under construction. During 1998, 1999 and 2000, the Company did not
capitalize comprehensive integral results.
. Depreciation is calculated based on the assets' estimated useful
lives and production capacity according to the estimates made by
management.
. Inventories are valued at average cost, which does not exceed market
value. The average cost approximates the last purchase price or
production cost.
. Cost of sales is determined on the estimated replacement value as of
the date on which sales were made.
iv) Restatement of stockholders' equity:
The capital stock, retained earnings and additional paid-in-capital
accounts include the effect from restatement, determined by applying
the NCPI factor from the date when capital was contributed and from the
year in which the results were determined, respectively. The
restatements represent the amount required to maintain the
contributions and accumulated results in constant Mexican Pesos as of
December 31, 2000.
v) Statement of changes in financial position:
Bulletin B-12, "Statement of Changes in Financial Position" ("Bulletin
B-12"), issued by the MIPA, addresses the appropriate presentation of
the statement of changes in financial position where financial
statements have been restated to constant Mexican Pesos as of the
latest balance sheet date. Bulletin B-12 identifies the generation and
application of resources representing differences between beginning and
ending balances of the balance sheets in constant Mexican Pesos,
excluding the effect from holding non-monetary assets. Bulletin B-12
also requires that monetary position and foreign exchange gains
(losses) are excluded from non-cash items in the determination of
resources provided by (used in) operating activities.
c) Translation of foreign subsidiaries
The translation of foreign subsidiaries is in accordance with Bulletin B-15,
"Foreign Currency Transactions and Translation of Financial Statements of
Foreign Operations" ("Bulletin B-15"). In accordance with Bulletin B-15, the
Company translates the financial statements of subsidiaries under the "foreign
entity method" applying the following procedures:
. Foreign subsidiaries apply the restatement provisions of Bulletin B-10 and
its amendments using the GCPI, which reflects the changes in the purchasing
power of the monetary unit of the country in which the subsidiary operates.
F-11
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
. After the financial statements of the foreign subsidiary are restated to
constant purchasing power, all assets and liabilities are translated to
Mexican Pesos by applying the exchange rate in effect as of the balance
sheet date. Income and expenses are translated using the average exchange
rate for the reporting period.
. The translation effects are recorded as part of the stockholders' equity in
the cumulative translation adjustment of foreign subsidiaries.
In 1998, the Company designated certain of its U.S. dollar denominated debt
as an economic hedge of a net investment in its U.S. subsidiaries and
consequently, Ps. 200,235 of foreign exchange loss for the year was reflected
in stockholders' equity as a component of the cumulative translation
adjustment of foreign subsidiaries. Hedge accounting was discontinued in 1999
since the Company paid off the related debt.
d) Temporary investments
Short-term investments consist of marketable securities with maturities of
less than 3 months and are carried at market value. Unrealized gains (losses)
are included in income.
e) Investments in affiliated companies
Investments in shares of affiliated companies in which the percentage of
ownership is less than 10% are recorded at cost and restated in Mexican Pesos
of December 31, 2000 purchasing power by applying factors derived from the
NCPI.
f) Property, plant and equipment
Property, plant and equipment are recorded at their acquisition cost, and
are restated by applying factors derived from the NCPI to the historical cost,
except for machinery and equipment of foreign origin which are restated by
applying factors derived from the GCPI and translating those amounts to
Mexican Pesos at the prevailing exchange rate at the balance-sheet date.
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.
g) Depreciation
Depreciation of property, plant and equipment is based upon the restated
carrying value of the assets and calculated by the method of units produced,
based on their useful lives and the estimated production capacity as shown
below:
Years
-----
Building............................... 25-50
Machinery and equipment................ 23-40
Office equipment....................... 5-10
Transportation equipment............... 1-5
Computer equipment..................... 1-3
h) Debt issuance cost
Debt issuance cost is capitalized and amortized over the period outstanding
term of the debt on a straight line basis, which does not materially differ
from the interest method.
F-12
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
i) Goodwill and negative goodwill
Acquired companies are recorded at their restated value; goodwill is the
difference between the fair value of the net assets of the acquired company
and the purchase price paid. If the purchase price paid exceeds the fair value
of the net assets acquired, the excess is recorded as goodwill. If the fair
value of the net assets acquired exceeds the purchase price paid, the excess
is recorded as negative goodwill. Both goodwill and negative goodwill are
restated, and amortized under the straight-line method over a period not to
exceed two years which, in management's opinion, approximates the period in
which the acquired subsidiaries are integrated into the Company. (See Note 4).
j) Pension plans, seniority premiums and indemnities
In accordance with Mexican Labor Law, the Company's Mexican employees are
entitled to seniority premiums after 15 years of service or upon dismissal,
disability or death. Under Bulletin D-3, "Labor Obligations", the actuarially
determined projected benefit obligation is computed using estimates of
salaries that would be in effect at the time of payment. Employees not yet
eligible for seniority premiums are also included in the determination of the
obligation with necessary adjustments made in accordance with the probability
that these employees will reach the required seniority. The cost of past
service is amortized over the average period required for workers to reach
their retirement age.
The cost of the employee retirement plans (pension and seniority premiums),
both formal and informal, is recognized as expenses in the years in which the
services are rendered, in accordance with studies performed by independent
actuaries using the projected unit credit method.
In accordance with Mexican Federal Labor Law, other compensation, based on
length of service, to which employees may be entitled in the event of
dismissal or death, is charged to income in the year in which it becomes
payable.
A defined contribution pension plan has been established for U.S.
subsidiaries covering all employees who meet certain eligibility requirements.
The benefits of such plan are based mainly on the employees' years of service
and compensation.
k) Payments for retirements and terminations
Payments for retirements and terminations are charged to income in the
period in which they occur.
l) Derivative financial instruments
Derivative financial instruments are used by the Company primarily to manage
its (i) interest rate risk, and (ii) foreign exchange rate risk. Interest rate
swaps are employed to achieve the Company's interest rate objectives. The
interest differential to be paid or received under the related interest rate
swap agreement is recognized over the life of the related contract and is
included in interest expense or income. At December 31, 2000, the Company had
no open contracts.
Additionally, GIDUSA entered into several equity share swap ("Equity Swap")
transactions on its own American Depository Receipts. The difference between
the fair value and the acquisition cost of those shares (including purchase
expenses and premiums or discounts), as well as financing costs are recorded
directly to stockholders' equity. (See Note 11b).
m) Revenue recognition
Sales are recognized upon delivery of products and customer acceptance.
Revenues are recognized only when the Company has transferred to the buyer the
significant risks and rewards of ownership of the goods, and when the amount
of revenue and the costs incurred or to be incurred in respect of the
transaction can be measured reliably.
F-13
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
n) Income taxes and employee profit sharing
Through December 31, 1999, income tax expense was recognized in the period
in which a current liability was incurred and revenues and expenses were
realized (i.e. partial liability method).
Effective January 1, 2000, the Company adopted the guidelines of amended
Bulletin D-4, "Accounting Treatment of Income Tax, Tax on Assets and Employee
Statutory Profit-Sharing", issued by the MIPA. As a result, the Company
switched from the partial liability method to the comprehensive asset and
liability method, which consists of calculating deferred income taxes by
applying the respective income tax rate to the temporary differences between
the accounting and tax values of asset and liabilities existing at the date of
the financial statements. The cumulative effect at the beginning of the year
derived from this change increased the deferred tax liability by $446,270 and
decreased stockholders' equity by the same amount. The effect of utilizing the
full liability method during 2000 increased in the deferred tax liability by
$331,110 at December 31, 2000 and decreased in the result of holding non-
monetary assets and income for the year by $9,484 and $347,485, respectively.
Additionally, there was a decrease in gain of monetary position of $199,085.
o) Foreign currency transactions
Transactions denominated in foreign currency are recorded at the exchange
rate in effect at the date they are translated. Assets and liabilities
receivable and payable in foreign currency are translated into Mexican pesos,
at the exchange rate in effect as of the balance sheet date. Exchange
differences resulting from such translations are recognized in income for the
year.
p) Long-lived assets
The Company evaluates potential impairment losses to long-lived assets by
assessing whether the unamortized carrying amount can be recovered over the
remaining life of the assets through undiscounted future expected cash flow
generated by the assets and without interest charges. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of the
assets, a loss is recognized for the difference between the fair value and
carrying value of the assets. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Long-lived assets, for which management has committed
to a plan of disposal, are recorded at the lower of the unamortized carrying
amount or fair value less disposal costs.
q) Earnings per share
Earnings per share computation are based on the net income attributable to
the majority interest divided by the weighted average number of shares
outstanding during year. There were no dilutive instruments during 1998, 1999
and 2000.
r) Segment reporting
In August 1997, the International Accounting Standards Committee issued
revised IAS No. 14, "Segment Reporting" ("IAS 14"), which is applicable to
Mexican companies under Bulletin A-8. IAS 14, which is effective for years
beginning after June 30, 1998, requires that companies look to their internal
organizational structure and internal reporting system for the purpose of
identifying segments. (See Note 18).
s) Convenience translation
U.S. dollar amounts shown in the combined and consolidated financial
statements have been included solely for the convenience of the reader and are
translated from Mexican Pesos, as a matter of arithmetic computation only, at
an exchange rate of $9.6098 per U.S. dollar, the interbank free market
exchange rate as reported by the Banco de Mexico as of December 31, 2000.
Translation herein should not be construed as a representation that the
Mexican Peso amounts have been or could be converted into U.S. dollars at the
foregoing or any other rate.
F-14
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 4--Acquisitions
During the three-year period ended December 31, 2000, the Company completed
the following acquisitions:
a. In January 1998, GIDUSA acquired two plants engaged in the manufacturing
of corrugated containerboard, located in the state of Texas, and a
warehouse located in the state of Arizona. As a result of these
acquisitions, McKinley Container Co., a subsidiary of Durango
International, Inc. was incorporated under the laws of State of
Delaware. The acquisitions totaled $217.3 million (US$23 million) and
were financed with bank loans.
b. In December 1998, CODUSA acquired the shares of capital stock of
Productora e Importadora de Papel, S.A. de C.V. ("PIPSA") and affiliates
(predecessor entities to Pipsamex, S.A. de C.V.) engaged in the paper
production to be used in the manufacturing of newspapers, books and
magazines. The companies are located in Mexico. The acquisitions totaled
$1,009.0 million (US$105 million) and the negative goodwill amounted to
$3,298 million, which was fully amortized during 1999. These
acquisitions were financed with bank loans.
c. In December 1999, the Company acquired the Gilman Paper Company and
affiliated companies, its converting plants and the assets of St. Mary's
Railroad LLC (now known as Durango Paper Company). The acquisitions
totaled $1,191.2 million (US$119.9 million) and the negative goodwill
amounted to $1,578,797 (US$158.9 million). These acquisitions were
financed with bank loans for an amount of $844.4 million (US$85.0
million) and a note payable to the seller for $243.4 million (US$24.5
million) and $103.4 million were paid in cash. The amortization of
negative goodwill for the years ended December 31, 1999 and 2000 was
$87,712 and $1,052,532, respectively.
On August 1, 2000, the Company reached a favorable purchased price
adjustment settlement with the Seller for US$6 million ($58.1 million).
The Company received US$3 million ($29.0 million) in cash and a
reduction of its seller note of US$3 million ($29.0 million).
d. On March 2000 the Company acquired from the Rincon family its 59%
ownership interest in GIDUSA's resulting a negative goodwill in the
amount of $294,758, which was amortized fully in 2000.
NOTE 5--Foreign Currency Position
As of December 31, the Mexican Peso to the U.S. Dollar, French Franc and
Danish Kroner exchange rates were as follows:
U.S. French Danish
dollars Francs Kroners
------- ------ -------
1999.................................................. 9.4986 6.5422 7.4144
2000.................................................. 9.6098 6.9535 7.9158
As of December 31, 1999 and 2000 the Company had the following foreign
currency monetary assets and liabilities:
Year ended December 31, 1999
--------------------------------
U.S. French Danish
dollars francs kroners
----------- --------- --------
(thousands)
Assets..................................... US$ 127,711 FF -- DK --
----------- --------- --------
Current liabilities........................ 243,209 6,958 1,705
Long-term liabilities...................... 653,130 5,081 1,230
----------- --------- --------
896,339 12,039 2,935
----------- --------- --------
Net monetary position...................... US$(768,628) FF(12,039) DK(2,935)
=========== ========= ========
F-15
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Year ended December 31, 2000
--------------------------------
U.S. French Danish
dollars francs kroners
----------- --------- --------
(thousands)
Assets..................................... US$ 105,637 FF DK
----------- --------- --------
Current liabilities........................ 236,103 10,985 866
Long-term liabilities...................... 694,397 9,793 805
----------- --------- --------
930,500 20,778 1,671
----------- --------- --------
Net monetary position...................... US$(824,863) FF(20,778) DK(1,671)
=========== ========= ========
The Company's foreign currency transactions were as follows:
Years ended December 31,
-----------------------------------
1998 1999 2000
---------- ---------- -----------
(thousands)
Sales................................. US$177,731 US$236,866 US$ 558,867
Interest income....................... 959 1,096 3,145
Purchase of fixed assets and
inventories.......................... (143,476) (236,503) (581,333)
Interest expense...................... (62,872) (76,722) (95,333)
Other................................. (22,502) (4,328) (11,753)
---------- ---------- -----------
US$(50,160) US$(79,591) US$(126,407)
========== ========== ===========
Additionally, as of December 31, 1999 and 2000, the Company had non-monetary
assets of foreign origin, amounting to US$1,027 million and US$925 million,
respectively.
NOTE 6--Accounts Receivable
Accounts receivable consist of the following:
December 31,
---------------------
1999 2000
---------- ----------
Trade ................................................ $2,127,429 $1,959,870
Other................................................. 118,906 175,915
---------- ----------
2,246,335 2,135,785
Less--Allowance for doubtful accounts................. 121,238 123,445
---------- ----------
$2,125,097 $2,012,340
========== ==========
F-16
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 7--Inventories
Inventories consist of the following:
December 31,
-----------------------
1999 2000
----------- -----------
Finished products.................................. $ 726,285 $ 603,250
Work in process.................................... 32,118 53,680
Raw materials...................................... 500,411 547,885
Direct materials and spare parts................... 339,041 384,889
Molds and dies, net................................ 47,002 47,437
Merchandise in transit............................. 455,232 491,886
Advanced payments to suppliers..................... 68,694 80,868
Other.............................................. 28,374 39,783
----------- -----------
2,197,157 2,249,678
Less--Allowance for obsolescence................... 47,274 39,321
----------- -----------
$ 2,149,883 $ 2,210,357
=========== ===========
NOTE 8--Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31,
-----------------------
1999 2000
----------- -----------
Land............................................... $ 992,726 $ 1,008,104
Buildings.......................................... 3,717,724 3,612,759
Machinery and equipment............................ 20,378,240 20,028,788
Transportation equipment, data-processing
equipment, furniture and other.................... 1,390,653 1,628,028
Construction in progress........................... 89,126 457,641
----------- -----------
26,568,469 26,735,320
Less--Accumulated depreciation..................... 10,919,006 10,912,456
----------- -----------
$15,649,463 $15,822,864
=========== ===========
Depreciation expense for the years ended December 31, 1998, 1999 and 2000
was, $320,387, $447,490 and $495,699, respectively.
NOTE 9--Other Assets
Other assets consist of the following:
December 31,
-----------------------
1999 2000
----------- -----------
Investment in shares of affiliated companies..... $ 34,520 $ 31,224
Intangible pension asset--Labor obligations...... 160,241 144,667
Debt issuance costs.............................. 91,204 89,325
Prepaid pension cost -- foreign subsidiaries..... 72,223 105,785
Other............................................ 51,709 129,284
----------- -----------
$ 409,897 $ 500,285
=========== ===========
Amortization expense of debt issuance cost was $21,963, $16,529 and $12,868
for 1998, 1999 and 2000, respectively.
F-17
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 10--Debt
a) Short-term notes payable:
Short-term debt as of December 31, was comprised of:
December 31,
-----------------
1999 2000
-------- --------
Bank loan for US$12.0 million, with California Commerce Bank
payable in a lump sum and maturing on July, 2001; bearing
interest at LIBOR plus 1.65%, payable annually............. -- $115,318
Bank loan for US$3.0 million, with California Commerce Bank
payable in a lump sum and maturing on July, 2001; bearing
interest at LIBOR plus 1.65%, payable annually............. -- 28,829
Bank loan for $3.0 million with Bancomext, S.N.C. payable in
a lump sum and maturing on April 25, 2001, bearing interest
at LIBOR plus 3.52%........................................ -- 28,829
Bank loan for US$35.0 million with Bank of America payable
in a lump sum and maturing on January 31, 2001, bearing
interest at LIBOR plus 3%.................................. -- 336,343
Bank loan for US$0.7 million, with California Commerce Bank
payable in a lump sum and maturing on November 5, 2001,
bearing interest at LIBOR plus 5.15%....................... -- 6,439
Bank loan for US$3.1 million, with Mifel payable in a lump
sum and maturing on May 30, 2001, bearing interest at LIBOR
plus 4.8926%............................................... $ 35,455 30,041
Bank loan for US$0.3 million, with Banco Bilbao Vizcaya
payable in a lump sum and maturing on October 19, 2000,
bearing interest at LIBOR.................................. 3,122 --
Bank loan for US$85.0 million, with Bank of America payable
in a lump sum and maturing on December 17, 2000, bearing
interest at LIBOR plus 5%.................................. 844,441 --
-------- --------
$883,018 $545,799
======== ========
F-18
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
b) Long-term debt:
Long-term debt as of December 31, was comprised of:
December 31,
---------------------
1999 2000
---------- ----------
Bonds registered with the Securities and Exchange
Commission ("Yankee Bonds"), with Chase Manhattan Bank
acting as a trustee, for US$150 million, payable in a
lump sum and maturing on July 15, 2001; bearing
interest at a fixed rate (12% annual rate), payable
semiannually (See Note 19)............................. $1,552,308 $1,441,470
Yankee Bonds for US$250 million, and the Bank of New
York acting as trustee, payable in a lump sum and
maturing on August 1, 2003; bearing interest at a fixed
rate (12.625% annual rate), payable semiannually. ..... 2,587,181 2,402,450
Bank loan with the Chase Manhattan Bank, for US$50
million, payable in five semiannual installments
beginning December 5, 2000; bearing interest at LIBOR
plus 1.50%, payable semiannually. ..................... 517,437 384,392
Bank loan for US$22 million, with Banamex bearing
interest at 10.20% payable semiannually (See Note
19). .................................................. -- 211,416
Bank loan for US$35 million, with Bank of America
payable in a lump sum bearing interest at LIBOR plus 3%
(See Note 19). ........................................ -- 336,343
Bank loan for US$15 million, with Bank of America
payable in a lump sum bearing interest at LIBOR plus
3.5% (See Note 19). ................................... -- 144,147
Financial lease agreement for the acquisition of
machinery for US$10.7 million, with several financial
institutions payable in 14 semiannual installments
beginning August 1998; bearing interest at LIBOR plus
3.5%. ................................................. 110,666 82,547
Bank loan for US$38 million, with Banamex payable in a
lump sum and maturing on January 12, 2001; bearing
interest at LIBOR plus 1.65%, payable annually (See
Note 19)............................................... 393,252 365,172
Bank loan for US$30 million, with Banamex payable in a
lump sum and maturing on June 11, 2001; bearing
interest at LIBOR plus 1.90%, payable annually (See
Note 19)............................................... 310,462 288,294
Bank loan for US$80 million, with Bancomext, S.N.C.
payable in 14 semiannual installments beginning July
2002; bearing interest at LIBOR plus 7.0%. ............ 827,898 768,784
Subordinated promissory note, for US$24.5 million, to HG
Estate payable at December 17, 2004. The interest rate
is 10% payable semiannually. .......................... 243,398 235,440
Notes payable for US$18.1 million to HG Estate maturing
from October to December 2002, bearing interest from
10% to 12% payable semiannually. ...................... -- 173,938
Bank loan for US$15.4 million, with Bancomext, S.N.C.
payable in 14 semiannually installments beginning
September 2003, bearing interest at LIBOR plus 5%, net
of withholding tax plus 1.5% payable semiannually. .... -- 147,991
Bank loan for US$4.0 million, with Banamex payable in a
lump sum and maturing on July 11, 2001; bearing
interest at LIBOR plus 2.00%, payable annually (See
Note 19)............................................... 41,395 38,439
Bank loan for US$15.0 million, with California Commerce
Bank payable in a lump sum and maturing on July 11,
2001; bearing interest at LIBOR plus 1.65%, payable
annually. ............................................. 153,990 --
Other long-term debt.................................... 139,440 67,621
---------- ----------
6,877,427 7,088,444
Current portion of long-term debt....................... 144,914 232,816
---------- ----------
$6,732,513 $6,855,628
========== ==========
As of December 31, 2000, LIBOR was 6.558%.
F-19
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
As of December 31, 2000, the maturities of the long-term debt were as
follows:
Year ended December 31, Amount
----------------------- ----------
2002................................................................. $ 689,190
2003................................................................. 2,833,102
2004................................................................. 1,142,743
2005 ................................................................ 279,610
2006 and thereafter.................................................. 1,910,983
----------
$6,855,628
==========
The Yankee Bonds, bank loans and financial lease agreements contain certain
covenants, obligations and restrictions which the Company and or its
subsidiaries must comply, mainly in respect of contracting other credit lines,
payment of dividends and decreases in capital stock, restrictions in
transactions with related parties and the maintenance of certain financial
ratios. As of December 31, 2000, the Company and its subsidiaries were in
compliance with its financial covenants.
c) In January 1999, the Company paid approximately US$40 million of short-
term bank loans.
d) In 1997, the Company entered into various lease agreements to finance the
acquisitions of machinery and equipment. These financial leases bear variable
interest rates of LIBOR plus 3.5% and 4% payable in 14 semi-annual
installments.
The following is an analysis of the leased property:
As of December
31,
------------------
1999 2000
-------- --------
Machinery and equipment..................................... $276,762 $260,586
Less: Accumulated depreciation.............................. (34,739) (38,935)
-------- --------
$242,023 $221,651
======== ========
As of December 31, 2000, the future minimum lease payments and the present
value of the future minimum lease payments were as follows:
Year ended December 31, Amounts
----------------------- --------
2001.................................................................. $ 30,641
2002.................................................................. 25,735
2003.................................................................. 19,712
2004.................................................................. 19,572
2005.................................................................. 1,744
2006 and thereafter................................................... 8,200
--------
Total............................................................... 105,604
Less--Amount representing interest.................................... 23,057
--------
Present value of minimum lease payment.............................. $ 82,547
========
F-20
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 11--Financial Instruments and Derivative Financial Transactions
(a) International Accounting Standard No. 32, "Disclosures About Fair Value
of Financial Instruments" ("IAS 32") requires disclosures of the fair value of
certain financial instruments for which it is practicable to estimate such
value. For the purposes of IAS 32, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The fair value amounts disclosed represent management's best
estimates of fair value.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
As of December 31, 1999 and 2000, the carrying amount of cash and temporary
investments, accounts receivable, trade accounts payable and accrued
liabilities and other accounts payable approximate their fair value because of
their short maturity. The net value of accounts receivable represents the cash
flow expected to be received by the Company.
As of December 31, 2000 and 1999, the carrying amount of short-term debt
approximates its fair value due to the variable rate used in such instruments
and its short-maturity term.
As of December 31, the estimated fair values of the Company's long-term debt
are as follows:
1999 2000
--------------------- ---------------------
Carrying Carrying
amount Fair value amount Fair value
---------- ---------- ---------- ----------
Publicly traded bonds(1).......... $4,139,489 $4,110,600 $3,843,920 $3,756,390
Variable debt(2):
Libor plus 1.5% notes............. 517,437 486,688 384,392 357,747
Libor plus 1.65% notes............ 547,242 522,155 365,172 364,163
Libor plus 1.90% notes............ 310,462 292,034 288,294 288,161
Libor plus 2.00% notes............ 41,395 39,052 38,439 38,457
Libor plus 3.0% notes............. -- -- 336,343 397,653
Libor plus 3.5% notes............. -- -- 144,147 170,423
Libor plus 5.0% notes............. -- -- 147,991 174,967
Libor plus 7.0% notes............. 827,898 909,147 768,784 720,112
Financial lease agreements bearing
interest LIBOR plus 3.5%......... 110,666 235,956 82,547 82,547
Fixed rate notes(2):
Subordinated promissory note
bearing interest at 10%.......... 250,696 258,045 235,440 235,440
Other notes bearing interest at
10% to 12%....................... -- -- 173,938 173,938
Bank loan bearing interest at
10.15%........................... 211,416 211,416
Other debt........................ 132,142 143,586 67,621 69,762
---------- ---------- ---------- ----------
$6,877,427 $6,997,263 $7,088,444 $7,041,176
========== ========== ========== ==========
--------
(1) The fair value of the publicly traded bonds is estimated based on quoted
market prices.
(2) Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of the existing debt.
F-21
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
(b) As of December 31, 2000, the estimated fair values of the Company's
financial derivatives are as follows:
1999 2000
-------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ----- -------- -------
Interest rate swap(1)........................... -- -- -- --
Equity Swap(2).................................. $467 $467 $63,475 $63,475
--------
(1) The Company has entered into an interest rate swap transaction pursuant to
which it has exchanged its floating rate interest obligation on US$50
million notional principal amount for a fixed rate payment obligation of
6.25% per annum for the three-year period beginning December 5, 1997 and
which has expired in 2000.
(2) GIDUSA entered into several equity swaps with respect to its American
Depositary Receipts ("ADRs"). The carrying value of these contracts is as
follows:
December 31,
------------------
1999 2000
-------- --------
Gain (loss) from valuation of financial instruments.... $ 902 $(64,292)
--Financial cost for the period........................ (10,798) (10,222)
--Financial cost from prior periods.................... (17,833) (26,460)
--Financial cost paid.................................. 27,262 37,499
-------- --------
$ (467) $(63,475)
======== ========
Balances ($467) as of December 31, 1999 and of ($63,475) as of December 31,
2000 were recorded in other long-term liabilities, with a corresponding
adjustment to stockholders' equity.
The fair value of the equity swap is estimated based on its quoted market
price.
Concentration of credit risk
The financial instruments which potentially are subject to a concentration
of credit risk, are principally cash and temporary investments and trade
accounts receivable. The Company deposits and invests its excess cash in
recognized financial institutions. The concentration of the credit risk with
respect to accounts receivable is limited, due to a large number of customers
comprising the Company's customer base and their dispersion across different
locations in Mexico and the U.S. There were no customers exceeding 10% of net
sales for any of the periods presented.
F-22
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 12--Pension Plans and Seniority Premiums
The valuation of labor obligations for retirement pensions and seniority
premiums covers all Mexican employees. The principal financial data related to
these obligations is as follows:
December 31,
--------------------
1999 2000
--------- ---------
Current benefit obligation.............................. $ 225,548 $ 218,577
Plan assets............................................. (500) (385)
--------- ---------
Net current liability................................... $ 225,048 $ 218,192
========= =========
Projected benefit obligation............................ $ 310,905 $ 285,172
Unamortized transition asset............................ (199,545) (181,509)
Unamortized prior service cost..........................
Unamortized differences in assumptions and experience
adjustments............................................ (82,581) (50,099)
Plan assets............................................. (500) (385)
--------- ---------
Projected net liability................................. 28,279 53,179
Additional minimum liability............................ 196,769 165,013
--------- ---------
Labor obligations....................................... $ 225,048 $ 218,192
========= =========
Intangible pension asset--Labor obligation.............. 160,241 144,667
========= =========
Amortization period (years):
Transition asset........................................ 18.5 18.5
Prior service cost and experience adjustments........... 24 24
The net cost for the year consisted of the following:
December 31,
-----------------------
1998 1999 2000
------- ------- -------
Service cost........................................... $14,812 $14,818 $14,131
Amortization of prior service cost..................... 14,702 18,112 16,893
Financial cost for the year............................ 12,390 15,310 13,343
------- ------- -------
$41,904 $48,240 $44,367
======= ======= =======
Prior service costs (transition liability), plan amendment costs and
actuarial losses are recorded through charges to income using straight-line
method over the average remaining service life over which employees are
expected to receive the benefits.
During 1999, the Company made payments for employee terminations, which
totaled $73,935.
The following actuarial assumptions were used to determine the present value
of accumulated plan benefits for pension plans and seniority premiums
(excluding inflation effects):
December 31,
--------------
1998 1999 2000
---- ---- ----
Discount rate.................................................... 5% 5% 5%
Salary increase rate............................................. 2% 2% 2%
Return on plan assets............................................ 5% 5% 5%
F-23
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The subsidiaries in the U.S., have established the following employee
benefits: a 401(k) retirement savings plan, money purchase and defined benefit
plans, health insurance plan, disability plan, and life insurance plan. For
the years ended December 31, 1998, 1999 and 2000 total expense related to
these plans were US$433 ($4,161), US$1,755 ($6,865) and US$12,381 ($118,978),
respectively.
NOTE 13--Contingencies and Commitments
The Company has the following contingencies:
a) The Company is contingently liable for indemnities payable to personnel in
case of dismissal under certain circumstances as provided by the Mexican
Labor Law. As of December 31, 2000, no obligations were recognized in the
financial statements.
b) The Company may be subject to a contingent liability for additional taxes
resulting from reviews of the tax returns filed by the Company should its
interpretation criteria differ from that of the Mexican Tax authorities. As
of December 31, 2000, there are no outstanding tax reviews from the Tax
authorities.
c) As of December 31, 2000, the Mexican subsidiaries lease certain equipment
under noncancelable operating leases. Rental expense under these leases was
approximately $33,133, $35,422 and $55,713 for the years ended December
1998, 1999 and 2000, respectively.
As of December 31, 2000, estimated future minimum lease payments under
noncancelable operating leases were as follows:
Year ended December 31,
-----------------------
2001.............................................................. $16,538
2002.............................................................. 14,184
2003.............................................................. 15,116
2004.............................................................. 216
-------
$46,054
=======
d) As of December 31, 2000 the US subsidiaries lease certain equipment under
noncancelable operating leases. Rental expense under these leases was
approximately $7,378, $13,261 and $26,820 for the years ended December
1998, 1999 and 2000, respectively.
As of December 31, 2000 estimated future minimum lease payments under
noncancelable operating leases were as follows:
Year ended December 31,
-----------------------
2001............................................................. $ 14,021
2002............................................................. 15,414
2003............................................................. 15,952
2004............................................................. 13,944
2005............................................................. 14,828
2006 and thereafter.............................................. 67,499
--------
$141,658
========
F-24
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
e) Pursuant to the Durango Paper Company Purchase Agreement (the "Purchase
Agreement"), liabilities with respect to environmental matters arising
prior to the closing date are the responsibility of the seller, except for
the first $1.6 million of indemnified onsite location environmental losses
(as defined), and except for the commitment related to the cluster rules
(U.S. environmental standards that are to be complied with by the Company),
which originally amounted to approximately $32 million, of which the Seller
paid $10.1 million prior to December 17, 1999 (closing date). The remaining
amount of the commitment is guaranteed by Durango Paper Company, with the
seller providing financing in the amount of $18.4 million, to be repaid
$12.7 million in 2002 and the balance in 2003 and an additional US$3.9
million to be financed by suppliers.
f) Pursuant to the Purchase Agreement, the seller shall indemnify and hold
harmless the Company from and against all liabilities which may arise due
to a termination of employment on or prior to the closing date and those
"Severance Liabilities" (liabilities described in the Gilman Paper Company
severance plan agreement ("Severance Plan") or as described in the
applicable collective bargaining agreement) incurred by the Company and its
affiliates with respect to an aggregate of not more than 250 employees of
the purchased companies prior to the first anniversary date of the closing
date and for not more than 300 employees (including the previous 250
employees) prior to the second anniversary of the closing date.
The accompanying financial statements do not reflect any liability in
connection with severance benefits as management does not expect to incur
any expenditures in excess of seller's commitment.
g) The Company entered into an employee benefits transition services agreement
("Benefits Agreement") with the seller. The seller agreed that the Company
will become participating employers in their existing employee benefit
plans related to pension plans, saving plans, welfare plans, and converting
health plans (collectively "Plans"). Employees continued to participate in
such Plans on the same terms and conditions in effect as of the closing
date for a period of six months following the closing date through May 17,
2000.
The Company continued to be liable for all costs associated with the
continued coverage pursuant to the terms and conditions contained in the
Benefits Agreement. The third-party cost and internal cost were
approximately $969 per month.
h) The Company has entered into a three year commitment (automatically
renewable for a period of three years unless terminated by either party to
the agreement) to obtain a minimum amount of wood chips at specified prices
directly from specific sawmills ("Supply Agreement"). Pursuant to the
Supply Agreement, the minimum amounts and prices have been established for
the year ended December 31, 2000 as follows: approximately 650,000 standard
short tons of de-barked chips at a price as defined in the Supply Agreement
and to be shipped at the rate of approximately 13,000 tons per week.
Minimum purchases and prices under the Supply Agreement for the years
subsequent to 2000 have not yet been determined.
i) The Company has entered into commitments to obtain logs, paper and
chemicals through various short-term, market-based pricing contracts. The
Company has also entered into an agreement to purchase sludge pressing
services and requiring the Company to purchase all of the energy produced
by an on-site independent power producer, once the power plant becomes
operational.
F-25
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 14--Capital Stock and Retained Earnings
Historical amounts of capital stock, retained earnings and current year
earnings have been restated to Mexican Pesos as of December 31, 2000 as
follows:
Historical Restatement Restated
balances effect balances
---------- ----------- ----------
Capital stock................................ $1,901,816 $202,113 $2,103,929
Retained earnings:
Legal reserve.............................. 7,463 1,669 9,132
Prior year retained earnings............... 3,142,141 586,366 3,728,507
Current year earnings........................ 1,453,241 163,453 1,616,694
---------- -------- ----------
$6,504,661 $953,601 $7,458,262
========== ======== ==========
As of December 31, 2000, the nominal capital stock amounted $1,901,816, and
the fixed minimum portion without a right of withdrawal amounted $301,816,
represented by 9,128,689 common, nominative, Series "A" shares without par
value. The variable portion of capital stock amounted $1,600,000, represented
by 20,018,465 common, nominative, Series "BI" (shares limited to Mexican
investors) and 19,233,426 Series "BII" (shares available to Mexican and
foreign investors), all shares are without par value.
At the General Extraordinary Stockholders' Meeting held on March 15, 2000,
the stockholders' resolved to increase the capital stock in the amount of
$1,844,846, (nominal).
NOTE 15--Retained Earnings
a) In conformity with the provisions of Mexican Corporate Law, a company's
net profits are subject to the shareholders' approval at the General
Stockholders' Meeting.
b) Mexican Corporate Law requires appropriation of 5% of annual net income
to the legal reserve until the reserve equals 20% of a company's restated
capital stock. This reserve is not available for dividends, but may be used to
reduce a deficit or may be transferred to contributed capital.
c) Retained earnings are subject to income tax, in the event that dividends
are paid (either in cash or in-kind). Tax payments made by a company are
considered paid when:
. Those earnings are neither paid out of the net taxable income nor
reinvestment accounts, triggering a 35% tax rate.
. Dividends are paid out of the reinvested net taxable income account,
resulting in a 5% tax rate. The tax rate for reinvested taxable income
generated in 2000 is 3%.
. No tax is due on any dividends paid out of the net taxable income account
(up to the total balance). In order to accomplish this; dividends must
first be paid out of the reinvested net taxable income account until that
account is exhausted.
d) Additionally, dividends paid to individuals or nonresidents, regardless
of their origin, are subject to withholding tax in accordance with the
applicable tax legislation.
F-26
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
e.) At December 31, the balances of the net taxable income accounts are:
December
---------------------
1999 2000
---------- ----------
Net taxable income account............................ $2,960,583 $3,244,602
Reinvested net taxable income account................. 165,451 599,780
In 1999, the income tax rate was increased from 34% to 35%. In addition, the
tax law established a deferment plan for the re-investment of earnings, by
applying a 30% tax rate to re-invested taxable income. In the year in which
earnings are declared as dividends, the remaining 5% tax will be paid. The
applicable tax rate for re-invested earnings was 32% and 3% in 1999 instead of
30% and 5%, respectively.
The Company is not permitted to declare or pay dividends if the dividends
from its subsidiaries are not received first under Mexican corporate law.
Additionally neither the Company nor its subsidiaries are permitted to declare
or pay dividends as a result of the negative covenants established in the
issuance of debt placed in the Mexican and international markets.
NOTE 16--Provision for Income and Asset Taxes
The income tax (ISR) provision for the years ended December 31, is comprised
as follows:
1998 1999 2000
------- -------- --------
ISR current..................................... $15,457 $167,162 $262,080
ISR deferred.................................... -- -- 347,485
Tax losses carryforwards utilized............... (6,913) (6,916) --
------- -------- --------
Total income tax provision.................... $ 8,544 $160,246 $609,565
======= ======== ========
At December 31, 2000, the reconciliation between the statutory and effective
income tax rate is shown below:
1998 1999 2000
----- ----- -----
ISR at the statutory rate............................. 35% 35% 35%
Increase (decrease) in effective ISR rate due to:
Inventories and cost of sales....................... 1.7 17.4 (3.8%)
Net effect of the comprehensive financing cost...... (48.5) 8.0 0.9%
Reserves............................................ 15.5 (13.5) 0.7%
Non-deductible expenses............................. 6.2 (54.5) 0.8%
Amortization of negative goodwill................... (62.3) -- (21.9%)
Tax loss carryforwards.............................. (8.0) (1.1) (2.8%)
Other............................................... 56.2 9.9 2.8%
----- ----- -----
Effective tax rate.................................. (4.2%) 1.2% 11.7%
===== ===== =====
F-27
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
At December 31, 2000, the principal temporary differences for which deferred
income tax is recognized are shown as follows:
Inventories..................................................... $ 874,646
Property, plant and equipment, net.............................. 11,700,261
Provisions...................................................... (867,793)
Tax loss carryforwards.......................................... (2,562,779)
Deferred assets................................................. 279,642
-----------
Total temporary differences 9,423,977
Statutory income tax rate....................................... 35%
-----------
Deferred income tax liability .................................. $ 3,298,392
Asset tax credits............................................... 281,978
-----------
Deferred tax income liability................................. $ 3,016,414
===========
During 2000, in accordance with Bulletin D-4, the Company charged directly
to the deficit from restatement $9,484 of the deferred tax liability related
to fixed assets of foreign origin and inventory resulting from the
restatements via specific index and specific costs, respectively.
During 1999, tax losses carryforwards totaling $19,760 were utilized,
resulting in a tax benefit of $6,916. During 2000, there was no amortization
of tax losses carryforwards.
GIDUSA and its Mexican subsidiaries are authorized by the Ministry of
Finance and Public Credit to file income tax returns on a consolidated basis.
Effective January 1, 1999, as a result of the change in the income tax law,
consolidated taxable income or loss rules have changed, the most significant
modifications are the following:
. Recognizing taxable income or loss subsidiaries to the extent of taking the
ownership percentage of the holding company in the subsidiaries and
multiplying the amount by a factor of 0.60. Controlled companies with
prior-years-tax-loss carryforwards, shall be considered at the total
percentage of direct or indirect equity participation share.
. Eliminating the concept of effective control of subsidiaries. Companies in
which a direct or indirect equity interest of less than 50% is held should
not be included in the consolidated tax return.
. The tax losses corresponding to the controlling or controlled companies,
which originated as individual entities, and those which cannot be offset
under the tax terms in effect must be added to income or deducted from the
consolidated tax loss in the year in which the right expires.
As of December 31, 2000, the Company and its Mexican subsidiaries had
consolidated tax loss carryforwards available for future use totaling
$2,305,041 which have been indexed for inflation. These tax loss carryforwards
can be carried forward for a period of ten years from the date they were
generated.
F-28
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
As of December 31, 2000, tax loss carryforwards of Mexican subsidiaries
within the Company and their expiration date are comprised as follows:
Expiration date Amount
--------------- ----------
2002........................................................... $ 59,649
2003........................................................... 116,852
2004........................................................... 282,116
2005........................................................... 773,792
2006 through 2011.............................................. 1,072,632
----------
$2,305,041
==========
At December 31, 2000 U.S. subsidiaries included within the Company had tax
loss carryforwards amounting to $257,738 with expiration dates in 2003 and
2004.
Asset tax is calculated imposed at a 1.8% rate on the net value of certain
assets and liabilities and is due only when the asset tax exceeds the income
tax amount payable. The asset tax paid can be recovered over the following 10
years, if and when income taxes exceed asset tax during such years.
For the years ended December 31, 1998, 1999 and 2000, the Company incurred
asset tax totaling $16,878, $20,915 and $71,806, respectively, which was
recognized in results for the year.
Employee profit sharing is determined at a 10% rate on the taxable income of
the companies, adjusted accordingly to what is established in the Mexican
Income Tax Law. The amortization of tax losses and asset tax credits is not
applicable for employee profit sharing purposes.
NOTE 17--Significant Transactions with Related Parties
The balances of advances, deposits, receivables and payables between the
Company and affiliated companies are:
1999 2000
------ ------
Accounts receivable:
Administradora Corporativa Mercantil, S.A. de C.V........... -- $2,782
Chapas Finas, S.A. de C.V................................... -- 6
Lineas Aereas Ejecutivas de Durango, S.A. de C.V............ -- 3,984
------ ------
$ -- $6,772
====== ======
Accounts payable:
Lineas Aereas Ejecutivas de Durango, S.A. de C.V............ $2,998 $ --
Industrializadora de Madera, S.A. de C.V.................... 11 10
Industria Extractiva, S.A. de C.V........................... 7 7
------ ------
$3,016 $ 17
====== ======
The Company entered into transactions with its affiliated companies, which
primarily include Lineas Aereas Ejecutivas de Durango, S.A. de C.V.,
shareholders, and entities under common control as follows:
Years ended
December 31,
--------------------
1998 1999 2000
----- ------- ----
Income
Interest earned...................................... $ 200 $ -- $416
Costs
Interest paid........................................ (269) (269) (75)
Other................................................ $ -- $(3,624) $--
F-29
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
NOTE 18--Financial Information by Business Segments
As noted in Note 3r., the Company adopted IAS 14 for segmental reporting
purposes. The Company is managed on a product basis and its reportable
segments are as follows:
Packaging
Manufacturing and selling of corrugated containers, molded pulp, and multi-
wall sacks and bags.
Paper
Manufacturing and selling of kraft and semikraft paper and paper to be used
in the manufacturing of newspaper, books and magazines.
Other
Manufacturing and selling of plywood, particleboard and lumber.
Prices between segments are based on market prices. Management evaluates
each business segment according to its operating income before depreciation
and amortization.
The accounting policies of the segments are the same as those described in
Note 3.
For the years ended December 31, the financial information by business
segment is as follows:
Operating
income
(loss)
before
Sales to Inter- depreciation
Depreciation Operating
third segment and
and income
parties sales Total sales amortization
amortization (loss)
----------- ----------- ----------- ------------
------------ ----------
1998:
Packaging............. $ 4,223,143 $ 106,457 $ 4,329,600 $ 871,983
$126,469 $ 745,514
Paper................. 1,137,274 1,590,686 2,727,960 459,313
166,665 292,648
Other................. 673,840 124,187 798,027 129,848
40,973 88,875
Eliminations.......... -- (1,821,330) (1,821,330) --
-- --
----------- ----------- ----------- ----------
-------- ----------
$ 6,034,257 $ -- $ 6,034,257 $1,461,144
$334,107 $1,127,037
=========== =========== =========== ==========
======== ==========
1999:
Packaging............. $ 4,103,457 $ 56,571 $ 4,160,028 $ 744,096
$108,175 $ 635,921
Paper................. 3,360,329 4,084,399 7,444,728 943,464
320,368 623,096
Other................. 624,782 57,646 682,428 135,219
35,476 99,743
Eliminations.......... -- (4,198,616) (4,198,616) (13,037)
-- (13,037)
----------- ----------- ----------- ----------
-------- ----------
$ 8,088,568 $ -- $ 8,088,568 $1,809,742
$464,019 $1,345,723
=========== =========== =========== ==========
======== ==========
2000:
Packaging............. $ 5,366,122 $ 84,177 $ 5,450,299 $ 789,497
$108,820 $ 680,677
Paper................. 5,734,095 4,471,462 10,205,557 970,150
368,953 601,197
Other................. 503,699 52,373 556,072 74,694
30,794 43,900
Eliminations.......... -- (4,608,012) (4,608,012) (1,855)
-- (1,855)
----------- ----------- ----------- ----------
-------- ----------
$11,603,916 $ -- $11,603,916 $1,832,486
$508,567 $1,323,919
=========== =========== =========== ==========
======== ==========
F-30
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
As of December 31, segment information related to assets, liabilities and
additions to property, plant and equipment is as follows:
Additions
to
property,
Segment Segment plant and
assets liabilities equipment
------------ ----------- ----------
1998:
Packaging............................... $ 20,561,580 $11,740,785 $ 413,335
Paper................................... 31,280,533 6,020,211 546,940
Other................................... 3,488,801 565,328 8,362
Eliminations............................ (35,677,516) (8,038,596) --
------------ ----------- ----------
$ 19,653,398 $10,287,728 $ 968,637
============ =========== ==========
1999:
Packaging............................... $ 18,728,195 $10,063,785 $ 86,634
Paper................................... 27,281,787 8,059,422 76,366
Other................................... 1,213,493 312,359 13,697
Eliminations............................ (25,943,657) (6,411,404) --
------------ ----------- ----------
$ 21,279,818 $12,024,162 $ 176,697
============ =========== ==========
2000:
Packaging............................... $ 16,657,965 $11,294,483 $ 190,874
Paper................................... 30,357,298 11,440,965 860,947
Other................................... 1,555,641 991,294 8,763
Eliminations............................ (27,236,017) (9,771,594) --
------------ ----------- ----------
$ 21,334,887 $13,955,148 $1,060,584
============ =========== ==========
Geographical segment information is as follows:
Additions
to
Segment property,
fixed plant and
Net Sales Assets equipment
----------- ----------- ----------
1998:
Mexico................................... $ 6,549,680 $13,878,263 $ 864,078
United States of America................. 1,305,907 1,549,955 104,559
Eliminations............................. (1,821,330) -- --
----------- ----------- ----------
$ 6,034,257 $15,428,218 $ 968,637
=========== =========== ==========
1999:
Mexico................................... $10,502,541 $12,210,411 $ 171,172
United States of America................. 1,784,643 3,439,052 5,525
Eliminations............................. (4,198,616) -- --
----------- ----------- ----------
$ 8,088,568 $15,649,463 $ 176,697
=========== =========== ==========
2000:
Mexico................................... $11,020,702 $12,115,855 $ 628,853
United States of America................. 5,191,226 3,707,009 431,731
Eliminations............................. (4,608,012) -- --
----------- ----------- ----------
$11,603,916 15,822,864 $1,060,584
=========== =========== ==========
F-31
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Note 19--Subsequent Events
In the first quarter of 2001, the Company restructured a portion of its
outstanding debt which consisted of the following:
a) In February 2001, the Company made a public offering of Yankee bonds
amounting to US$180 million maturing on August 1, 2006 bearing an annual
interest rate of 13 1/8% payable semiannually in February and August (the
"Senior Notes 2006"). The proceeds received from Senior Notes 2006 were used
to pay some of the indebtedness outstanding at December 31, 2000. A total of
US$111.2 million were utilized to pay, prior to the scheduled maturity, some
of the bondholders of the GIDUSA US$150 million Yankee bond maturing on July
15, 2000. Some of the GIDUSA bondholders elected not to accept the offer for
the anticipated payment. As a result, the Company deposited US$43.5 million in
a trust that represents the estimated funds necessary to liquidate the
principal and interest of the bonds at its original maturity date.
b) In addition, the Company used the remaining net proceeds from the Senior
Notes 2006 to pay two short-term loans totaling US$30 million (US$22 million
with Banamex and US$8 million with The Chase Manhattan Bank).
c) In early 2001, the Company renegotiated two short-term loans with Banamex
totaling US$94 million. Pursuant to the new agreement, the new loans bear an
annual interest rate of LIBOR plus 2.80% with quarterly payments and are due
on 2005. In addition, the Company received a bank loan from California
Commerce Bank of US$11.7 million which matures in 2003 and has an average
interest rates of LIBOR + 2.75%.
d) Our subsidiary, Durango Paper Company has a Ps 489.9 million (US$51.6
million) of indebtedness to Bank of America at March 31, 2001, as part of a
US$36.6 million revolving and US$15 million term facility. This facility
matures in January 2004 and has an interest rate of LIBOR + 3.5%. The Bank of
America loan is secured by a pledge of substantially all of the physical
assets of the Durango Paper Company.
In accordance with Bulletin B-13, "Subsequent Events" and Circular 46,
"Short-Term Liabilities Refinanced to Long-Term Subsequent to the Date of the
Financial Statements" and as a result of the transactions described above, the
Company reclassified US$294 million of debt maturing in 2001 to long-term
debt.
In January 2001, the Company paid a loan in the amount of US$35 million with
Bank of America.
Currently, the Company is negotiating the sale of non-strategic assets of
its subsidiary Durango Paper Company and does not anticipate a loss on
disposition of these assets.
NOTE 20--New Accounting Pronouncements
In August 2000, the MIPA issued Bulletin B-4, "Comprehensive Income", to
become effective January 1, 2001. This Bulletin sets forth new guidelines for
reporting and disclosing comprehensive income and its components. Based on
this Bulletin, comprehensive income will include net income of the year and
other items which, in accordance with other bulletins, are recorded directly
in stockholders' equity and which are not a result of stockholders transaction
such as contributions, reductions, or distributions of capital.
F-32
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Effective January 1, 2001, Bulletin C-2, "Financial Instruments", issued by
the MIPA, provides new rules for recording those instruments. It requires
recording assets or liabilities in the balance sheet, valued at their market
value. In the opinion of the Company's Management, the most significant effect
derived from adopting this pronouncement will be the accounting for Equity
swaps which are described in Note 10.
NOTE 21--Reconciliation Between Mexican and U.S. GAAP
The Company's combined and consolidated financial statements are prepared in
accordance with Mexican GAAP, which differs in certain significant respects
from U.S. GAAP. The Mexican GAAP combined and consolidated financial
statements include the effects of inflation as provided for under Bulletin B-
10. The application of Bulletin B-10 represents a comprehensive measure of the
effects of price level changes in the Mexican economy, and is considered to
result in a more meaningful presentation than historical cost-based financial
reporting for both Mexican and U.S. accounting purposes. Therefore, the
following reconciliation to U.S. GAAP does not include the reversal of such
inflationary effects.
The principal differences between Mexican GAAP and U.S. GAAP, other than
inflation accounting, are presented in the following pages with an
explanation, where appropriate, of the effects on combined and consolidated
net income and stockholders' equity. Reconciling items are presented net of
any gain or loss from monetary position.
Reconciliation of combined and consolidated net income:
Years ended December 31,
------------------------------------
1998 1999 2000
----------- ---------- -----------
Net income under Mexican GAAP........ $ 3,199,928 $ 969,466 $ 1,458,923
Deferred income taxes................ 114,093 470,052 (262,298)
Deferred employee profit sharing..... (23,454) 103,817 (45,087)
Employee benefits.................... 715 3,127 --
Purchase accounting adjustments:
. Amortization of negative goodwill.. (3,386,408) (87,712) (1,347,290)
. Depreciation....................... 41,731 141,162 189,918
. Other reserves..................... -- 116,823 --
Effect of fifth amendment to Bulletin
B-10 ............................... (26,605) (42,518) (62,450)
Effect of Bulletin B-15 on prior
years............................... 7,048 5,507 --
Equity swaps......................... (116,909) 69,866 (75,522)
Effect of U.S. GAAP adjustments on
minority interest................... 72,123 (449,761) 158,299
----------- ---------- -----------
U.S. GAAP net (loss) income.......... $ (117,738) $1,299,829 $ 14,493
=========== ========== ===========
F-33
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Reconciliation of combined and consolidated stockholders' equity:
Year ended December 31,
-------------------------------------
1998 1999 2000
----------- ----------- -----------
Total stockholders' equity
corresponding to majority
interest under Mexican GAAP......... $ 6,953,574 $ 6,895,845 $ 5,975,806
Deferred income taxes................ (2,661,207) (2,022,685) 393,636
Deferred employee profit sharing..... (960,593) (856,776) (901,863)
Employee benefits.................... (3,127) -- --
Purchase accounting adjustments:
. Accumulated negative goodwill...... (4,230,689) (4,486,871) (5,539,736)
. Accumulated depreciation........... 110,222 251,384 441,302
. Other reserves..................... (116,823) -- --
Effect of Fifth Amendment of Bulletin
B-10:
. Fixed assets....................... 511,256 1,514,863 2,346,120
. Fixed assets accumulated
depreciation....................... 160,992 (151,696) (501,051)
Effect of restatement of prior year
amounts per Bulletin B-15........... 299,444 64,835 --
Effect of U.S. GAAP adjustments on
minority interest................... 1,548,975 1,127,929 145,303
----------- ----------- -----------
Total U.S. GAAP stockholders'
equity.............................. $ 1,612,024 $ 2,336,828 $ 2,359,517
=========== =========== ===========
Provided below is an analysis of the changes in stockholders' equity under
U.S. GAAP:
Year ended December
31,
-----------------------
1999 2000
----------- ----------
Balance at beginning of the year.................. $ 1,612,024 $2,336,828
Capital contributions............................. 2,721 --
Net income under U.S. GAAP........................ 1,299,829 14,493
Deficit from restatement.......................... (1,071,644) (501,496)
Adjustment for additional pension liability
related to seniority premiums.................... -- (11,470)
Cumulative translation adjustment................. 577 10,130
Effect of Bulletin B-15 on prior years............ (240,116) (64,835)
Capital contribution as a result of acquisition of
GIDUSA........................................... -- 31,515
Effect of Fifth Amendment of Bulletin B-10........ 733,437 544,352
----------- ----------
Balance at end of the year........................ $ 2,336,828 $2,359,517
=========== ==========
F-34
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Comprehensive income
Comprehensive income under Mexican GAAP is as follows:
Years ended December 31,
-----------------------------------
1998 1999 2000
---------- ----------- ----------
Mexican GAAP net income before
minority interest.................... $3,199,928 $ 969,466 $1,458,923
---------- ----------- ----------
Other comprehensive income (loss),
net:
Cumulative translation adjustment..... (58,053) 577 10,130
Effect of adoption of Bulletin D-4.... -- -- (446,270)
Gain (loss) from holding non-monetary
assets............................... 37,728 (1,071,644) (494,811)
Adjustment for additional pension
liability related to seniority
premiums............................. -- -- (11,470)
Deferred income tax................... -- -- (8,545)
Cancellation of GIDUSA of
stockholders' equity upon acquisition
..................................... -- -- 2,460,153
---------- ----------- ----------
(20,325) (1,071,067) 1,509,187
---------- ----------- ----------
Comprehensive income (loss)........... $3,179,603 $ (101,601) $2,968,110
========== =========== ==========
Accumulated comprehensive loss........ $ (886,627) $(1,937,694) $ (428,507)
========== =========== ==========
--------
(1) For 2000, due to the adoption of Bulletin D-4, amount includes deferred tax
effect of $6,685.
The components of other accumulated comprehensive loss is as follows as of
December 31, 1998, 1999 and 2000:
Effect of
adoption Other
of Cumulative Deficit accumulated
Bulletin translation from comprehensive
D-4 adjustment restatement loss
--------- ----------- ----------- -------------
Balances at December 31,
1998..................... -- $ 2,249 $ (868,876) $ (866,627)
Current period changes... -- 577 (1,071,644) (1,071,067)
--------- ------- ----------- -----------
Balances at December 31,
1999..................... -- $ 2,826 $(1,940,520) $(1,937,694)
Current period changes... -- 10,130 (494,811) (484,681)
Adjustment for additional
pension liability
related to seniority
premiums................ -- -- (11,470) (11,470)
Deferred income tax...... (446,270) -- (8,545) (454,815)
Cancellation of GIDUSA
stockholders' equity
upon acquisition........ -- 2,258 2,457,895 2,460,153
--------- ------- ----------- -----------
Balances at December 31,
2000..................... $(446,270) $15,214 $ 2,549 $ (428,507)
========= ======= =========== ===========
F-35
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Effect of Bulletin B-15 on restatement to constant currency
As disclosed in Note 3, the Company adopted Bulletin B-15, during 1997,
Bulletin B-15 requires that the restatement of prior year amounts of foreign
subsidiaries be determined by first restating prior year foreign currency
amounts by the inflation of the foreign country and then retranslating such
amounts at the exchange rate as of the date of the latest balance sheet
present (December 31, 2000). Under U.S. GAAP, the primary financial statements
should be presented in the same reporting constant currency for all periods.
Prior to the adoption of Bulletin B-15, prior year consolidated amounts were
adjusted for the effects of inflation in Mexico and such adjustments were
considered to be an integral part of preparing price level adjusted financial
statements. The methodology established by Bulletin B-15 separates the
adjustment process for the effects of inflation on prior year amounts for
foreign and domestic subsidiaries, which results in the presentation of
amounts, which are not in a constant unit of measure. The difference in the
methodologies used to restate balances to December 31, 2000 purchasing power
is included as a one-line adjustment in the reconciliation to U.S. GAAP of net
income and stockholders' equity.
1998 1999
----------- -----------
Combined net income:
As previously reported indexed for effects of
inflation in Mexico........................... $ 3,240,755 $ 1,428,944
As reported under Bulletin B-15................ (3,233,707) (1,423,437)
----------- -----------
$ 7,048 $ 5,507
=========== ===========
Combined stockholders' equity:
As previously reported indexed for effects of
inflation in Mexico........................... $ 9,677,025 $ 9,320,491
As reported under Bulletin B-15................ (9,377,581) (9,255,656)
----------- -----------
$ 299,444 $ 64,835
=========== ===========
F-36
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The following tables present the Company's condensed balance sheets as of
December 31, 1999 and 2000 and statements of income for the three years ended
December 31, 1998, 1999 and 2000, reflecting U.S. GAAP adjustments. All
amounts have been indexed to December 31, 2000 constant pesos, using the
Mexican NCPI factor:
CONDENSED BALANCE SHEETS:
At December 31,
-----------------------
1999 2000
----------- -----------
Assets
Current assets:
Cash and cash equivalents........................ $ 852,888 $ 730,086
Accounts receivable.............................. 2,145,637 2,012,340
Inventories...................................... 2,172,963 2,210,357
Other............................................ 101,276 58,955
----------- -----------
Total current assets........................... 5,272,764 5,011,738
Property, plant and equipment...................... 11,367,261 12,130,946
Other assets....................................... 412,946 500,285
----------- -----------
Total assets................................... $17,052,971 $17,642,969
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Short term debt, notes payable and current
portion of long-term debt....................... $ 1,063,134 $ 778,615
Accrued liabilities and other payable............ 2,548,049 2,481,045
Deferred income tax and employee profit sharing.. 137,884 211,518
----------- -----------
Total current liabilities...................... 3,749,067 3,471,178
----------- -----------
Long-term debt..................................... 6,745,128 6,855,628
Seniority premiums................................. 225,048 218,192
Deferred income tax and employee profit sharing.... 2,741,577 3,313,123
Other.............................................. 23,441 166,701
----------- -----------
Total long-term liabilities.................... 9,735,194 10,553,644
----------- -----------
Total liabilities.............................. 13,484,261 14,024,822
----------- -----------
Minority interest.................................. 1,231,882 1,258,630
----------- -----------
Stockholders' equity............................... 2,336,828 2,359,517
----------- -----------
Total liabilities and stockholders' equity..... $17,052,971 $17,642,969
=========== ===========
F-37
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
CONDENSED STATEMENTS OF INCOME:
Years ended December 31,
-----------------------------------
1998 1999 2000
---------- ---------- -----------
Net sales............................. $6,231,905 $8,147,298 $11,603,916
Cost of sales......................... 4,665,604 6,162,949 9,556,467
---------- ---------- -----------
Gross profit.......................... 1,566,301 1,984,349 2,047,449
Selling, general and administrative
expenses............................. 450,880 406,601 648,033
---------- ---------- -----------
Operating income...................... 1,115,421 1,577,748 1,399,416
---------- ---------- -----------
Financing cost:
Interest expense.................... 967,399 827,225 1,061,570
Interest income..................... (114,047) (106,116) (111,544)
Foreign exchange loss (gain), net... 1,135,581 (301,220) 92,096
Gain from monetary position......... (821,488) (726,751) (534,066)
---------- ---------- -----------
1,167,445 (306,862) 508,056
---------- ---------- -----------
Other (expense) income, net......... (209,151) 9,670 (15,222)
---------- ---------- -----------
(Loss) income before provision and
minority interest................... (261,175) 1,894,280 876,138
Provision for:
Income and asset tax (benefit)
expense............................ (104,839) (309,281) 862,173
Minority interest................... 38,598 (903,732) 528
---------- ---------- -----------
Net (loss) income................... $ (117,738) $1,299,829 $ 14,493
========== ========== ===========
Effect of fifth amendment to Bulletin B-10 (Modified)
As mentioned in Note 2, the Company elected, as a result of the adoption of
the Fifth Amendment to Bulletin B-10 (Modified), to restate its non-monetary
assets of foreign origin based on the change of the Mexican peso against the
foreign currencies and by applying inflation rates of the countries from which
the non-monetary assets originate. This methodology is not consistent with
Rule 3-20 of Regulation S-X regarding the use of the same reporting currency
for all periods. Under U.S. GAAP, these assets, which are used in Mexico,
would be adjusted by the Mexican NCPI and depreciation would be calculated on
this basis.
Deferred income tax and employee profit sharing
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes" ("SFAS 109") requires an asset and liability approach for financial
accounting and reporting for income tax under the following basic principles:
(a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and tax loss and tax credit
carryforwards, (c) the measurement of current and deferred tax assets and
liabilities is based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated, and (d) the
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits for which available evidence indicates that it is more likely
than not that the tax benefit will not be realized. Under this method,
deferred tax and employee profit sharing are recognized with respect to all
temporary differences, and the benefit from utilizing tax loss carryforwards
and
F-38
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
asset tax credits is recognized in the year in which the losses or credits
arise (subject to a valuation allowance with respect to any tax benefits which
in management's opinion, are more likely than not that they are not expected
to be realized). The subsequent realization of this benefit does not affect
the income tax provision.
The significant components of income and asset tax (benefit) provision under
U.S. GAAP were as follows:
Years ended December 31,
------------------------------
1998 1999 2000
--------- --------- --------
Income and asset tax expense (benefit):
Current
Domestic................................... $ 9,254 $ 160,771 $262,080
--------- --------- --------
Deferred
Domestic................................... -- (498,716) 548,119
Foreign.................................... (114,093) 28,664 51,974
--------- --------- --------
(114,093) (470,052) 600,093
--------- --------- --------
Income and asset tax (benefit) provision..... ($104,839) ($309,281) $862,173
========= ========= ========
F-39
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The significant temporary differences comprising the Company's net deferred
income tax and profit sharing assets and liabilities under U.S. GAAP are as
follows:
December 31, 2000
--------------------------------
SFAS 109
SFAS 109 applied
December 31, applied to Foreign-
1999 Mex-Subs Subs Total
------------ ---------- -------- ----------
Deferred income tax
liabilities (assets):
Inventories............... $ 486,528 $ 492,236 $ -- $ 492,236
Inventory-Rule 106........ (345,899) (324,222) -- (324,222)
Property, plant and
equipment................ 2,530,398 2,720,288 134,230 2,854,518
Other assets.............. 54,336 61,168 -- 61,168
Provisions ............... (230,299) (98,957) -- (98,957)
Equity swap............... 163 (22,216) -- (22,216)
Other..................... (27,929) (23,250) (4,295) (27,545)
Asset tax credits......... (385,675) (291,522) -- (291,522)
Tax loss carryforwards.... (1,058,573) (770,738) (209,183) (979,921)
---------- ---------- -------- ----------
1,023,050 1,742,787 (79,248) 1,663,539
Valuation allowance...... 999,635 959,239 -- 959,239
---------- ---------- -------- ----------
Total net deferred income
tax liability........... $2,022,685 $2,702,026 $(79,248) $2,622,778
========== ========== ======== ==========
December 31,
------------------
1999 2000
-------- --------
Deferred employee profit sharing liabilities (assets):
Inventory............................................ $ 96,137 $136,139
Inventory-Rule 106................................... (98,882) (92,635)
Property, plant and equipment........................ 872,038 905,043
Other assets......................................... 16,242 8,465
Allowance for doubtful accounts...................... (16,674) (25,433)
Exchange rate fluctuations........................... (12,132) (23,073)
Equity swap.......................................... 47 (6,643)
-------- --------
Total net deferred employee profit sharing
liability......................................... $856,776 $901,863
======== ========
Under U.S. GAAP, employee profit sharing is recorded as an operating expense.
For the year ended December 31, 2000, the difference in net deferred tax
liabilities between Mexican and U.S. GAAP was as follows:
Mexican U.S.
GAAP GAAP Difference
---------- ---------- ----------
Deferred tax liability applied to
balances as of :
December 31, 1999...................... $2,685,304 $2,022,685 $ 662,619
December 31, 2000...................... 3,016,414 2,622,778 393,636
---------- ---------- ---------
Net change............................. $ 331,110 $ 600,093 $(268,983)
========== ========== =========
F-40
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The net change in the deferred tax liability during 2000 was allocated to
the following components:
Mexican U.S.
GAAP GAAP Difference
--------- -------- ----------
Deferred tax liability:
Deferred tax expense...................... $ 347,485 $600,093 $(252,608)
Monetary gain on initial balance.......... (208,775) -- (208,775)
Monetary loss on current period change.... 199,085 -- 199,085
--------- -------- ---------
$ 337,795 $600,093 $(262,298)
Deficit from restatement.................. (6,685) -- (6,685)
--------- -------- ---------
$ 331,110 $600,093 $(268,983)
========= ======== =========
Temporary differences under SFAS 109 are determined based on the difference
between the indexed tax-basis amount of the asset or liability and the related
restated amount reported in the financial statements. The deferred income tax
expense or benefit is calculated as the difference between (a) the deferred
tax assets and liabilities at the end of the current period, and (b) the
deferred tax assets and liabilities reported at the end of the prior period
remeasured to units of current general purchasing power at the end of the
current period, whereas, under Mexican GAAP Bulletin D-4, the change in the
deferred tax asset or liability is first measured on a historical cost basis
and the components of the change including and monetary gains or losses are
allocated between tax provision, deficit from restatement and monetary gain or
loss.
Employee benefits
Liabilities and costs related to pension plans and seniority premiums are
recorded under Mexican GAAP according to Bulletin D-3 (Revised), "Labor
Liabilities", as described in Note 3(j). Under U.S. GAAP, the requirements of
SFAS No. 87, "Employers' Accounting for Pensions", as amended by SFAS No. 132,
"Employees Disclosures about Pensions and Other Postretirement Benefits", for
recording liabilities and costs relating to pension plans and seniority
premiums using actuarial computations are similar to those of Bulletin D-3.
The difference in the accrued liability between Mexican GAAP and U.S. GAAP was
related to the adoption of the principles on different dates.
F-41
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The following sets forth the changes in benefit obligations, and the funded
status of such plans for 1999 and 2000 reconciled with the amounts reported in
the consolidated balance sheets under U.S. GAAP.
The components of net periodic cost of retirement under SFAS No. 87 as of
December 31, 1999 and 2000 consist of the following:
December 31,
--------------------
1999 2000
--------- ---------
Change in benefit obligation:
Projected benefit obligation, beginning of year...... $ 297,175 $ 310,864
Service cost......................................... 14,818 14,495
Interest cost........................................ 15,310 13,430
Actuarial loss....................................... 18,112 17,080
Benefits paid........................................ (34,551) (23,796)
--------- ---------
Projected benefit obligation, end of year............ $ 310,864 $ 332,073
========= =========
Unfunded liability.................................... 310,864 332,073
--------- ---------
Plan assets........................................... $ (500) $ (385)
Unrecognized transition obligation and other.......... (245,541) (258,163)
--------- ---------
Net pension liability................................. $ 64,823 $ 75,525
========= =========
Amounts recognized in balance sheets:
Accrued benefit liability............................ $ 225,048 $ 218,192
Intangible pension asset--labor obligations.......... 160,225 144,667
--------- ---------
Net amount recognized under U.S. GAAP................ 64,823 73,525
Net liability recognized under Mexican GAAP.......... 64,823 73,525
--------- ---------
Additional minimum liability......................... $ -- $ --
========= =========
The Company has no post-retirement health care insurance or other post-
employment benefit plans, other than the pensions plans mentioned above.
The following rates were used for the assumptions in determining the
actuarial present value of accumulated benefits for the Company's defined
benefit plans:
Year ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
Discount rate................................. 5% 5% 5%
Salary increase rate.......................... 2% 2% 2%
Rate of return................................ 5% 5% 5%
F-42
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
Acquisitions
As discussed in Note 3(i) for various acquisitions realized in 1998 and
1999, under Mexican GAAP, the Company has recorded negative goodwill,
representing the excess of the book value of the net assets acquired over the
purchase price. Such negative goodwill is being amortized into income, over
the period in which the Company expects to integrate these operations.
Under U.S. GAAP, these acquisitions have been accounted for under the
purchase method and consequently, the purchase price has been allocated to
assets acquired and liabilities assumed based the relative fair values. As a
result under U.S. GAAP, negative goodwill was recorded as a reduction in the
carrying value of the long-term assets (primarily fixed assets). The results
of operations of the acquired companies have been included in the combined and
consolidated results for periods subsequent to the acquisitions.
Additionally, U.S. GAAP allows the recognition of termination costs and the
effect of conforming the accounting policies of the acquired companies as
liabilities assumed at the acquisition date. Such costs are considered
components of the net investments.
Under Mexican GAAP, post acquisition adjustments should be recognized
directly to income as incurred.
As a result, the Company reversed the post acquisition adjustments recorded
against income during 1999 amounting to $108,438 already recognized as part of
the negative goodwill for U.S. GAAP purposes at December 31, 1998.
The reserves are for the following items:
Termination benefits................................................. 68,626
LIFO to average reserve.............................................. 17,564
Environmental reserve................................................ 22,248
-------
108,438
=======
Supplemental unaudited proforma results of operations on a Mexican GAAP
basis as though the Durango Paper Company and Pipsamex acquisitions had
occurred January 1, 1998 is as follows:
Years ended December
31,
-----------------------
1998 1999
---------- -----------
(Unaudited)
Net sales........................................... $5,584,430 $ 3,575,754
Operating loss...................................... (554,949) (1,402,897)
Net loss............................................ $ (378,581) $(1,452,227)
Acquisition of GIDUSA by CODUSA
As disclosed in Note 1, in 2000, the Rincon family contributed Ps. 1,954,993
to CODUSA which was used by CODUSA for the acquisition of the 59% interest in
GIDUSA previously held directly by the Rincon family. Under Mexican GAAP,
these transactions were accounted for as a capital contribution and subsequent
acquisition, resulting in negative goodwill of Ps. 294,758 which was fully
amortized in 2000. Accordingly, in the statement of stockholders' equity under
Mexican GAAP, the capital contribution, and acquisition of GIDUSA are
presented separately. Under U.S. GAAP, this has been accounted for a
transaction of two entities under common control and consequently, purchase
accounting would not apply. Under U.S. GAAP, the difference
F-43
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
between the purchase price paid for the 59% interest and the historical book
value of the Rincon family's interest in GIDUSA on a U.S. GAAP basis would be
reflected as a capital contribution of Ps. 31,585 and presented as one line
item in the statement of stockholders' equity.
Equity swap agreements
As described in Note 11(b), GIDUSA has entered into several Equity swaps
with financial institutions, with respect to its ADR's at prices ranging from
US$10.4489 to US$14.2813. The Equity swaps have notional amounts of US$11.88
and US$6.06 at December 31, 1999 and 2000, respectively, bearing interest at
LIBOR plus 2.95% payable semiannually and are due in 2002 and 2003. Under
Mexican GAAP, the Company has recorded the fair value of the Equity swaps on
the balance sheet, with a corresponding adjustment to stockholders' equity.
Under U.S. GAAP, the fair value of the Equity swaps is recorded in income for
the period.
Minority Interest
Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component with stockholders equity in the consolidated
balance sheet. For U.S. GAAP purposes, the minority interest is not included
in stockholders equity.
SUPPLEMENTAL U.S. GAAP DISCLOSURES
Cash flow information
Under U.S. GAAP, pursuant to SFAS No. 95, "Statement of Cash Flows" ("SFAS
95)", a statement of cash flows is a required component of a complete set of
financial statements in lieu of a statement of changes in financial position.
SFAS 95 establishes specific presentation requirements and additional
disclosures but does not provide guidance with respect to inflation adjusted
financial statements. Based on requirements of the Securities and Exchange
Commission (the "SEC"), the effect of inflation restatements and foreign
exchange gains and losses on cash flow related to financing and operating
activities has been included in the line item, "Monetary gain", and the effect
of inflation on cash balances has been included in a separate line item after
cash flows from investing activities.
F-44
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
The U.S. GAAP statements of cash flow are as follows:
Years ended December 31,
------------------------------------
1998 1999 2000
----------- ----------- ----------
Operating activities:
U.S. GAAP Net (loss) income......... $ (117,738) $ 1,299,829 $ 14,493
Adjustments to reconcile net income
to net cash flow provided by
operating activities:
Depreciation and amortization....... 292,376 322,857 318,649
Minority interest................... (38,598) 903,732 (528)
Deferred income taxes............... (114,093) (470,052) 600,093
Deferred employee profit sharing.... 23,454 (103,817) 45,087
Allowance for doubtful accounts..... 42,051 72,503 38,561
Inventory obsolescence allowance.... 38,177 2,741 978
Employee benefits................... (715) (3,127)
Monetary gain....................... (821,355) (726,751) (534,066)
Accrued interest.................... 55,853 (342) --
Equity swap......................... 116,909 (69,866) 75,522
(Gain) loss on sale of fixed
assets............................. (89) -- 4,975
Unrealized foreign exchange loss,
net................................ 300,753 173,724 100,347
Other............................... 265,783 (13,453) 23,994
----------- ----------- ----------
42,768 1,387,978 688,105
Changes in operating assets and
liabilities:
Accounts receivable, net............ (662,407) (817,996) (894,234)
Inventories, net.................... (265,003) (581,143) (252,712)
Prepaid expenses.................... (2,640) (16,091) (48,351)
Other liabilities................... 1,525,736 759,245 1,131,860
----------- ----------- ----------
Cash flow provided by operating
activities......................... 638,454 731,993 624,668
----------- ----------- ----------
Financing activities:
Bank loans.......................... 2,410,202 170,028 437,763
Payments of long-term debt.......... (439,913) (455,197) (120,224)
Payment for debt issuance cost...... -- -- (22,528)
----------- ----------- ----------
Cash flow provided by (used in)
financing activities............... 1,970,289 (285,169) 295,011
----------- ----------- ----------
Investing activities:
Acquisitions of fixed assets........ (1,175,748) (193,699) (1,061,388)
Proceeds from sale of fixed assets.. -- -- 5,941
Investments in subsidiaries......... (1,094,109) (1,240,691) --
Acquisitions of minority interest... (13,968) (49,388) --
Other assets........................ (21,941) (3,034) (90,478)
----------- ----------- ----------
Cash flow used in investing
activities......................... (2,305,766) (1,486,812) (1,145,925)
----------- ----------- ----------
Effect of inflation and exchange rate
changes on cash and cash
equivalents......................... 167,991 734,858 103,444
Net increase (decrease) in cash and
cash equivalents.................... 470,968 (305,130) (122,802)
Cash and cash equivalents at
beginning of year................... 687,050 1,158,018 852,888
----------- ----------- ----------
Cash and cash equivalents at end of
year................................ $ 1,158,018 $ 852,888 $ 730,086
=========== =========== ==========
Supplemental cash flow disclosures:
Years ended December 31,
--------------------------
1998 1999 2000
-------- -------- --------
Cash paid during the year for:
Interest......................................... $824,196 $730,450 $844,830
Income and asset tax............................. 25,385 148,023 126,678
F-45
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
In 1999, a non-cash transaction related to the issuance of common shares for
the acquisition of minority interest amounted to $3,475.
Supplemental balance sheet information
.Accrued liabilities and other current payables:
Included within accrued liabilities and other payables as of December 31,
1999 and 2000 are customer advances ($613 and $100, respectively) and
accrued freight costs ($5,458 and $14,664, respectively).
.Segment disclosures
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
guidelines for the way that public enterprises report information about
operating segments in financial statements. SFAS 131 also established
guidelines for related disclosures about products and services, geographic
areas, and major customers. See Note 18 for the Company's segment disclosures
in accordance with IAS 14 and SFAS 131.
.Valuation and qualifying accounts:
The following table presents the rollforward of the allowance for doubtful
accounts:
Years ended December 31,
------------------------------
1998 1999 2000
-------- --------- ---------
Balance at the beginning of the period...... $(65,056) $ (89,132) $(121,238)
Effects of inflation........................ 14,555 6,898 10,221
Increase in the allowance................... (42,051) (72,503) (38,561)
Write-offs.................................. 3,420 33,499 26,133
-------- --------- ---------
Balance at the end of the period............ $(89,132) $(121,238) $(123,445)
======== ========= =========
The following table presents the rollforward of the inventory obsolescence
allowance:
Years ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Balance at the beginning of the period........ $(17,297) $(54,903) $(47,274)
Effects of inflation.......................... (3,925) 6,080 3,723
Increase in the allowance..................... (38,177) (2,741) (978)
Write-offs.................................... 4,496 4,290 5,208
-------- -------- --------
Balance at the end of the period.............. $(54,903) $(47,274) $(39,321)
======== ======== ========
Risks and uncertainties
.Environmental matters
The Company's Mexican operations are subject to the Mexican General Law of
Ecological Stabilization and Environment Protection (Ley General el Equilibrio
Ecologico y la Proteccion al Ambiente) and the rules
F-46
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the Years Ended December 31, 1998, 1999 and 2000
(thousands of constant Pesos restated as of December 31, 2000)
published hereunder (the "Ecological Law"). In accordance with the Ecological
Law, companies engaged in industrial activities are subject to the regulatory
jurisdiction of the Ministry of Natural Resources, Environment and Fishing
(Secretaria del Medio Ambiente, Recursos Naturales y Pesca), which has broad
discretion in carrying out its statutory mandate.
In 1998, the Company agreed with Mexican environmental regulatory
authorities to bring its paper plants into compliance with wastewater
discharge regulations. The Company has since instituted new procedures, and
management believes the Company is currently in compliance with both the
general standard established under the Ecological Law and with specific
standards promulgated by the regulatory authorities. However, there can be no
assurance that relevant authorities will continue finding the Company's
environmental procedures adequate, or that more stringent environmental laws
will not be enacted in the future.
New accounting pronouncements
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." This statement is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. The Company management does not expect the adoption of
this statement to have a material impact on financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statement" which provides guidance on
the recognition, presentation and disclosure of revenue in financial
statements have been presented on a basis that is consistent with the
provisions of SAB 101 for all periods presented. There was no effect upon
implementation of SAB 101.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") which requires that all derivatives instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as a part of a hedge
transaction, and, if so, the type or hedge transaction. This statement is
effective for fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued statement No. 138, "Accounting for Derivative Instruments and
Hedging Activities--an amendment of SFAS 133." This amendment addresses
certain issues causing implementation difficulties for entities that have
adopted or will adopt SFAS 133. The adoption of SFAS 133 did not have a
material impact on the Company's financial position or results of operations.
F-47
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
AND GRUPO INDUSTRIAL DURANGO, S.A. DE C.V. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements
March 31, 2000 and 2001
F-48
CORPORACION DURANGO, S.A. DE C.V.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 2000 and 2001
(thousands of constant Pesos restated as of March 31, 2001)
(Notes 1 and 2)
U.S. dollars
thousands
2000 2001 2001
----------- ----------- -------------
ASSETS
Current Assets:
Cash and temporary investments....... $ 731,092 $ 488,947 US$ 51,504
Accounts receivable, net............. 2,167,402 1,917,557 201,991
Affiliated companies................. 0 5,058 533
Taxes recoverable and other assets... 18,847 62,182 6,550
Inventories, net (Note 3)............ 2,061,941 2,115,836 222,877
Prepaids............................. 15,778 15,672 1,651
----------- ----------- -------------
Total current assets................ 4,995,060 4,605,252 485,106
Property, plant and equipment, net.... 15,456,660 15,809,349 1,665,316
Other assets.......................... 483,931 612,978 64,570
----------- ----------- -------------
Total assets........................ $20,935,651 $21,027,579 2,214,992
=========== =========== =============
LIABILITIES
Current Liabilities:
Short-term debt...................... 993,027 246,471 25,963
Interest payable..................... 225,097 183,018 19,279
Trade accounts payable............... 1,164,052 1,269,847 133,762
Notes payable (Note 4)............... 221,992 46,704 4,920
Affiliated companies................. 854 17 2
Accrued liabilities and other
payables............................ 448,008 637,636 67,167
Employee profit sharing.............. 9,051 7,320 771
----------- ----------- -------------
Total current liabilities........... 3,062,081 2,391,013 251,864
----------- ----------- -------------
Long-term debt (Note 4)............... 6,658,182 7,379,068 777,292
Notes payable......................... 22,258 97,863 10,309
Other liabilities..................... 25,465 172,495 18,170
Deferred tax (Note 7)................. 2,152,678 3,018,266 317,936
Pension plans and seniority premiums.. 224,986 224,611 23,660
----------- ----------- -------------
Total long-term liabilities......... 9,083,569 10,892,303 1,147,367
----------- ----------- -------------
Total liabilities................... 12,145,650 13,283,316 1,399,231
----------- ----------- -------------
Negative goodwill..................... 1,225,621 175,099 18,445
----------- ----------- -------------
Contingencies and commitments:
STOCKHOLDERS' EQUITY
Capital stock (Note 6)................ 1,901,816 1,901,816 200,332
Restatement of capital stock.......... 225,677 225,677 23,772
----------- ----------- -------------
2,127,493 2,127,493 224,104
Additional paid-in capital............ -- (45,638) (4,807)
Retained earnings..................... 4,667,478 5,737,081 604,329
Deficit from restatement.............. (379,610) (1,210,677) (127,530)
----------- ----------- -------------
Cumulative translation adjustment of
foreign subsidiaries................. 3,290 13,487 1,421
Deferred tax ......................... (451,268) (451,268) (47,535)
----------- ----------- -------------
Total majority interest.............. 5,967,383 6,170,478 649,982
Total minority interest.............. 1,596,997 1,398,686 147,334
----------- ----------- -------------
Total stockholders' equity............ 7,564,380 7,569,164 797,316
----------- ----------- -------------
Total liabilities and stockholders'
equity............................. $20,935,651 $21,027,579 US$ 2,214,992
=========== =========== =============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-49
CORPORACION DURANGO, S.A. DE C.V.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2000 and 2001
(thousands of constant Pesos restated as of March 31, 2001)
(Notes 1 and 2 )
U.S.
dollars
thousands
2000 2001 2001
---------- ---------- ----------
Net sales.................................. $2,903,028 $2,587,685 US$272,580
Cost of sales.............................. 2,386,488 2,141,577 225,588
---------- ---------- ----------
Gross profit........................... 516,540 446,108 46,992
Selling, general and administrative
expenses.................................. 180,247 169,665 17,872
---------- ---------- ----------
Operating income....................... 336,293 276,443 29,120
---------- ---------- ----------
Other income (expense)..................... 1,349 3,682 388
---------- ---------- ----------
Financing (cost) result:
Interest expense......................... (241,381) (268,526) (28,286)
Interest income.......................... 25,873 19,444 2,048
Foreign exchange gain, net............... 148,389 57,495 6,056
Gain from monetary position.............. 155,407 82,084 8,647
---------- ---------- ----------
88,288 (109,503) (11,535)
---------- ---------- ----------
Amortization of negative goodwill.......... 556,179 251,776 26,521
---------- ---------- ----------
Income before provisions for income and
asset taxes, employee profit sharing,
deferred income tax and minority
interest.................................. 982,109 422,398 44,494
---------- ---------- ----------
Provision for:
Income and asset taxes................... (57,788) (62,859) (6,621)
Employee profit sharing.................. (3,452) (1,662) (175)
Deferred income tax...................... (91,506) 19,661 2,071
---------- ---------- ----------
(152,746) (44,860) (4,725)
---------- ---------- ----------
Net income before minority interest........ 829,363 377,538 39,769
Minority interest.......................... 87,117 54,759 5,769
---------- ---------- ----------
Net income................................. $ 742,246 $ 322,779 US$ 34,000
========== ========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-50
CORPORACION DURANGO, S.A. DE C.V.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF CHANGES IN FINANCIAL POSITION
For the three months ended March 31, 2000 and 2001
(thousands of constant Pesos restated as of March 31, 2001)
(Notes 1 and 2)
U.S.
dollars
thousands
2000 2001 2001
----------- --------- ----------
Operating activities:
Net income before minority interest...... $ 829,363 $ 377,538 US$ 39,769
Items recognized in net income not
(generating) or requiring the use of
resources:
Depreciation and amortization.......... 116,402 114,849 12,098
Amortization of negative goodwill...... (556,179) (251,776) (26,521)
Deferred income tax.................... 91,606 (19,661) (2,071)
Other.................................. 17,350 32,038 3,374
----------- --------- ----------
498,542 252,988 26,649
Changes in operating assets and liabili-
ties:
Decrease in accounts receivable........ 64,793 134,429 14,160
(Increase) decrease in other accounts
receivable............................ (7,931) (46,638) (4,913)
(Increase) in inventories.............. 101,051 111,599 11,756
Decrease in other accounts payable and
accrued expenses...................... (495,116) (356,095) (37,510)
----------- --------- ----------
Resources generated by operating ac-
tivities............................ 161,339 96,283 10,142
----------- --------- ----------
Financing activities:
Bank loans............................... (35,621) (536,061) (56,467)
Long-term debt, net...................... (65,294) 524,593 55,259
Increase in capital...................... 1,978,199 -- --
----------- --------- ----------
Resources generated by (used in) fi-
nancing activities.................. 1,877,284 (11,468) (1,208)
----------- --------- ----------
Investing activities:
Property, plant and equipment, net....... (179,292) (220,818) (23,261)
Investment in subsidiaries............... (1,978,199) -- --
Other assets............................. (2,289) (110,494) (11,639)
----------- --------- ----------
Resources used in investing activi-
ties................................ (2,159,780) (331,312) (34,900)
----------- --------- ----------
Decrease in cash and temporary
investments............................... (121,157) (246,497) (25,966)
Cash and temporary investments at beginning
of the period............................. 852,249 735,444 77,470
----------- --------- ----------
Cash and temporary investments at end of
the period................................ $ 731,092 $ 488,947 US$ 51,504
=========== ========= ==========
The accompanying notes are an integral part of these unaudited condensed
financial statements.
F-51
CORPORACION DURANGO, S.A. DE C.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2000 and 2001
(In thousands of Mexican Pesos in purchasing power as of March 31, 2001)
1. Basis of Presentation
The interim consolidated financial statements of Corporacion Durango, S.A.
de C.V. (the "Company") and its consolidated subsidiaries (the "Company"), as
of March 31, 2000 and 2001, and for the three months ended March 31, 2000 and
2001, are unaudited. In the opinion of the management of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the consolidated financial statements have been included
therein. The results of interim periods are not necessarily indicative of
results for the entire year.
For purposes of these interim consolidated financial statements, certain
information and disclosures, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have
been condensed or omitted. These unaudited statements should be read in
conjunction with the Company's consolidated and audited financial statements
and notes thereto for the years ended December 31, 1998 1999 and 2000 ("the
audited annual financial statements").
Convenience translation
United States dollar amounts shown in the interim financial statements have
been included solely for the convenience of the reader and are translated from
Mexican Pesos, as a matter of arithmetic computation only, at an exchange rate
of Ps 9.4933 per U.S. dollar, the interbank free market exchange rate as
reported by Banco Nacional de Mexico, S.A. as of March 31, 2001. Translations
herein should not be construed as a representation that Mexican Peso amounts
have been or could be converted into U.S. dollars at the foregoing or any
other rate.
2. Effects of Inflation on the Financial Statements
The interim consolidated financial statements of the Company have been
prepared in accordance with Bulletin B-10 and Bulletin B-15, as described in
the audited annual financial statements. The consolidated financial statements
for the three months ended March 31, 2000 of Mexican subsidiaries have been
restated to pesos as of March 31, 2001 by applying the restatement factor to
March 31, 2000 of 1.0717%. The inflation factor is derived from the National
Consumer Price Index ("NCPI"), published by Banco de Mexico (the Central Bank
of Mexico). The consolidated financial statements for the three months ended
March 31, 2000 and 2001, of foreign subsidiaries have been restated to pesos
as of as of March 31, 2001, by applying to the three months foreign currency
balances the changes in General Consumer Price Index ("GCPI") of the foreign
country in which the subsidiary operates and then applying the exchange rate
as of the March 31, 2001.
3. Inventories
At March 31, inventories consist of:
2000 2001
---------- ----------
Finished products.................................... $ 755,927 $ 680,665
Work in process...................................... 49,008 60,602
Raw materials........................................ 523,873 585,116
Direct materials and spare parts..................... 367,044 394,698
Molds and dies, net.................................. 46,234 47,437
Merchandise in transit............................... 234,665 267,753
Advanced payments to suppliers....................... 102,735 89,447
Others............................................... 29,438 29,324
Less--Allowance for obsolecense...................... (46,983) (39,206)
---------- ----------
$2,061,941 $2,115,836
========== ==========
F-52
CORPORACION DURANGO, S.A. DE C.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the three months ended March 31, 2000 and 2001
(In thousands of Mexican Pesos in purchasing power as of March 31, 2001)
4. Notes Payable and Long-Term Debt Securities
At the beginning of the year 2001, the Company finalized a series of
financial negotiations to restructure a portion of its debts and as a result,
a significant part of the debt was transferred from short to long-term. The
negotiations consisted of the following:
a) In February 2001, the Company made a public offering of Yankee bonds
amounting to US$180 million maturing on August 1, 2006 bearing an annual
interest rate of 13 1/8% payable semiannually in February and August (the
"Senior Notes 2006"). The proceeds received from Senior Notes 2006 were used
to pay some of the indebtedness outstanding at December 31, 2000. A total of
US$111.2 million were utilized to pay early some of the bondholders of the
GIDUSA US$150 million Yankee bond maturing on July 15, 2001. Some of the
bondholders elected not to accept the offer for the anticipated payment. As a
result, the Company deposited US$43.5 million in a trust that represents the
funds necessary to liquidate the principal and interest of the bonds at its
original maturity date.
b) In addition, the Company used the remaining net proceeds from the Senior
Notes 2006 to pay two short-term loans totaling US$30 million (US$22 million
with Banamex and the US$8 million with The Chase Manhattan Bank).
c) In early 2001, the Company renegotiated two short-term loans with Banamex
totaling US$94 million. Pursuant to the new agreement, the new loans bear an
annual interest rate of LIBOR plus 2.80% with quarterly payments and are due
on 2005. In addition, the Company has bank loans with California Commerce Bank
of US$15 million which mature in 2002, 2003 and 2004 and have average interest
rates of LIBOR + 3.25%.
d) Our subsidiary, Durango Paper Company has a Ps 489.9 million (US$51.6
million) of indebtedness to Bank of America at March 31, 2001, as part of a
US$36.6 million revolving and US$15 million term facility. This facility
matures in January 2004 and has an interest rate of LIBOR + 3.5%. The Bank of
America loan is secured by a pledge of substantially all of the physical
assets of the Durango Paper Company.
e) In January 2001, the Company paid a loan in the amount of US$35 million
with The Chase Manhattan Bank.
5. Commitments and Contingencies
At March 31, 2001, the Company did not have any additional significant
commitments or contingencies other than those that have been disclosed in the
annual consolidated financial statements as of December 31, 2000.
6. Capital Stock
As of March 31, 2001, the Company's capital stock consists of:
Capital Stock
Authorized and Issued
---------------------
Shares Amount
---------- ----------
Series A shares..................................... 9,128,689 $ 301,816
Series BI shares.................................... 20,018,465 816,000
Series BII shares................................... 19,233,426 784,000
---------- ----------
48,380,580 $1,901,816
========== ==========
F-53
CORPORACION DURANGO, S.A. DE C.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the three months ended March 31, 2000 and 2001
(In thousands of Mexican Pesos in purchasing power as of March 31, 2001)
7. Deferred Taxes
Beginning on January 1, 2000, the Company adopted the guidelines of amended
Bulletin D-4, "Accounting Treatment of Income Tax, Tax on Assets and Employee
Statutory Profit-sharing", issued by the Mexican Institute of Public
Accountants ("MIPA"). As a result of the foregoing, for recognition of
deferred income tax, the Company switched from the partial liability method to
the comprehensive assets and liability method, which consists of calculating
deferred income tax by applying the respective income tax rate to the
temporary differences between the accounting and tax values of assets and
liabilities at the date of the financial statements.
8. Segment Data
The table below presents information by segment for the three months ended
March 31, 2001:
Operating
income
(loss)
before
Depreciation
Sales to depreciation
and Operating
third Intersegment and
amortization income
parties sales Total sales amortization
expense (loss)
---------- ------------ ----------- ------------
------------ ---------
2000:
Packaging............... $1,344,853 $ 16,827 $ 1,361,680 $221,005
$ 28,833 $192,172
Paper................... 1,427,698 1,072,017 2,499,715 194,840
80,057 114,783
Other................... 130,477 14,547 145,024 29,219
7,512 21,707
Eliminations............ (1,103,391) (1,103,391) 7,631
7,631
---------- ---------- ----------- --------
-------- --------
Consolidated Total...... $2,903,028 $ -- $ 2,903,028 $452,695
$116,402 $336,293
========== ========== =========== ========
======== ========
2001:
Packaging............... $1,271,306 $ 19,861 $ 1,291,167 $183,361
$ 25,392 $157,969
Paper................... 1,253,899 1,100,864 2,354,763 202,823
85,247 117,576
Other................... 62,480 11,629 74,109 7,866
4,210 3,656
Eliminations............ (1,132,354) (1,132,354) (2,758)
(2,758)
---------- ---------- ----------- --------
-------- --------
Consolidated Total...... $2,587,685 $ -- $ 2,587,685 $391,292
$114,849 $276,443
========== ========== =========== ========
======== ========
9. Subsequent Events
1) On April 26, 2001, the Company temporarily shut down one of its mills in
Atenquique, Jalisco. During 2000, the plant represented 0.7% of third party
sales and 1% of operating income. Based on current negotiations with the labor
union, the Company expects the mill to reopen by the third quarter of 2001.
2) In May 2001, the Company negotiated the sale of non-strategic assets of
its subsidiary Durango Paper Company receiving net proceeds of US$27.2
million. As a result, the Company recognized a US$1.0 milion gain on the
disposition.
3) In May 2001, the Company refinanced a US$15.0 million bank loan with
California Commerce Bank which will mature in 2002, 2003, and 2004 and have an
average interest rate of LIBOR +3.25%.
10. Reconciliation between Mexican and U.S. GAAP
The Company's interim condensed consolidated financial statements are
prepared in accordance with Mexican GAAP, which differs in certain significant
respects from U.S. GAAP. For a full description of the
F-54
CORPORACION DURANGO, S.A. DE C.V.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the three months ended March 31, 2000 and 2001
(In thousands of Mexican Pesos in purchasing power as of March 31, 2001)
differences between Mexican and U.S. GAAP refer to the Company's combined and
consolidated financial statements for the years ended December 31, 1998, 1999
and 2000, included elsewhere in the Prospectus. As disclosed in Note 19 to the
annual financial statements, during the three month period ended March 31,
2001, the Company early extinguished its previously outstanding US$150 million
bonds due 2001. Under Mexican GAAP, the Company capitalized the consent fee
totaling Ps 29,487 paid to the US$ 150 million bondholders, and plans to
amortize such amount over the term of the new US$180 million Senior Notes due
2006, which were issued simultaneously. Under U.S. GAAP, this consent fee
would be recognized in earnings immediately and considered as part of the cost
of extinguishing the US$150 million bonds. In addition, under U.S. GAAP, the
loss on extinguishment of the US$150 million bonds (which includes the consent
fee) would have totaled Ps 19,167, net of related tax benefit of Ps 10,320 and
would have been reflected as an extraordinary item in the consolidated income
statement.
F-55
GILMAN PULP AND PAPER GROUP
Combined Financial Statements
December 17, 1999
(With Independent Auditors' Report Thereon)
F-56
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Durango Paper Company
We have audited the accompanying combined statement of net assets of Gilman
Pulp and Paper Group (the "Group") as of December 17, 1999, and the related
combined statements of revenue and expenses, changes in net assets, and cash
flows for the eleven months and seventeen days then ended. These combined
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these combined financial
statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the combined
financial statements. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Gilman Pulp and
Paper Group as of December 17, 1999, their revenue and expenses and their cash
flows for the eleven months and seventeen days then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Miami, Florida
August 25, 2000
F-57
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENT OF NET ASSETS
December 17, 1999
(in thousands of U.S. Dollars)
ASSETS
Current Assets:
Trade accounts receivable, net...................................... $ 27,333
Other accounts receivable........................................... 138
Inventories, net.................................................... 41,784
Consumable supplies................................................. 7,205
Other prepaid expenses.............................................. 332
--------
Total current assets.............................................. 76,792
Property, plant and equipment, net.................................. 51,312
Prepaid pension cost................................................ 8,063
--------
$136,167
--------
LIABILITIES
Current Liabilities:
Trade accounts payable.............................................. $ 14,692
Accrued liabilities................................................. 7,975
--------
Total liabilities................................................. 22,667
Commitments and contingencies......................................... --
--------
Net assets........................................................ $113,500
========
See accompanying notes to combined financial statements.
F-58
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENT OF REVENUE AND EXPENSES
Eleven months and seventeen days ended December 17, 1999
(in thousands of U.S. Dollars)
Net sales........................................................... $ 348,606
Cost of goods sold:
Product and conversion costs...................................... 342,178
Depreciation and amortization..................................... 3,141
---------
345,319
---------
Gross profit.................................................... 3,287
Selling, general and administrative expenses........................ 14,996
Impairment charges.................................................. 135,363
---------
Operating loss.................................................. (147,072)
Other (income) expenses, net:
Management fee.................................................... 950
Interest expense.................................................. 3,278
Other............................................................. (173)
---------
4,055
---------
Excess of expenses over revenue before income tax benefit....... (151,127)
Income tax benefit.................................................. 29,097
---------
Excess of expenses over revenue................................. $(122,030)
=========
See accompanying notes to combined financial statements.
F-59
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENT OF CHANGES IN NET ASSETS
Eleven months and seventeen days ended December 17, 1999
(in thousands of U.S. Dollars)
Balance at January 1, 1999......................................... $ 212,232
Excess of expenses over revenue for the eleven months and seventeen
days ended December 17, 1999...................................... (122,030)
Net cash advances, allocated costs, assets retained, and other
transferred to/from seller........................................ 23,298
---------
Balance at December 17, 1999....................................... $ 113,500
=========
See accompanying notes to combined financial statements.
F-60
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENT OF CASH FLOWS
Eleven months and seventeen days ended December 17, 1999
(in thousands of U.S. Dollars)
Cash flows from operating activities:
Excess of expenses over revenue.................................. $(122,030)
Adjustments to reconcile excess of expenses over revenue to net
cash provided (used in) operating activities:
Depreciation and amortization.................................... 3,141
LIFO reserve..................................................... 1,696
Impairment charges............................................... 135,363
Deferred income taxes............................................ (29,097)
Allowance for doubtful accounts.................................. 796
Pension and postretirement plans................................. (2,013)
Net changes in operating accounts:
Trade accounts receivable...................................... 2,459
Other accounts receivable...................................... 1,986
Inventories.................................................... 8,557
Consumable supplies............................................ 1,159
Prepaid expenses and others.................................... 466
Trade accounts payable......................................... 3,400
Accrued liabilities............................................ (1,501)
---------
Net cash provided by operating activities.................... 4,382
---------
Cash flows from investing activities:
Capital expenditures............................................. (28,701)
---------
Net cash used in investing activities........................ (28,701)
Cash flows from financing activities:
Repayment of notes payable....................................... (437)
Net cash advances, allocated costs and others to/from seller..... 23,298
---------
Net cash provided by financing activities.................... 22,861
---------
Net decrease in cash and cash equivalents.......................... (1,458)
Cash and cash equivalents at January 1, 1999....................... 1,458
---------
Cash and cash equivalents at December 17, 1999..................... $ --
---------
Supplementary Information:
Cash paid during the period for:
Interest expense............................................... $ 3,278
Income taxes................................................... 507
=========
See accompanying notes to combined financial statements.
F-61
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 17, 1999
(all amounts in thousands of U.S. Dollars)
(1) Business and Organizational History
(a) Organizational History
The Gilman Pulp and Paper Group (the "Group") includes the following
companies: Gilman Paper Company, Converting Corporation, Converting LLC (a
wholly owned subsidiary of Converting Corporation), Gilman Sales Company (a
wholly owned subsidiary of Gilman Paper Company) and the membership interest
of St. Marys Railroad LLC. The Gilman Pulp and Paper Group was owned by Gilman
Investment Company ("GIC") until January 14, 1999.
On January 14, 1999, GIC and its subsidiaries underwent a series of mergers,
reorganizations and related transactions (collectively "the Mergers"). As a
result of the Mergers, HG Estate LLC ("HG" and successor to GIC) became the
sole owner of the Group, which, previous to that date did not have a separate
legal existence. The restructuring transactions were accounted for as
transactions among commonly controlled entities, and accordingly, the carrying
values of the assets and liabilities were unchanged as a result of the
restructuring. These transactions were not considered to be part of a business
combination.
A brief description of the entities comprising the group follows:
Gilman Paper Company (a Georgia Corporation, which became operational
January 14, 1999) and subsidiary which has the following divisions:
. Pulp and paper mill in St. Marys, Georgia ("St. Marys Kraft" division);
. Sales force operations; and
. Wood yards utilized exclusively by St. Marys Kraft for wood procurement
and transportation.
Converting Corporation (a New York Corporation, which owns Converting LLC, a
single member LLC which became operational January 14, 1999), which has the
following divisions:
. Paper converting operations in Georgia manufacturing multiwall bags;
. Paper converting operations in Tennessee; and
. Paper converting operations in Pennsylvania manufacturing computer and
office forms.
St. Marys Railroad LLC (a wholly owned subsidiary of St. Marys Railroad
Corporation, which became operational January 14, 1999) operates the short-
line railroad division connecting the pulp and paper mill to the nearest
interconnecting rail-line.
The Group sells its products primarily to industrial users such as
converters, printers, food and industrial products companies and office
products wholesalers. During the last three years the Group has incurred
operating losses, and the working capital to sustain its operations was
provided by or obtained through GIC and HG.
(b) Stock Purchase Agreement
On December 9, 1999, HG Estate LLC, St. Marys Railroad Corporation, and W.O.
Corporation (the "Sellers") entered into a stock purchase agreement (the
"Agreement") with Durango Paper Company (the "Buyer") to sell all of the
outstanding common stock of the Group as of December 17, 1999. The Agreement
F-62
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
stipulated that all assets and liabilities of the Group should be transferred
to the Buyer, except that all intercompany receivables and payables should
have been settled, and the available cash balances of the Group would be
distributed to HG Estate LLC, prior to the consummation of the transaction.
The accompanying balance sheet as of December 17, 1999 contains all assets and
liabilities of the Gilman Pulp and Paper Group, as existing as of that date.
The purchase price of the net assets transferred was $113,500, of which
$89,000 was paid in cash and a $24,500 subordinated note, bearing interest at
10 percent per annum, payable by the Buyer on December 17, 2004.
The working capital required to sustain future operations of the Group will
be provided by the Buyer.
(c) Impairment Charges
As further described in note 1(a) above, on January 14, 1999 the Group's
holding company effected a restructuring of its holdings, including the
entities constituting the Gilman Pulp and Paper Group, as part of its plan to
realize value from its holdings following the death of its principal
stockholder in early 1998. The representatives of the Estate engaged financial
advisers in 1999 and a bidding process took place, culminating in the sale of
the Group as discussed above. Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. The Group considers continued
operating losses and significant and long-term changes in industry conditions
to be factors in the impairment of the carrying value of the long-lived assets
of its pulp and paper products segments. As such, the carrying values of the
long-lived assets of the paper mill were written down to an estimate of their
fair value based on contemporaneous estimates. The resulting adjustment of
approximately $135 million was recorded in January, 1999, upon management's
decision to dispose of the assets.
The impairment charge is the difference between the net book value of the
pulp and paper products segment's property, plant and equipment, and the fair
value thus established.
(2) Basis of Presentation
The accompanying combined financial statements present, on a historical
basis, the combined statements of net assets, revenue and expenses and cash
flows of the Gilman Pulp and Paper Group. The Group was part of Gilman
Investment Company in 1999 and prior, and does not have a separate legal
status or existence. The Group's results of operations have historically been
commingled with those of Gilman Investment Company through January 14, 1999,
and subsequently as subsidiaries of HG Estate LLC. These statements are
presented as if the Group had existed as a separate entity during the period
presented. Because certain intercompany assets and liabilities have been
either eliminated against net assets or assumed by the Seller, the
accompanying combined financial statements are not intended to be a complete
presentation of the assets, liabilities, or cash flows of the Gilman Pulp and
Paper Group on a stand-alone basis.
The accompanying combined statement of net assets reflect those assets and
liabilities of the Gilman Paper Company, Converting Corporation and St. Marys
Railroad LLC at the date of the Agreement, and include assets and liabilities
relating to the pension plan and postretirement benefit plan specifically
assumed by the Buyer. Further, deferred income taxes specifically attributable
to such assets and liabilities have also been included in the accompanying
combined financial statements.
F-63
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
The entities are being combined by reason of common ownership. All
significant intercompany/interdivision balances and transactions have been
eliminated and excluded in the combination.
(3) Summary of Significant Accounting Policies
A summary of the significant accounting policies used in the preparation of
the accompanying combined financial statements follows:
(a) Trade Accounts Receivable and Revenue Recognition
Trade accounts receivable result primarily from sales made to Group
customers, such as converters, printers, food and industrial products
companies and office product wholesalers. Revenue is recognized upon shipment
to customers. Trade accounts receivable are recorded net of the related
allowance for doubtful accounts and estimated rebates based on sales volume,
if any.
Management evaluates current information and events regarding the customer's
ability to repay their obligations and considers accounts receivable to be
impaired when it is probable that the Group will be unable to collect all
amounts due from the related sale. At that time, management records an
allowance for doubtful accounts for the specific receivables deemed not
collectible. As of December 17, 1999, the allowance for doubtful accounts
amounted to $1,216.
The Group enters into contractual agreements with its customers for rebates
and/or discounts based on quantity volume on certain products. Such amounts
are recorded on the accrual basis as a deduction from gross sales and trade
accounts receivable.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method for all inventories. Provision
for potentially obsolete or slow-moving inventory is made based on
management's analysis of inventory levels and future sales forecasts.
(c) Supplies and Spare Parts
Supplies and spare parts are carried at average cost. The Group classifies
consumables as current assets and replacement parts for plant machinery and
equipment as long-lived assets. Provision for obsolete and slow moving spare
parts is based on management's analysis of the future usage of specific parts.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost after the effect of
impairment charges on the paper mill assets [see notes 1(c) and 3(i)].
Depreciation on plant, machinery and equipment is calculated on the straight-
line method over the estimated useful lives of the assets. The estimated
useful lives of the assets are as follows:
Years
-----
Buildings and improvements............................................. 20-40
Machinery and equipment................................................ 10-16
Vehicles............................................................... 3-5
Computers and others................................................... 6-8
Replacement parts...................................................... --
F-64
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements, which extend the useful live or increase the capacity of
machinery and equipment, are capitalized and depreciated at applicable
straight-line rates.
(e) Income Taxes
Income taxes are accounted for under the asset and liability method as if
the Group filed a separate return. Deferred taxes and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Employee Benefit Plans
The Group has a noncontributory qualified pension plan covering
substantially all of their hourly employees. The benefit formulas for the
hourly employees are based on years of service and compensation.
The Group has a deferred compensation plan under Section 401(k) of the
Internal Revenue Code. Pursuant to terms of the plan, eligible salaried
employees can defer a portion of their income through contributions to the
plan and the Group will match a percentage of the participant's contribution,
subject to Internal Revenue Services, limitations.
(g) Prepaid Pension Costs
Represents the excess of the fair value of the Group's pension plan assets
for hourly employees over the plans' obligations. These amounts are being
included among the assets sold. The amounts may not be retrieved in cash, but
the excess may be amortized as future contributions are required.
(h) Concentration of Credit Risk
Financial instruments, as defined by Statement of Financial Accounting
Standards No. 105, which potentially subject the Group to concentrations of
risk, consist principally of trade accounts receivable. The Group manages the
credit risk by selling primarily to well-established companies, performing
ongoing credit evaluations and making frequent contact with customers.
(i) Impairment of Long-Lived Assets
As stated above, the Group accounts for long-lived assets in accordance with
the provisions of the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Live Assets
to be Disposed Of." This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison to the best evidence available of fair value. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount exceeds the fair value of the assets.
F-65
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
(j) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other assets and accounts payable and accrued liabilities are equal or
approximate fair value because of the short maturity of these instruments.
(k) Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these combined financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(l) Commitments and Contingencies
The Group's past and present operations include activities which are subject
to federal, state and local environmental regulations and requirements,
particularly relating to air and water quality. The Group may face potential
environmental liability as a result of violations of permit terms and similar
authorizations that may have occurred from time to time at its facilities. The
Group may face potential liability for response or remediation costs at
various sites with respect to which the Group have received notice that it may
be a potentially responsible party ("PRP"), as well as contamination of
certain of the Group's owned properties, concerning hazardous substance
contamination.
Pursuant to the Agreement, liabilities with respect to environmental matters
arising after the closing date are the responsibility of the Group.
(m) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which will become effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The effective date of SFAS No. 133 has been delayed for fiscal years beginning
after June 15, 2000. Management believes that the adoption of SFAS No. 133
will not have a material impact on the Group's combined net assets, results of
operations or liquidity.
(4) Inventories, Net
Inventory cost is determined using the last-in, first-out (LIFO) method.
Inventories would have been $12,505 greater at December 17, 1999, had the
average cost method (which for finished goods approximates selling prices)
been used. In addition, net loss would have decreased by $1,696 for the eleven
months and seventeen days ended December 17, 1999.
F-66
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
As of December 17, 1999, inventories consisted of the following:
Finished goods....................................................... $35,892
Raw materials........................................................ 16,964
Work in process...................................................... 1,433
-------
Subtotal........................................................... 54,289
Less LIFO reserve.................................................... 12,505
-------
Total inventories, net............................................... $41,784
=======
(5) Property, Plant and Equipment, Net
As of December 17, 1999, property, plant and equipment consisted of the
following:
Land............................................................. $ 2,012
Buildings, plant, machinery, equipment, vehicles and replacement
parts........................................................... 75,054
Construction in progress......................................... 6,146
--------
83,212
Less accumulated depreciation and amortization................... (31,900)
--------
Net property, plant and equipment.............................. $ 51,312
========
(6) Income Taxes
Income tax benefit for the eleven months and seventeen days ended December
17, 1999, consists of the following:
Current--federal and state........................................ $ --
Deferred--federal and state....................................... (29,097)
--------
Total income tax benefits....................................... $(29,097)
========
The actual income tax benefit differs from the "expected" income tax benefit
for the eleven months and seventeen days ended December 17, 1999 (computed by
applying the United States federal corporate tax rate of 34 percent to
(loss)/earnings before income taxes) as follows:
Computed "expected" income tax benefit............................ $(51,383)
State and local income taxes, net of federal benefit.............. (7,463)
Change in valuation allowance..................................... 29,539
Other............................................................. 210
--------
Total........................................................... $(29,097)
========
The deferred tax liabilities of $29,097 at December 31, 1998 were eliminated
as a result of the impairment charge discussed elsewhere. At December 17, 1999
the Group had no net deferred tax assets or liabilities. Temporary differences
between combined financial statement carrying amounts and tax bases of assets
and
F-67
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
liabilities that give rise to significant portions of the deferred tax assets
and liabilities at December 17, 1999 are as follows:
Deferred tax assets:
Plant and equipment.............................................. $ 10,815
Supplies and spare parts......................................... 3,203
Vacation accrual................................................. 2,313
Sale/leaseback................................................... 3,889
Allowance for doubtful accounts.................................. 690
Net operating loss............................................... 11,646
--------
Total gross deferred tax assets.................................. 32,556
Less valuation allowance....................................... (29,539)
--------
Net deferred tax assets.......................................... 3,017
Deferred tax liabilities:
Prepaid pension cost............................................. 3,017
--------
Total gross deferred tax liabilities............................. 3,017
--------
Net deferred taxes ............................................ $ --
========
The valuation allowance at December 17, 1999 was $29,539. This valuation
allowance increased by $29,539 from the year ended December 31, 1998. This
increase is due to the uncertainty as to the realizability of the deferred tax
assets.
F-68
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
(7) Employee Benefit Plans
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the eleven months and
seventeen days ended December 17, 1999, and a statement of the funded status
as of December 17, 1999:
Qualified plan
pension
benefits
--------------
Reconciliation of benefit obligation:
Obligation at January 1, 1999............................... $41,938
Service cost................................................ 727
Interest cost............................................... 2,791
Plan amendments............................................. 40
Actuarial loss.............................................. 790
Benefits and other transfers................................ (2,571)
-------
Obligation at December 17, 1999............................. $43,715
-------
Reconciliation of fair value of plan assets:
Fair value at January 1, 1999............................... $50,952
Actual return on plan assets................................ 5,374
Employer contributions...................................... 473
Benefit payments............................................ (2,571)
-------
Fair value at December 17, 1999............................. $54,227
-------
Funded status:
Funded status at December 17, 1999.......................... $10,513
Unrecognized transition obligation.......................... (1,654)
Unrecognized prior service cost............................. 1,434
Unrecognized gain........................................... (2,230)
-------
Net amount recognized--asset at December 17, 1999............. $ 8,063
=======
The following table provides the amounts recognized in the statement of net
assets as of December 17, 1999.
Prepaid benefit cost................................................. $8,063
Accrued benefit liability............................................ --
------
Net amount recognized--asset....................................... $8,063
======
Assets for the qualified plan consist principally of high-grade marketable
equity securities, corporate bonds and U.S. Government obligations.
F-69
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
Components of net periodic benefit cost for the period of eleven months and
seventeen days ended December 17, 1999 are as follows:
Qualified plan
pension
benefits
--------------
Service cost................................................ $ 727
Interest cost............................................... 2,791
Expected return on plan assets.............................. (4,329)
Amortization of unrecognized prior service cost............. 224
Amortization of the net unrecognized obligation or net asset
existing at date of initial application of SFAS No. 87..... (494)
-------
$(1,081)
=======
Significant plan assumptions for 1999 are as follows:
Expected long-term rate of return on plan assets..................... 9.00%
----
Weighted average discount rate for year-end funded status of all
benefits and postretirement benefit costs........................... 7.00%
----
(8) Other Commitments and Contingencies
(a) Environmental Commitments
Pursuant to the Agreement, liabilities with respect to environmental matters
arising prior to the closing date are the responsibility of the Seller, except
for the first $1.5 million of indemnified onsite location environmental losses
(as defined), and except for the commitment related to the cluster rules
(environmental standards that are to be complied with by the Group), which
originally amounted to approximately $32 million, of which the Seller paid $10
million prior to December 17, 1999. The remaining amount of the commitment is
guaranteed by Durango Paper Company, with the Sellers providing financing in
the amount of $18.1 million, to be repaid $12.1 million in 2002 and the
balance in 2003.
(b) Operating Leases
The Group conducts a portion of its operations in leased facilities and
leases certain equipment and vehicles under operating leases expiring at
various dates through 2005. Certain of the leases contain escalation clauses
for payments of expenses over base rent.
F-70
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
The approximate minimum annual rental commitments under operating leases are
as follows:
Year ended December 31,
-----------------------
1999 (December 18-December 31)...................................... $ 56
2000................................................................ 1,323
2001................................................................ 1,153
2002................................................................ 1,129
2003................................................................ 1,361
2004 and thereafter................................................. 5,716
-------
Total minimum payments.............................................. $10,738
=======
Net annual rental expense for the eleven months and seventeen days ended
December 17, 1999 was approximately $1,290.
(c) Wood Chips Supply Agreement
The Group has entered into a three year commitment (automatically renewable
for a period of three years unless terminated by either party to the
agreement) to obtain a minimum amount of wood chips at specified prices
directly from specific sawmills ("Supply Agreement"). Pursuant to the Supply
Agreement, the minimum amounts and prices have been established for the year
ended December 31, 2000 as follows: approximately 650,000 standard short tons
of de-barked chips at a price as defined in the Supply Agreement and to be
shipped at the rate of approximately 13,000 tons per week. Minimum purchases
and prices under the Supply Agreement for the years subsequent to 2000 have
not yet been determined.
(d) Other Supply Agreements
The Group has entered into commitments to obtain logs, paper and chemicals
through various short-term, market-based pricing contracts. The Group has also
entered into an agreement to purchase sludge pressing services and requiring
the Group to purchase all of the energy produced by an on-site independent
power producer, once the power plant becomes operational.
(e) Employee Benefits Agreement
The Group entered into an employee benefits transition services agreement
("Benefits Agreement") with the Sellers. The Sellers agree that the Group will
become participating employers in their existing employee benefit plans
related to pension plans, saving plans, welfare plans, and converting health
plans (collectively "Plans"). Employees continued to participate in such plans
on the same terms and conditions in effect as of the Closing Date through May
17, 2000.
The Group continued to be liable for all costs associated with the continued
coverage pursuant to the terms and conditions contained in the Benefits
Agreement. The third-party cost and internal cost were approximately $1,000
per month.
(f) Severance Benefits
Pursuant to the Agreement, Sellers shall indemnify and hold harmless the
Group from and against all liabilities which may arise due to a termination of
employment on or prior to the Closing Date and those
F-71
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
"Severance Liabilities" (liabilities described in the Gilman Paper Company
severance plan agreement ("Severance Plan") or as described in the applicable
collective bargaining agreement) incurred by Buyer and its affiliates with
respect to an aggregate of not more than 250 employees of the purchased
companies prior to the first anniversary date of the Closing Date and for not
more than 300 employees (including the previous 250 employees) prior to the
second anniversary of the Closing Date.
Pursuant to the Severance Plan, in the event of termination, participants of
the Severance Plan will be eligible to receive severance benefits as follows:
(i) for participants employed with employer for one year or more, one week's
annual base salary for each year of participant's active employment with
employer; and (ii) for participants employed for three years or more, an
additional three months' annual base salary. For purposes of the Severance
Plan, annual base salary is determined at Closing Date.
The accompanying combined financial statements do not reflect any liability
in connection with severance benefits as management does not expect to incur
any expenditures in excess of Seller's commitment.
(g) Collective Bargaining Agreements
Certain collective bargaining agreements covering employees of the Group
have expired; however the Group and the employees have continued to operate,
as if the agreements were still in place. The agreements were renegotiated and
accepted on August 10, 2000.
(h) Administration Services Agreement
The Group has entered into a Administration Services Agreement ("Services
Agreement") to continue providing accounting, procurement and administrative
services to certain of its woodchip suppliers for a period from the Closing
Date through September 30, 2000, at cost. The services agreement was
terminated by mutual consent in May, 2000.
(i) Litigation
The Group is party to various lawsuits in the normal course of conducting
its business, which management believes will not have a material effect on the
financial condition of the Group.
Pursuant to the Agreement, and subject to certain limitations, liabilities
with respect to legal claims arising before the Closing Date are the
responsibility of the Sellers, and those arising after the Closing Date are
the responsibility of the Group.
(9) Related-Party Transactions
The Group utilizes central purchasing and management functions for items
such as payroll, accounting, treasury, computer services, purchasing, human
resources, insurance and so on. These costs are allocated to each of the
operating divisions of GIC using consistent methodology, and are based upon
the estimated usage and headcount. Management believes that the allocation
methods utilized for shared costs result in a reasonable presentation of the
actual costs to provide such services, had the Group operated as an
unaffiliated entity. The following is a detail of related-party transactions
included in the statement of revenue and expenses:
During 1999, one of the Group's entities, purchased $16,301 of chips and
bark and $590 of logs from GIC and an affiliate, respectively. These purchases
were discontinued after December 17, 1999, as a result of the sale of the
Group.
F-72
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 17, 1999
(all amounts in thousands of U.S. Dollars)
The Group also purchased $595 of logs in 1999 from Deerfield Timber
Investors, Inc., a company owned by affiliates of GIC.
In 1999, selling and administrative charges amounting to $13,427 were
allocated by GIC to the Group's entities.
Administrative wood procurement and other costs of one of the Group's
entities, amounting to approximately $2,090, were allocated to GIC during
1999. Management believes that the charge to GIC for wood procurement services
would have been approximately $800 each year if the Group had been on a stand-
alone basis. The allocation practice was discontinued after December 17, 1999.
Transportation charges related to chips and bark from GIC, which amounted to
$927, were allocated to one of the Group's entities in 1999.
One of the Group's entities was charged $308 for warehouse rental charges by
GIC in 1999.
Management fees amounting to $950 represent special non-recurring charges
associated with the restructuring of the Group, primarily professional fees
and executive management allocated salaries.
(10) Segment Information
The Group's reportable segments are strategic business units that offer
different products and services through a vertically integrated strategy. The
Group has three reportable segments: pulp and paper products, converting
products and railroad operations. The pulp and paper segment manufactures,
markets and sells rolls of paper for industrial applications and use in
converting operations, including its own. The converting products segment buy
products from the pulp and paper segment and designs, manufactures, markets
and sells industrial and consumer products that have gone through a conversion
process. The railroad operation connects the pulp and paper facilities to the
nearest interconnecting railway.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies.
F-73
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 17, 1999
(all amounts in thousands of U.S. Dollars)
The following is information related to the various segments:
Net sales:
Pulp and paper products........................................ $ 249,897
Converting products............................................ 96,481
Railroad operations............................................ 2,228
---------
Total........................................................ $ 348,606
=========
Intersegment sales:
Pulp and paper products........................................ $ 42,049
Converting products............................................ --
Railroad operations............................................ 2,417
---------
Total........................................................ $ 44,466
=========
Gross profit (loss):
Pulp and paper products........................................ $ 88
Converting products............................................ 4,549
Railroad operations............................................ (1,350)
---------
Total........................................................ $ 3,287
=========
Operating losses:
Pulp and paper products........................................ $(145,040)
Converting products............................................ (918)
Railroad operations............................................ (1,114)
---------
Total........................................................ $(147,072)
=========
Excess of expenses over revenue:
Pulp and paper products........................................ $(119,484)
Converting products............................................ (1,432)
Railroad operations............................................ (1,114)
---------
Total........................................................ $(122,030)
=========
Depreciation and amortization:
Pulp and paper products........................................ $ 1,846
Converting products............................................ 1,231
Railroad operations............................................ 64
---------
Total........................................................ $ 3,141
=========
Segment assets:
Pulp and paper products........................................ $ 96,790
Converting products............................................ 37,982
Railroad operations............................................ 1,395
---------
Total........................................................ $ 136,167
=========
Capital expenditures:
Pulp and paper products (before impairment).................... $ 28,195
Converting products............................................ 506
Railroad operations............................................ --
---------
Total........................................................ $ 28,701
=========
Net sales include export sales to non-affiliated customers, and are less than
1% of total net sales.
F-74
GILMAN PULP AND PAPER GROUP
(A Division of Gilman Investment Company)
Combined Financial Statements
December 31, 1997 and 1998
With Report of Independent Certified Public Accountants
F-75
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gilman Investment Company
We have audited the accompanying combined statements of net assets of the
Gilman Pulp and Paper Group (a division of Gilman Investment Company) (the
"Group"--see Note B) as of December 31, 1997 and 1998, and the related
combined statements of revenues and expenses, changes in net assets and cash
flows for the years then ended. These combined financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined net assets of the Gilman Pulp
and Paper Group as of December 31, 1997 and 1998, and combined revenues and
expenses, combined changes in net assets, and combined cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton
New York, New York
April 15, 1999, except for Notes A-2 and J,
as to which the date is December
9, 1999,
and Note J-1, as to which the date
is July 31, 2000.
F-76
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENTS OF NET ASSETS
December 31,
(in thousands of U.S. Dollars)
1997 1998
--------- ---------
ASSETS
Cash.................................................... $ 1,615 $ 1,458
Trade accounts receivable (less allowance and discounts
of $662 in 1997 and $671 in 1998)...................... 31,564 30,588
Inventory, net of LIFO reserve.......................... 43,871 52,037
Consumable supplies..................................... 7,808 8,364
Other receivables....................................... -- 2,124
Prepaid expenses and other.............................. 1,361 798
--------- ---------
Total current assets................................ 86,219 95,369
Property, plant and equipment
Land.................................................. 1,578 1,546
Building and building improvements.................... 14,068 14,098
Manufacturing equipment............................... 359,101 373,461
Vehicles, computers and other......................... 5,206 5,741
Replacement parts for manufacturing equipment......... 10,018 10,766
Construction in progress.............................. 4,928 2,115
--------- ---------
394,899 407,727
Accumulated depreciation.............................. (231,715) (246,612)
--------- ---------
Net fixed assets.................................... 163,184 161,115
Prepaid pension costs................................... 3,117 6,509
--------- ---------
Total assets........................................ 252,520 262,993
--------- ---------
LIABILITIES
Notes payable........................................... 499 437
Trade accounts payable.................................. 13,140 11,292
Accrued liabilities..................................... 11,739 9,476
--------- ---------
Total current liabilities........................... 25,378 21,205
Accrued postretirement benefits......................... 358 459
Deferred income taxes................................... 23,249 29,097
--------- ---------
Total liabilities................................... 48,985 50,761
Commitments and contingencies
--------- ---------
Net assets.............................................. $ 203,535 $ 212,232
========= =========
The accompanying notes are an integral part of these statements.
F-77
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENTS OF REVENUES AND EXPENSES
Year ended December 31,
(in thousands of U.S. Dollars)
1997 1998
-------- --------
Net revenues.............................................. $339,268 $340,644
Cost of goods sold
Product and conversion costs............................ 313,749 327,037
Depreciation and amortization........................... 18,207 18,314
-------- --------
Gross profit (loss)................................... 7,312 (4,707)
Selling, general and administrative expenses.............. 14,574 14,666
Other expense (income), net............................... 85 (96)
-------- --------
Operating loss........................................ (7,347) (19,277)
Interest expense.......................................... 44 111
-------- --------
Deficiency of revenues over expenses, before income tax
benefit.................................................. (7,391) (19,388)
Income tax benefit........................................ (2,809) (7,368)
-------- --------
Deficiency of revenues over expenses...................... $ (4,582) $(12,020)
======== ========
The accompanying notes are an integral part of these statements.
F-78
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
(in thousands of U.S. Dollars)
1997 1998
-------- --------
Balance at beginning of year.............................. $181,517 $203,535
Deficiency of revenues over expenses for the year......... (4,582) (12,020)
Net cash advances and allocated costs from Gilman
Investment Company....................................... 26,600 20,717
-------- --------
Balance at end of year.................................... $203,535 $212,232
======== ========
The accompanying notes are an integral part of these statements.
F-79
GILMAN PULP AND PAPER GROUP
COMBINED STATEMENTS OF CASH FLOWS
Year ended December 31,
(in thousands of U.S. Dollars)
1997 1998
-------- --------
Cash flows from operating activities
Deficiency of revenues over expenses...................... $ (4,582) $(12,020)
Adjustments to reconcile excess (deficiency) of revenues
over expenses to net cash used in operating activities
Postretirement and pension accruals...................... (3,853) (3,291)
Depreciation and amortization............................ 18,207 18,314
Deferred income taxes.................................... 4,978 5,848
Changes in operating assets and liabilities
Accounts receivable.................................... (3,212) 976
Inventory.............................................. (9,979) (8,166)
Consumable supplies and replacement parts for
manufacturing equipment............................... (1,775) (1,304)
Other receivables...................................... -- (2,124)
Prepaid expenses and other............................. 889 563
Accounts payable....................................... 90 (1,848)
Accrued expenses....................................... 1,701 (2,263)
-------- --------
Cash flows provided by (used in) operating activities .... 2,464 (5,315)
-------- --------
Cash flows from investing activities
Purchases of property, plant and equipment, net........... (35,396) (15,497)
-------- --------
Cash flows from financing activities
Repayment of notes payable................................ (62) (62)
Proceeds from the sale and lease-back of production
equipment................................................ 6,852 --
Advances provided by Gilman Investment Company, net....... 26,600 20,717
-------- --------
Cash flows provided by financing activities.............. 33,390 20,655
Net increase (decrease) in cash.......................... 458 (157)
Cash, at beginning of year................................. 1,157 1,615
-------- --------
Cash, at end of year....................................... $ 1,615 $ 1,458
======== ========
The accompanying notes are an integral part of these statements.
F-80
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
NOTE A--Business and Organizational History
1. Organizational History
On January 3, 1998, the sole shareholder of Gilman Investment Company
("GIC") died. On January 14, 1999, Gilman Investment Company and its
subsidiaries underwent a corporate restructuring of their operating entities
through a series of mergers and related transactions (the "Restructuring"). As
a result of these Restructuring transactions, the net assets of each of the
operating units have been placed in separate Limited Liability Company's or C-
Corporations, each of which are direct or indirect wholly-owned subsidiaries
of HG Estate LLC. Prior to the Restructuring, substantially all of the
operating units of the Group were wholly owned subsidiaries or divisions of
(old) Gilman Paper Company, a wholly-owned subsidiary of GIC, which, previous
to that date, did not have a separate legal existence.
The Restructuring transaction was accounted for as a transaction among
commonly controlled entities, and accordingly, the carrying values operating
assets and liabilities were unchanged as a result of the Restructuring.
The Gilman Pulp and Paper Group includes the following operations:
. Gilman Paper Company (a Georgia Corporation, which became operational
January 14, 1999) and its wholly-owned subsidiary, Gilman Sales Inc., have
the following divisions:
. Pulp and paper mill in St. Marys, Georgia ("St. Marys Kraft
division"),
. Sales force operations ("Sales") and
. Certain assets of the Timber Division of the seller, which
specifically relate to the six woodyards utilized exclusively by St.
Marys Kraft division for wood procurement and transportation
("Woodyard").
. Converting Corporation (a New York corporation, which owns Converting LLC,
a single member LLC which became operational January 14, 1999), which has
the following divisions:
. Paper converting operations in Georgia ("Multiwall") manufacturing
multiwall bags,
. Paper converting operations in Tennessee ("McDowell") and
. Paper converting operations in Pennsylvania ("Sky") manufacturing
computer and office forms,
. St. Marys Railroad LLC (a wholly-owned subsidiary of St. Marys Railroad
Corporation, which became operational January 14, 1999) which operates the
short-line railroad division connecting the pulp and paper mill to the
nearest interconnecting rail-line.
The Gilman Pulp and Paper Group sells its products primarily to industrial
users such as converters, printers, food and industrial products companies and
office product wholesalers. The Group has incurred significant operating
losses in 1997 through 1998. The working capital required to sustain
operations of the Group was provided by GIC or HG Estate LLC through the date
of the Stock Purchase Agreement, which is discussed in Note A-2.
2. Stock Purchase Agreement
On December 9, 1999, HG Estate LLC, St. Marys Railroad Corporation, and W.O.
Corporation (the "Sellers") entered into a Stock Purchase Agreement (the
"Agreement") with Durango Paper Company
F-81
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
("Durango") to sell all of the outstanding common stock of Gilman Paper
Company, Converting Corporation, Converting LLC (a wholly owned subsidiary of
Converting Corporation), Gilman Sales Company (a wholly owned subsidiary of
Gilman Paper Company) and the membership interest of St. Marys Railroad LLC
(collectively referred to as the "Group" or the "Gilman Pulp and Paper
Group"). See Note J for a description of the purchase transaction.
NOTE B--Basis of Presentation
The accompanying combined financial statements present, on a historical
basis, the statements of net assets, the statements of revenues and expenses,
changes in net assets, and the statements of cash flows of the Gilman Pulp and
Paper Group. The Group was part of Gilman Investment Company in 1997 and 1998,
and does not have a separate legal status or existence. The Group's results of
operations have historically been commingled with those of Gilman Investment
Company through January 14, 1999, and subsequently as part of HG Estate LLC.
These statements are presented as if the Group had existed as a separate
entity during the periods presented. The accompanying combined financial
statements include all assets and liabilities of the Gilman Pulp and Paper
Group, on a stand alone basis, as existed at the balance sheet dates
presented. The intercompany balances have been intermingled with the
divisional equity accounts and can not be segregated effectively. As part of
the contractual requirements of the purchase agreement these intercompany
balances were not acquired by the Durango Paper Company, and in fact were
closed against net assets for all periods presented in the accompanying
combined financial statements.
The accompanying combined financial statements reflect those assets and
liabilities of the Gilman Paper Company, Converting Corporation and St. Marys
Railroad LLC at the date of the Agreement, and include assets and liabilities
relating to the pension plan and postretirement benefit plan specifically
assumed by Durango. Further, deferred income taxes specifically attributable
to all assets and liabilities of the Group have also been included in the
accompanying combined financial statements.
NOTE C--Summary of Accounting Policies
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying combined financial statements follows:
1. Principles of Combination
The operating units of the Group are being combined by reason of common
ownership. All intercompany and interdivision transactions and balances within
the Group are eliminated and excluded from the accompanying statements of net
assets and statements of revenues and expenses.
2. Revenue Recognition
Revenue is recognized upon shipment to the Group's customers. Accounts
receivable are recorded at sales price, less the related allowance for
doubtful accounts, if any. Management considers current information and events
regarding the customer's ability to repay their obligations and considers
accounts receivable to be impaired when it is probable that the Group will be
unable to collect all amounts due from the related sale. At that time,
management of the Group records an allowance for doubtful accounts for
receivables deemed not collectible.
F-82
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
3. Inventory
Inventory is valued at the lower of cost or market. Cost is determined
principally by the last-in, first-out (LIFO) method.
4. Consumable Supplies and Replacement Parts for Manufacturing Equipment
Consumable supplies and replacement parts for manufacturing equipment are
carried at average cost. Replacement parts used for manufacturing equipment
have been reclassified as a long-term asset. Consumable supplies are
considered a current asset.
5. Property, Plant and Equipment and Depreciation
Property, plant and equipment are stated at cost. Depreciation has been
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated lives by the straight-line method summarized
as follows:
Building and building
improvements.................... 20-40 years
Manufacturing equipment.......... 10-16 years
Vehicles, computers and other.... 3-18 years
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements, which extend the lives of the related assets, are
capitalized and depreciated at applicable straight-line rates. In 1997, the
Division adopted the policy of capitalizing refurbishments, which extend the
useful life or increase the capacity of machinery and equipment. Such
expenditures amounted to $17,695 and $7,874 for the years ended December 31,
1997 and 1998, respectively.
The cost and accumulated depreciation of items of property, plant and
equipment retired or otherwise disposed are removed from the related accounts,
and any residual values are charged or credited to other income (expense).
The Group does not capitalize interest on construction projects, as these
projects are generally of a short-term nature.
6. Income Taxes
The Group's results of operations have been included in the consolidated
Federal income tax return filed by GIC through January 14, 1999. GIC has
instructed each of its operating units to provide income tax expense (benefit)
as if computed on a separate company basis pursuant to an informal tax sharing
arrangement. Income tax expense (benefit) has been included in the
accompanying combined financial statements at a 38% statutory rate, including
3% for state income taxes, net of the Federal tax benefit. Income taxes
payable are part of the intercompany accounts with GIC, which are excluded
from the net assets being presented in the accompanying combined financial
statements.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires, among other things, an asset and liability approach for
financial accounting and reporting of deferred income taxes. In addition, the
deferred tax liabilities and assets are required to be adjusted for the effect
of any future changes in the tax law or rates.
F-83
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
Deferred income taxes arise from temporary differences resulting in the basis
of assets and liabilities for financial reporting and income tax purposes. A
valuation allowance is provided if the Company is uncertain as to the
realization of deferred tax assets.
7. Concentration of Credit or Market Risk
Statement of Financial Accounting Standards No. 105 ("SFAS No. 105")
requires the disclosure of significant concentration of credit or market risk,
regardless of the degree of such risk. Financial instruments, as defined by
SFAS No. 105, which potentially subject the Group and its subsidiaries to
concentrations of risk, consist principally of cash and accounts receivable.
The Group manages the credit risk by selling primarily to well-established
companies, performing ongoing credit evaluations and making frequent contact
with customers.
Sales by the St. Marys Kraft division to two customers accounted for
approximately 8% and 7% of the Group's net sales in 1997 and 1998,
respectively.
The Group maintains cash in checking and savings accounts which, at times,
may exceed the Federally insured limits. The Group has not experienced any
losses on such accounts and does not believe it is exposed to any significant
credit risk on its cash balances.
Other receivables at December 31, 1998 principally represents the insurance
recovery of fire damages at the St. Marys Kraft division Paper Machine No. 1,
which was received in January 1999.
8. Valuation of Long-Lived Assets
The Group has adopted Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of." The statement requires that the Group
recognize and measure impairment losses of long-lived assets and certain
identifiable intangibles and value long-lived assets to be disposed of.
The Group reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Group has not recorded any provision for the impairment of
long-lived assets at December 31, 1997 or 1998.
9. Disclosure About Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107")
requires the disclosure of the fair value of financial instruments, both
assets and liabilities, that are recognized or unrecognized on the balance
sheet. The carrying amount of cash and notes payable approximates fair value
because of the short maturities of those instruments. The notes payable were
fully repaid in January 1999. Interest paid during 1997 and 1998 approximated
interest expense.
10. Comprehensive Income
The Group implemented Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." Comprehensive income consists of net
earnings or losses for the current period and other comprehensive income (such
as, income, expenses, gains and losses that currently bypass the income
statements and are reported directly as a separate component of equity).
Comprehensive income does not differ materially from the deficiency of
revenues over expenses of the Group.
F-84
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
11. Use of Estimates
In preparing combined financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the combined
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
12. Advertising Expenses
Advertising expenses are charged to operations as incurred, and amounted to
$542 and $691 for the years ended December 31, 1997 and 1998, respectively.
13. Research and Development
Research and development expenditures are expensed as incurred.
14. Recent Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments." The statement is effective for financial years beginning after
June 15, 2000. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion
of the derivative's gain or loss is initially reported as a component of
income when the transaction affects earnings. For a derivative not designated
as a hedging instrument, the gain or loss is recognized in income in the
period of change. The management of the Group believes that adoption of SFAS
133 will have no material impact on its financial position or results of
operations. There were no derivative instruments at December 31, 1997 and
1998.
15. Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the current presentation.
NOTE D--Inventory
The replacement cost of LIFO basis inventory exceeds the stated LIFO cost by
approximately $13,490 and $10,809 at December 31, 1997 and 1998, respectively.
The annual increase (decrease) in the LIFO reserve caused a charge (credit) of
$396 and $(2,681) for the years ended December 31, 1997 and 1998,
respectively, which is included in cost of sales in the accompanying statement
of revenues and expenses.
The composition of inventory is as follows:
December 31,
---------------
1997 1998
------- -------
Raw materials............... $14,969 $17,043
Work in process............. 794 975
Finished goods.............. 28,108 34,019
------- -------
$43,871 $52,037
======= =======
F-85
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
NOTE E--Related Party Transactions
GIC utilizes central purchasing and management functions for items such as
payroll, accounting, computer services, purchasing, human resources,
insurance, etc. These costs are allocated to each operating division of GIC
using consistent methodology, and are based upon the estimated usage and
headcount. Management believes that the allocation methods utilized for shared
costs result in a reasonable presentation of the actual costs to provide such
services. GIC also acts as a centralized payment agent for accounts payable
for substantially all of its operating divisions. The following summarizes
transactions between the Group and GIC and its subsidiaries.
Employee Benefit Plans
GIC has several noncontributory qualified pension plans covering
substantially all of their hourly and salaried employees. The benefit formulas
for the hourly and salaried plans are based on years of service and
compensation. In connection with the Stock Purchase Agreement, the St. Marys
Kraft Pension Plan for Hourly Employees was assumed by Durango (see Note J),
and accordingly, the net asset related to such plan is included in the
accompanying statements of net assets and the required disclosures included in
these combined financial statements (see Note H). The amounts expensed by the
Group for hourly and salaried plans not assumed by Durango are allocated to
each operating division based upon specific employees. Such costs amounted to
$959 and $18 for the years ended December 31, 1997 and 1998, respectively.
Effective July 1, 1995, the GIC established a nonqualified unfunded
supplemental plan (the "Supplemental Plan") to provide certain highly
compensated employees' benefits not payable from the qualified plans due to
Internal Revenue Code limitations on compensation and benefits. The death of
the sole owner of GIC on January 3, 1998 triggered a funding requirement
pursuant to the Supplemental Plan. In January 1999, GIC made distributions to
the participants of the Supplemental Plan of all required amounts pursuant to
the Supplemental Plan. The Division was not allocated any of the charge for
the additional cost attributed to the curtailment of the Supplemental Plan and
funding requirement during January 1998, which amounted to $4,725, as such
additional costs were borne as a corporate-level charge. The amount expensed
by the Group, allocated based upon specific employees, for the year ended
December 31, 1997 amounted to $227.
GIC has a deferred compensation plan under Section 401(k) of the Internal
Revenue Code. Pursuant to terms of the plan, eligible salaried employees can
defer a portion of their income through contributions to the plan and GIC will
match a percentage of the participant's contribution, subject to Internal
Revenue Service limitations. The amount matched by GIC and charged to
operations of the Gilman Pulp and Paper Group was $624 and $641 for the years
ended December 31, 1997 and 1998, respectively. Participants can invest in a
variety of participant-directed investment options.
Statement of Financial Accounting Standards No. 106 ("SFAS No. 106")
requires companies to accrue for the estimated future cost of postretirement
health and non-pension benefits during the years that the employee renders the
necessary service, rather than recognizing the cost of such benefits after the
employee has retired and when the benefits are actually paid. The costs of
retiree health care and life insurance benefits were expensed as incurred
prior to the adoption of SFAS No. 106. GIC has elected to amortize the
transition liability over a twenty-year period.
Substantially all employees not covered by a collective bargaining agreement
and certain employees covered by a collective bargaining agreement receive
medical and life insurance benefits under the Plan. In connection with the
Stock Purchase Agreement, the St. Marys Kraft Life Insurance Plan for Hourly
Employees was assumed by Durango (see Note J), and, accordingly, the net
liability related to such life insurance plan is included in the
F-86
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
accompanying statements of net assets and the required disclosures included in
these combined financial statements (see Note H). The amounts expensed by the
Group for postretirement benefit plans not assumed by Durango, allocated based
upon specific employees, for the years ended December 31, 1997 and 1998
amounted to $1,675 and $1,796, respectively.
Intercompany Purchases and Sales Included in Revenues and Expenses
. The Group purchased $940 and $915 of logs used by the St. Marys Kraft
Division from GIC-owned timberlands in 1997, and 1998, respectively.
. The Group purchased $19,017 and $19,847 of chips and bark used by the St.
Marys Kraft Division from GIC in 1997 and 1998, respectively.
. The Group purchased $1,409 and $919 of logs from Deerfield Timber
Investors, Inc., a company owned by affiliates of GIC, in 1997 and 1998,
respectively.
Intercompany Administrative and Other Charges Included in Revenues and
Expenses
. The Group was allocated $297 and $264 of selling and administrative charges
from GIC in 1997 and 1998, respectively.
. The Group charged $2,487 and $2,698 of administrative, wood procurement and
other costs to GIC in 1997 and 1998, respectively.
. The Group was charged $959 and $938 of transportation charges from GIC in
1997 and 1998, respectively.
. The Group was charged $330 and $340 of warehouse rental charges from GIC in
1997 and 1998, respectively.
NOTE F--Commitments and Contingencies
1. Operating Leases
The Group conducts a portion of its operations in leased facilities and
leases certain equipment and vehicles under operating leases expiring at
various dates through 2006. Certain of the leases contain escalation clauses
for payments of expenses over base rent. In addition, during 1997, the Group
entered into several sale and leaseback transactions of operating equipment
aggregating approximately $6,852 million which have been accounted for as
operating leases.
The approximate minimum annual rental commitments under operating leases are
as follows:
Year ended December 31,
1999........................................................... $ 2,365
2000........................................................... 1,861
2001........................................................... 1,529
2002........................................................... 1,298
2003........................................................... 1,171
2004 and thereafter............................................ 2,707
-------
Total minimum payments...................................... $10,931
=======
F-87
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
Net annual rental expenditures for 1997 and 1998 were approximately $1,434
and $2,447, respectively.
2. Future Commitments and Environmental Matters
The Group's past and present operations include activities which are subject
to Federal, state and local environmental requirements, particularly relating
to air and water quality. The Group faces potential environmental liability as
a result of violations of permit terms and similar authorizations that have
occurred from time to time at its facilities.
The Group may face potential liability for response costs at various sites
with respect to which the Group has received notice that it may be a
potentially responsible party ("PRP"), as well as contamination of certain
Group-owned properties, concerning hazardous substance contamination. In
estimating its reserves for environmental remediation and future costs, the
Group's estimated liability reflects only the Group's expected share and takes
into consideration the number of other PRP's at each site, the identity and
financial condition of such parties and experience regarding similar matters.
Management of the Group is not aware of any significant environmental matters
which would have a material effect on the financial condition of the Group.
In 1997, new environmental laws (the "Cluster Rules") came into effect. The
Group spent approximately $14,000 during 1999 and agreed to fund up to
$18,000, pursuant to the Agreement (see Note J-2 (a)) during 2000 to become
compliant with these future environmental standards.
3. Other
The Group has entered into commitments to obtain logs, paper and chemicals
through various short-term, market-based pricing contracts. The Group has also
entered into an energy output agreement requiring the Group to purchase all of
the energy produced by an on-site independent power producer, once the power
plant becomes operational.
4. Litigation
The Group is a party to various lawsuits in the normal course of conducting
its business, which it believes will not have a material effect on the
financial condition of the Group.
NOTE G--Income Taxes
The provision for income tax expense (benefit) is substantially the same as
the statutory rate, including state income taxes (at 3%, net of the Federal
income tax benefit derived therefrom) and is summarized as follows:
Year ended December 31,
-------------------------
1997 1998
----------- ------------
Current....................................... $ (7,787) $ (13,216)
Deferred...................................... 4,978 5,848
----------- ------------
$ (2,809) $ (7,368)
=========== ============
F-88
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
The actual income tax benefit differs from the expected income tax benefit
for the years ended December 31, 1998 and 1997 (computed by applying the
United States federal corporate rate of 34% to (loss) before income taxes) as
follows:
Year ended
December 31,
------------------
1997 1998
-------- --------
Computed expected income tax benefit............... $ (2,513) $ (6,592)
State and local income taxes, net of federal
benefit........................................... (296) (776)
-------- --------
Income tax benefit................................. $ (2,809) $ (7,368)
======== ========
The following is a summary of the items giving rise to deferred tax assets
(liabilities) at December 31, 1997 and 1998:
1997 1998
-------- --------
Depreciation of plant and equipment................ $(24,152) $(28,370)
Pension and postretirement benefits................ (1,048) (2,679)
Accrued vacation................................... 1,273 1,296
Receivable reserves................................ 328 360
Other.............................................. 350 296
-------- --------
$(23,249) $(29,097)
======== ========
F-89
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
NOTE H--Employee Benefit Plans
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets of the St. Marys Kraft Pension
Plan for Hourly Employees (the "qualified plan") and St. Marys Kraft Life
Insurance Plan for Hourly Employees (the "postretirement plan") assumed by
Durango for the periods ended December 31, 1997 and 1998, and a statement of
the funded status of such plans as of December 31, 1997 and 1998:
Postretirement Postretirement
Qualified Qualified plan plan
plan 1997 plan 1998 1997 1998
--------- --------- -------------- --------------
Reconciliation of benefit
obligation
Obligation at January 1.... $37,007 $40,259 $ 876 $1,000
Service cost............... 659 737 10 11
Interest cost.............. 2,689 2,781 64 60
Assumption change.......... 2,208 -- 54 --
Actuarial (gain) loss...... -- 665 -- (117)
Projected benefits and
other transfers........... (2,304) (2,504) (4) (5)
------- ------- ------- ------
Obligation at December 31.. $40,259 $41,938 $ 1,000 $ 949
======= ======= ======= ======
Reconciliation of fair value
of plan assets
Fair value at January 1.... $34,890 $42,775 $ -- $ --
Actual return on plan
assets.................... 6,330 8,108 -- --
Employer contributions..... 3,858 2,814 4 5
Benefit payments........... (2,304) (2,504) (4) (5)
Adjustments................ -- (241) -- --
------- ------- ------- ------
Fair value at December 31.. $42,774 $50,952 $ -- $ --
======= ======= ======= ======
Funded status
Funded status at December
31........................ $ 2,515 $ 9,014 $(1,000) $ (949)
Unrecognized transition
(assets) obligation....... (2,663) (1,975) 485 453
Unrecognized prior service
cost...................... 1,849 1,619 43 40
Unrecognized (gain) loss... 1,416 (2,149) 114 (3)
------- ------- ------- ------
Net amount recognized--
asset (liability) in the
statements of net assets
at December 31............ $ 3,117 $ 6,509 $ (358) $ (459)
======= ======= ======= ======
Assets for the qualified plans consist principally of high-grade marketable
equity securities, corporate bonds and U.S. Government obligations.
F-90
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
Components of net periodic benefit costs (benefit) for the years ended
December 31, 1997 and 1998 are as follows:
Postretirement Postretirement
Qualified Qualified plan plan
plan 1997 plan 1998 1997 1998
--------- --------- -------------- --------------
Service cost............. $ 659 $ 737 $ 10 $ 11
Interest cost............ 2,689 2,781 64 60
Expected return on plan
assets.................. (3,164) (3,812) -- --
Amortization of prior
service cost and
transition obligation... (284) (284) 35 36
------- ------- ---- ----
$ (100) $ (578) $109 $107
======= ======= ==== ====
Significant plan assumptions are as follows:
1997 1998
---- ----
Expected long-term rate of return on plan assets................ 9.0% 9.0%
Weighted average discount rate for annual pension and post-
retirement expense calculation................................. 7.5% 7.0%
Weighted average discount rate for year-end funded status of all
benefits and postretirement benefit costs...................... 7.0% 7.0%
NOTE I--Segment Information
The Group adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information."
The Group's reportable segments are strategic business units that offer
different products. They are managed separately because each business requires
different products and marketing strategies. The Group has three reportable
segments: Pulp and Paper products, Converting products and Railroad
operations. The Pulp and Paper products segment manufactures, markets and
sells rolls of paper for industrial applications and use in converting
operations. The Converting products segment designs, manufactures, markets and
sells industrial and consumer products that have gone through a conversion
process. The Railroad operation segment connects the St. Marys Kraft division
facility to the nearest interconnecting railway.
Net sales include export sales in 1997 and 1998 to non-affiliated customers,
and are less than 1% of total net sales.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies.
F-91
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
The following is information related to industry segments:
1997 1998
-------- --------
Net sales
Pulp and Paper products............................... $233,680 $224,037
Converting products................................... 104,128 115,065
Railroad operations................................... 1,460 1,542
-------- --------
$339,268 $340,644
======== ========
Intersegment sales
Pulp and Paper products............................... $ 19,303 $ 22,386
Converting products................................... -- --
Railroad operations................................... 5,270 5,586
-------- --------
$ 24,573 $ 27,972
======== ========
Segment profitability
Pulp and Paper products............................... $ (7,589) $(20,826)
Converting products................................... 1,279 3,300
Railroad operations................................... (1,081) (1,862)
-------- --------
Income before taxes..................................... $ (7,391) $(19,388)
======== ========
Depreciation and amortization
Pulp and Paper products............................... $ 16,538 $ 15,919
Converting products................................... 1,604 2,295
Railroad operations................................... 65 100
-------- --------
$ 18,207 $ 18,314
======== ========
Segment assets
Pulp and Paper products............................... $207,371 $217,310
Converting products................................... 44,010 44,509
Railroad operations................................... 1,623 1,869
Eliminations.......................................... (484) (695)
-------- --------
$252,520 $262,993
======== ========
Capital expenditures
Pulp and Paper products............................... $ 34,608 $ 14,279
Converting products................................... 664 286
Railroad operations................................... 124 932
-------- --------
$ 35,396 $ 15,497
======== ========
NOTE J--Stock Purchase Agreement
1. Background
On December 9, 1999, HG Estate LLC, St. Marys Railroad Corporation, and W.O.
Corporation (the "Sellers") entered into a Stock Purchase Agreement (the
"Agreement") with Durango Paper Company (the "Buyer") to sell all of the
outstanding common stock of Gilman Paper Company, Converting Corporation,
F-92
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
Converting LLC (a wholly-owned subsidiary of Converting Corporation), Gilman
Sales Company (a wholly-owned subsidiary of Gilman Paper Company) and the
membership interest of St. Marys Railroad LLC. The purchase price was $92
million in cash paid at the closing date of December 17, 1999 plus a $27.5
million subordinated note, bearing interest at 10% per annum, payable by
Durango to HG Estate LLC and its subsidiary, St Marys Railroad Corporation,
due on December 17, 2004. The Agreement also indicated that an adjustment to
the purchase price would be made to the extent the "actual working capital"
was greater or less than a specified amount. In July 31, 2000, the Sellers and
Durango settled the purchase price adjustment relating to the Stock Purchase
Agreement by the payment of $3 million in cash by HG Estate LLC to Durango and
the reduction of $3 million of the principal of the note due in 2004.
2. Commitments and Contingencies
(a) Environmental Matters
Pursuant to the Agreement, liabilities with respect to environmental matters
arising prior to the Closing Date are the responsibility of the Sellers,
except for the first $1.5 million of Indemnified Onsite Location Environmental
Losses (as defined in the Agreement) and except for the commitment related to
the Cluster Rules.
HG Estate LLC agreed to advance the current costs of capital improvements
required to maintain compliance with the Cluster Rules up to a maximum of $18
million to be repaid by Durango to HG Estate LLC pursuant to notes with
balloon payments which mature in 2002 and 2003.
Pursuant to the Agreement, liabilities with respect to environmental matters
arising after the Closing Date are the responsibility of Durango.
(b) Wood Chips Supply Agreement
The Gilman Pulp and Paper Group entered into a three-year commitment
(automatically renewable for a period of three years unless terminated by
either party to the agreement) to obtain a minimum amount of wood chips at
specified prices directly from specific sawmills ("Supply Agreement") owned by
HG Estate LLC. Pursuant to the Supply Agreement, the minimum amounts and
prices have been established for the year ended December 31, 2000 as follows:
approximately 650,000 standard short tons of de-barked chips at a price as
defined in the Supply Agreement and to be shipped at the rate of approximately
13,000 tons per week. Minimum purchases and prices under the Supply Agreement
for the years subsequent to 2000 have not yet been determined.
(c) Transition Services Agreement
The Gilman Pulp and Paper Group has entered into a Transition Services
Agreement ("Services Agreement") to continue providing accounting, procurement
and administrative services to certain subsidiaries of HG Estate LLC, which
supply woodchips to the St. Marys Kraft division, for a period from the
Closing Date through September 30, 2000. The administrative services primarily
consist of usage of computer hardware and software, which are used for
purposes related to the operations of the woodchip suppliers. Such services
are to be provided to the suppliers at actual cost (including salary and out-
of-pocket expenses) of providing such services, without a markup.
(d) Litigation
Pursuant to the Agreement, and subject to certain limitations, liabilities
with respect to legal claims arising before the Closing Date are the
responsibility of the Sellers, and those arising after the Closing Date are
the responsibility of Durango.
F-93
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
(e) Collective Bargaining Agreements
Certain collective bargaining agreements covering employees of the Gilman
Pulp and Paper Group have expired; however, the Group and the employees have
continued to operate, to date, as if the agreements were still in place. The
Group is in the process of renegotiating these agreements.
(f) Severance Benefits
Pursuant to the Agreement, Sellers shall indemnify and hold harmless Durango
from and against all liabilities which may arise due to a termination of
employment on or prior to the Closing Date and those "Severance Liabilities"
(liabilities described in the Gilman Paper Company Severance Plan Agreement
("Severance Plan") or as described in the applicable collective bargaining
agreement) incurred by Durango and its affiliates with respect to an aggregate
of not more than 250 employees of the Group prior to the first anniversary
date of the Closing Date and for not more than 300 employees (including the
previous 250 employees) prior to the second anniversary of the Closing Date.
Pursuant to the Severance Plan, in the event of termination, participants of
the Severance Plan will be eligible to receive severance benefits as follows:
(i) for participants employed with employer for one year or more, one week's
annual base salary for each year of participant's active employment with
employer; and (ii) for participants employed for three years or more, an
additional three months' annual base salary. For purposes of the Severance
Plan, annual base salary is determined at Closing Date.
The accompanying combined financial statements do not reflect any liability
in connection with severance benefits.
3. Employee Benefit Plans
Durango entered into an Employee Benefits Transition Services Agreement
("Benefits Agreement") with the Sellers. The Sellers and Durango agreed that
the Purchased Companies will become participating employers in certain
employee benefit plans ("W.O. Plans") maintained by W.O. Corporation, a
wholly-owned subsidiary of HG Estate LLC, pursuant to the terms and conditions
contained in the Benefits Agreement. Employees will continue to participate in
such plans on the same terms and conditions in effect as of the Closing Date
for a period of six months following the Closing Date (or such shorter period
as provided in the Benefits Agreement) ("Transition Period").
Durango shall reimburse W.O. Corporation for the sum of the monthly "Third-
Party Cost" and the monthly "Internal Cost" of administering the W.O. Plans on
behalf of the Group' employees. The Third-Party Cost shall be consistent with
past practices and policy paid by W.O. Corporation. The Internal Cost is equal
to $75,000 per month.
(a) Pension Plans
Pursuant to the Benefits Agreement, employees who currently participate in
the "Pension Plans," as defined in the Agreement, will no longer participate
in such plans as of December 17, 1999 (the "Closing Date"). However, the
Agreement contemplates that those employees that participate in Sellers'
pension plans will be credited with imputed service and pay during the
Transition Period.
Durango Paper Company shall reimburse W.O. Corporation for the "Pension Plan
Actual Costs" with respect to the credit imputed to the employees under the
Pension Plans during a period of six months after the
F-94
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(in thousands of U.S. Dollars)
Closing Date ("Transition Period"). The Pension Plan Actual Costs shall be the
sum of the present value of the difference for each participant, if any,
between: (i) the accrued benefits under the Pension Plans at the end of the
Transition Period (or the participant's date of retirement or termination, if
earlier), and (ii) the accrued benefits under Pension Benefit Guaranty
Corporation Valuation Rates for plan terminations as of the Closing Date and
the 1983 Group Annuity Mortality Table. For participants who retire during the
Transition Period, accrued pension benefits at the Closing Date and as of the
date of retirement will be reduced by the applicable Pension Plan early
retirement reductions based on the participant's age at retirement, as
specified in the Pension Plans.
The present values for retired participants will be calculated based on the
participant's age at the end of the Transition Period and will be increased by
the value of the benefits paid during the Transition Period. For all other
participants (those continuing in active employment and those terminating the
vested benefits during the Transition Period), accrued pension benefits shall
be reduced in accordance with the Plan's provisions to the expected retirement
age specified by ERISA but no earlier than age 55. The present values will be
calculated based on the participant's age at the end of the Transition Period.
Durango is to make monthly payments of $165,000 ("Pension Plan Actual
Payments") towards the Pension Plan Actual Costs, noted above. To the extent
that the Pension Plan Actual Costs (as determined by an actuary 180 days
following the end of the Transition Period) exceed the Pension Plan Actual
Payments, Durango shall reimburse W.O. Corporation for the amount of such
excess plus interest, computed at prime rate plus 2%.
(b) Savings Plans
Pursuant to the Benefits Agreement, employees who currently participate in
the "Deferred Compensation Plans," as defined in the Agreement, as of the
Closing Date, will be entitled to continue participating in the Deferred
Compensation Plan, during the Transition Period, upon the same terms and
conditions that existed for such employees prior to the Closing Date. Durango
shall reimburse W.O. Corporation on a monthly basis for the Deferred
Compensation Plan Actual Costs, which shall include any before tax employee
contributions or employer matching contributions required to be made to the
Deferred Compensation Plan.
(c) Welfare Plans
Pursuant to the Benefits Agreement, employees who currently participate in
the "Welfare Plans," as defined in the Agreement, as of the Closing Date, will
be entitled to continue participating in the Welfare Plans, during the
Transition Period, upon the same terms and conditions that existed for such
employees prior to the Closing Date.
Costs, which shall be any costs payable to the insurers attributable to the
employee participation in the Welfare Plans during the Transition Period.
Durango is to make monthly payments of $410,000 ("Welfare Plan Actual
Payments") towards the Welfare Plan Actual Costs, noted above. To the extent
that the Welfare Plan Actual Costs (as determined by an actuary 180 days
following the end of the Transition Period) exceed the Welfare Plan Actual
Payments, Durango Paper Company shall reimburse W.O. Corporation for the
amount of such excess plus interest, computed at the prime rate plus 2%.
(d) Converting and Company Health Plans
Pursuant to the Benefits Agreement, employees who currently participate in
the "Converting and Company Health Plans" (or "Health Plans") as scheduled and
defined in the Agreement as of the Closing Date, will be
F-95
GILMAN PULP AND PAPER GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
December 31, 1997 and 1998
(all amounts in thousands of U.S. Dollars)
entitled to continue participating in the Health Plans, during the Transition
Period, upon the same terms and conditions that existed for such employees
prior to the Closing Date.
Durango shall reimburse W.O. Corporation for the "Health Plan Actual Costs"
which shall be any costs payable to the third party administrators
attributable to the employee's participation in the Health Plans during the
Transition Period.
Durango is to make monthly payments of $149,000 ("Health Plan Actual
Payments") towards the Health Plan Actual Costs, noted above. To the extent
that the Health Plan Actual Costs (as determined by an actuary 180 days
following the end of the Transition Period) exceed the Health Plan Actual
Payments, Durango Paper Company shall reimburse W.O. Corporation for the
amount of such excess plus interest, computed at the prime rate plus 2%.
F-96
We have not authorized any person to give any information or to make any
representations other than those contained in this prospectus and consent
solicitation and, if given or made, you must not rely on this information or
representation as having been authorized by us. This statement and any related
documents do not constitute an offer to buy or the solicitation of an offer to
sell the exchange notes in any circumstance in which the offer or solicitation
is unlawful. In those jurisdictions where the securities, blue sky or other
laws require the offer to be made by a licensed broker or dealer, the offer
will be deemed to be made on behalf of Corporacion Durango, S.A. de C.V. by
the dealer manager and solicitation agent or one or more registered brokers or
dealers licensed under the laws of that jurisdiction.
In order to tender, a holder must tender pursuant to DTC's Automated Tender
Offer Program.
The exchange agent for the exchange offer is:
The Chase Manhattan Bank
Capital Markets Fiduciary Services
450 W. 33rd St., 15th Floor
New York, NY 10001-2697
Tel: (212) 638-0459
(212) 638-0431
Any questions or requests for assistance or for additional copies of this
prospectus and consent solicitation, the consent and letter of transmittal
or related documents may be directed to the information agent at its
telephone number set forth below. A holder may also contact the dealer
manager and solicitation agent at its telephone number set forth below or
such holder's broker, dealer, commercial bank, trust company or other
nominee for assistance concerning the exchange offer.
The information agent for the exchange offer is:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
Banks and Brokers, call collect:
(212) 269-5550
Others, call toll free:
(800) 714-3312
The exclusive dealer manager and solicitation agent for the exchange offer and
consent solicitation is:
Banc of America Securities LLC
100 North Tryon Street, 7th Floor
Charlotte, NC 28255
Attention: High Yield Special Products
Tel.: (704) 388-4807 (Collect)
Tel.: (888) 292-0070 (Toll Free)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS AND CONSENT SOLICITATION
20. Indemnification of Directors and Officers.
The Registrant has not purchased directors and officers liability insurance
for its directors and executive officers. However, under Mexican law, when an
officer or director of a corporation acts within the scope of his authority,
the corporation will answer for any resulting liabilities or expenses.
21. Exhibits and Financial Statement Schedules.
1.1 Form of Dealer Manager Agreement*
3.1 Articles of Association of Corporacion Durango, S.A. de C.V. (English
translation)**
3.2 Bylaws of Corporacion Durango, S.A. de C.V. (English translation)**
4.1 Form of Indenture relating to the 2008 notes between the Registrant and
The Chase Manhattan Bank*
4.2 Indenture dated as of July 25, 1996 between Grupo Industrial Durango,
S.A. de C.V. and The Chase Manhattan Bank, relating to the 2003 notes
4.3 Indenture dated as of February 5, 2001, between the Registrant and The
Chase Manhattan Bank, relating to the 2006 notes*
4.4 Form of Amended and Restated Pledge Agreement between the Registrant and
The Chase Manhattan Bank relating to the pledge of 2006 intercompany note
issued by GID to the Registrant*
4.5 Form of Amended and Restated Unsubordinated Promissory Note issued by GID
to the Registrant*
4.6 Form of Pledge Agreement between the Registrant and The Chase Manhattan
Bank relating to the pledge of the 2008 intercompany note issued by GID
to the Registrant*
4.7 Form of Unsubordinated Promissory Note issued by GID to the Registrant*
5.1 Opinion of White & Case S.C. as to the validity of the notes
5.2 Opinion of White & Case LLP as to the validity of the notes
10.1 Stock Purchase Agreement dated December 9, 1999 relating to acquisition
of Gilman Pulp and Paper Group, by and among HG Estate LLC, St. Marys
Railroad Corporation, W.O. Corporation, and Durango Paper Company*
10.2 Asset Purchase Agreement, dated as of April 27, 2001, between Durango
Georgia Converting LLC and TST Impreso, Inc., relating to the sale of the
assets of Sky division converting facilities*
10.3 Asset Purchase Agreement, dated as of June 1, 2001, between Durango
Georgia Converting LLC and Stone Container Corporation, relating to the
sale of the assets of its Eastman division converting facilities*
10.4 English translation of the Purchase Agreement, dated as of July 31, 2000,
between Celulosa Avicola de Tepatitlan, S.A. de C.V. and Envases y
Empaques de Mexico, S.A. de C.V., relating to the purchase of mill in
Jalisco, Mexico*
12.1 Ratio of earnings to fixed charges ***
21.1 List of Subsidiaries**
23.1 Consent of PriceWaterhouseCoopers
23.2 Consent of White & Case S.C. (included in Exhibit 5.1)
23.3 Consent of White & Case LLP (included in Exhibit 5.2)
23.4 Consent of KPMG LLP
23.5 Consent of Grant Thornton LLP
25.1 Statement of Eligibility of Trustee*
99.1 Consent and Letter of Transmittal
99.2 Letter to Broker Dealers, Commercial Banks, and Depository Company
Participants
99.3 Letter to Clients
99.4 Form of Exchange Agent Agreement*
99.5 Form of Information Agent Agreement*
--------
* Previously filed.
** Incorporated by reference from Registration Statement No. 333-13082 on Form
F-1 filed on January 19, 2001.
*** Included in the prospectus and consent solicitation under the heading
"Ratio of Earnings to Fixed Charges"
II-1
22. Undertakings.
The undersigned Registrant undertakes (i) to respond to requests for
information that is incorporated by reference into the prospectus and consent
solicitation pursuant to Item 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of a request, and to send the incorporated documents
by first class mail or other equally prompt means and (ii) to arrange or
provide for a facility in the U.S. for the purpose of responding to requests.
The undertaking in subparagraph (i) above includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
The undersigned Registrant undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired, that was not the subject of and included in the registration
statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-4 and has duly caused this Pre-Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Durango, Mexico, on
July 30, 2001.
CORPORACION DURANGO, S.A. DE C.V.
/s/ Miguel Rincon
By __________________________________
Name:Miguel Rincon
Title: Chief Executive Officer
Signatures Title
Date
---------- -----
----
/s/ Miguel Rincon (Chief Executive Officer) July 30,
2001
______________________________________
Miguel Rincon
/s/ Mayela Rincon de Velasco (Principal Financial Officer) July 30,
2001
______________________________________
Mayela Rincon de Velasco
/s/ Jose Antonio Rincon (Principal Operating Officer) July 30,
2001
______________________________________
Jose Antonio Rincon
/s/ Jesus Romo Carrasco (Principal Accounting Officer) July 30,
2001
______________________________________
Jesus Romo Carrasco
/s/ Jesus Rincon Director July 30,
2001
______________________________________
Jesus Rincon
/s/ Wilfrido Rincon Director July 30,
2001
______________________________________
Wilfrido Rincon
/s/ Ignacio Rincon Director July 30,
2001
______________________________________
Ignacio Rincon
/s/ Martin Rincon Director July 30,
2001
______________________________________
Martin Rincon
/s/ Prudencio Calderon Authorized Representative in July 30,
2001
______________________________________ the United States
Prudencio Calderon
II-3