SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16
OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of May 12, 2003
Durango Corporation
(f/k/a Grupo Industrial Durango, S.A. de C.V.)
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(Translation of registrant's name into English)
Torre Corporativa Durango, Potasio 150, Cuidad Industrial,
Durango, Durango, Mexico
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(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover 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-_____________.
CORPORACION DURANGO, S.A. DE C.V.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
INDEX
Table of Contents Page
Report of Independent Accountants 1 and 2
Financial Statements:
Balance Sheets 3
Statements of Income 4
Statements of Changes in Shareholders' Equity 5
Statements of Changes in Financial Position 6
Notes to the Financial Statements 7 to 39
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico, D. F., April 25, 2003
To the Board of Directors and Shareholders of
Corporacion Durango, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of
Corporacion Durango, S.A. de C.V. and subsidiaries (the "Company"),
as of December 31,2002 and 2001 and the related consolidated
statements of income, of changes in shareholders' equity and of
changes in financial position for the 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. 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.
1. The accompanying financial statements have been prepared considering
the Company as a going concern, which assumes that assets will be
realized and liabilities will be complied with in the normal course of
business operations. As mentioned in Note 10, the Company has
significant bank loans and bonds outstanding, which require, aside from
compliance with a number of financial ratios, payment when due, of
principal and interest. As a result of both internal and external
market and economic factors, in the last quarter of the period, the
Company experienced a significant reduction in cash flow, which
resulted in the inability to pay principal and interest under certain
obligations that matured in November and December 2002.
As a result of such payments defaults, the Company reclassified
certain bank loans and bonds as short-term debt.
As a consequence the Company shows negative working capital amounting
to $5,932,855 thousand, and a net loss of $3,545,923 thousand in the
period. Due to the above-mentioned financial and operating deterioration,
the Company's ability to continue operating as a going concern will
depend on management's ability to generate profits, obtain waivers from
its creditors and/or renegotiate the bank and bond debt or obtain new
financing. The accompanying financial statements include no adjustment
pertaining to the recoverability and classification of the amounts
recorded as assets and the amounts and classification of the liabilities
that may become necessary in the event that the Company is unable to
continue in operation as a going concern.
2. As mentioned in Note 4.b, the Company's Management sold the shares of
Durango Paper Co. to Operadora Omega, S.A de C.V. (a related party) in
October, 2002, with the effects mentioned in that Note.
3. As mentioned in Note 1 to the financial statements, at the General
Extraordinary Shareholders' Meeting held on October 8, 2001, the
shareholders approved the merger of Corporacion Durango, S.A. de C.V.
("CODUSA") into its subsidiary Grupo Industrial Durango, S.A. de C.V.
("GIDUSA"). The merger was effective for financial purposes on October 8,
2001. In connection with the merger, the Company changed its name to
Corporacion Durango, S.A de C.V. on February 7, 2002, when its bylaws were
amended. The merger was effected through the exchange of all of the
outstanding shares in CODUSA for shares in GIDUSA, which name was changed
on the same date to Corporacion Durango, S.A. de C.V.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Corporacion Durango, S.A. de C.V. and subsidiaries, as of
December 31, 2002 and 2001 and the consolidated results of their
operations, the changes in their shareholders' equity and the changes in
their financial position for the years then ended, in conformity with
accounting principles generally accepted in Mexico.
PricewaterhouseCoopers
Rafael Maya Urosa
Public Accountant
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(Notes 1, 2, 3 and 4)
(Thousands of constant Mexican Pesos restated as of December 31, 2002)
December 31,
ASSETS 2002 2001
CURRENT ASSETS:
Cash and temporary investments $255,711 $508,894
Accounts receivable, net (Note 6) 1,937,042 2,230,610
Taxes recoverable 38,797 29,688
Inventories, net (Note 7) 1,277,453 1,459,597
Prepaids 28,551 26,850
Total current assets 3,537,534 4,255,639
PROPERTY, PLANT AND EQUIPMENT, net (Note 8) 13,063,711 16,488,984
OTHER ASSETS (Note 9) 711,429 532,908
Total assets $17,312,674 $21,277,531
LIABILITIES
CURRENT LIABILITIES:
Bank loans (Note 10) $7,292,875 $317,775
Interest payable 453,057 302,083
Current portion of long-term debt (Note 10) 283,471 299,621
Trade accounts payable 899,471 1,218,333
Notes payable 49,624 36,739
Accrued liabilities and other payables 489,551 468,876
Employee profit sharing 2,340 9,020
Total current liabilities 9,470,389 2,652,447
LONG TERM LIABILITIES:
Long-term debt (Note 10) 1,083,372 7,243,673
Notes payable 136,932 86,363
Derivative instruments (Note 11b) - 72,157
Deferred tax (Note 15) 2,009,274 3,090,368
Other liabilities - 16,199
Pension plans and seniority premiums (Note 12) 182,409 239,654
Contingencies and commitments (Note 13) - -
Total long-term liabilities 3,411,987 10,748,414
Total liabilities 12,882,376 13,400,861
SHAREHOLDERS' EQUITY
CONTRIBUTED CAPITAL
Capital stock (Note 14)
Nominal 1,412,214 1,412,214
Restatement 3,260,252 3,260,252
4,672,466 4,672,466
Additional paid-in capital 1,222,835 1,271,766
Retained earnings (Note 14) 5,948,848 9,494,771
Deficit from restatement (4,384,180) (4,485,883)
Adjustment for additional pension liability related
to seniority premiums (140,858) (140,858)
Deferred income tax (Note 3n) (2,963,255) (2,963,255)
Cumulative translation adjustment of foreign subsidiaries 6,024 (14,191)
Total majority interest 4,361,880 7,834,816
Minority interest 68,418 41,854
Total shareholders' equity 4,430,298 7,876,670
Total liabilities and shareholders' equity $17,312,674 $21,277,531
The accompanying notes are an integral part of these financial statements.
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(Notes 1, 2, 3 and 4)
(Thousands of constant Mexican Pesos restated as of December 31, 2002)
2002 2001
NET SALES $8,498,205 $10,532,395
COSTS OF SALES 7,242,966 8,770,658
Gross profit 1,255,239 1,761,737
Selling, general and administrative expenses 611,262 728,132
OPERATING INCOME 643,977 1,033,605
Other expense, net (46,506) (40,309)
FINANCING COST (INCOME):
Interest expense (1,088,703) (1,077,654)
Interest income 39,165 66,897
Foreign exchange (gain) loss, net (1,049,835) 313,372
Gain from monetary position 415,172 310,005
(1,684,201) (387,380)
Amortization of negative goodwill - 495,297
Special items (Note 17) (1,451,431)
(Loss) income before provisions for taxes,
employee profit sharing, extraordinary items,
impairment reserve and minority interests (2,538,161) 1,101,213
Current income and asset taxes (Note 15) (114,382) (235,819)
Employee profit sharing (1,041) (4,720)
Deferred income tax (Note 15) 667,294 267,291
551,871 26,752
(Loss) income before extraordinary items,
impairment reserve and minority interest (1,986,290) 1,127,965
Impairment reserve (Note 8) (1,556,511) -
Extraordinary items (Note 18) (298,638)
Net (loss) income before minority interest (3,542,801) 829,327
Minority interest 3,122 4,029
NET (LOSS) INCOME ($3,545,923) $825,298
The accompanying notes are an integral part of these financial statements.
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(Notes 1, 2, 3 and 4)
(Thousands of constant Mexican Pesos restated as of December 31, 2002)
Capital stock Additional
Paid in
Nominal Restatement capital
Balances as of January 1, 2001 $1,901,816 $419,888 ($49,086)
Appropriation of 2000 net income
Effects of merger (489,602) 2,840,364 1,320,852
Comprehensive income
Balances as of January 1, 2002 1,412,214 3,260,252 1,271,766
Appropriation of 2001 net income
Swaps cancellation (48,931)
Comprehensive loss
Balances as of December 31, 2002 $1,412,214 $3,260,252 $1,222,835
Adjustment
for additional
Retained earnings (Note 15): pension liability
Legal Prior Current Deficit from related to senio-
reserve year year restatement irity premiums
Balances as of January 1, 2001 $10,076 $3,172,960 $1,634,573 ($23,207) ($12,658)
Appropriation of 2000 net income 420,791 (420,791)
Effects of merger 179,249 4,886,397 (1,213,782) (3,491,986)
Comprehensive income 825,298 (970,690) (128,200)
Balances as of January 1, 2002 189,325 8,480,148 825,298 (4,485,883) (140,858)
Appropriation of 2001 net income 40,424 784,874 (825,298)
Swaps cancellation
Comprehensive loss (3,545,923) 101,703
Balances as of December 31, 2002 $229,749 $9,265,022 ($3,545,923) ($4,384,180) ($140,858)
Cumulative
translation
adjustment Total Total
Deferred of foreign Majority Minority shareholders'
income tax subsidiaries interest interest equity
Balances as of January 1, 2001 ($492,463) $16,788 $6,578,687 $1,504,475 $8,083,162
Appropriation of 2000 net income
Effects of merger (2,470,792) (11,118) 1,549,582 (1,466,649) 82,933
Comprehensive income (19,861) (293,453) 4,028 (289,425)
Balances as of January 1, 2002 (2,963,255) (14,191) 7,834,816 41,854 7,876,670
Appropriation of 2001 net income
Swaps cancellation (48,931) (48,931)
Comprehensive loss 20,215 (3,424,005) 26,564 (3,397,441)
Balances as of December 31, 2002 ($2,963,255) $6,024 $4,361,880 $68,418 $ 4,430,298
The accompanying notes are an integral part of these financial statements.
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(Notes 1, 2, 3 and 4)
(Thousands of constant Mexican Pesos restated as of December 31, 2002)
OPERATING ACTIVITIES: 2002 2001
Net (loss) income before minority interest ($3,542,801) $829,327
Items recognized in net income not (generating)
requiring the use of resources:
Depreciation and amortization 475,429 492,288
Amortization of negative goodwill - (495,297)
Deferred income tax (667,294) (267,291)
Special items 1,451,431 -
Impairment reserve 1,556,511 -
Other 137,869 78,376
(588,855) 637,403
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (40,220) 62,253
(Increase) decrease in inventories (372,889) 965,540
Increase in other assets (5,890) (62,858)
Increase (decrease) in other accounts payable
and accrued expenses 870,233 (696,186)
Resources (used) generated by operating
activities (137,621) 906,152
FINANCING ACTIVITIES:
Bank loans 3,157,591 2,571,709
Payment of bank loans (2,358,942) (3,107,122)
Long-term debt, net (62,912) (115,067)
Resources (used in) generated by financing
activities 735,737 (650,480)
INVESTING ACTIVITIES:
Additions to plant and equipment, net (305,255) (345,591)
Increase in minority interest 23,430 (6,656)
Investment in subsidiaries (204,770) -
Other assets (364,704) (205,717)
Resources used in investing activities (851,299) (557,964)
Decrease in cash and temporary investments (253,183) (302,292)
CASH AND TEMPORARY INVESTMENTS AT THE
BEGINNING OF THE YEAR 508,894 811,186
CASH AND TEMPORARY INVESTMENTS AT THE
END OF THE YEAR $255,711 $508,894
The accompanying notes are an integral part of these financial statements.
CORPORACION DURANGO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(Thousands of constant Mexican Pesos restated as of December 31, 2002)
NOTE 1 - ENTITY AND NATURE OF BUSINESS:
The consolidated financial statements as of December 31, 2002 referred
to herein reflect the accounts of Corporacion Durango, S.A. de C.V.
("CODUSA") and its subsidiaries, which arose from the merger of Grupo
Industrial Durango, S.A. de C.V. ("GIDUSA") and its subsidiaries and
Corporacion Durango, S.A. de C.V. and its subsidiaries (collectively,
the "Company"). The Company is primarily engaged in the manufacturing
and selling of packaging (corrugated container, 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 products (plywood, particleboard and lumber) in Mexico
and in the United States of America ("U.S.").
The following transactions have occurred over the last two years:
a. In March 2000, CODUSA acquired 46,892,700 Series "A" shares of
GIDUSA in different transactions over the Bolsa Mexicana de Valores
(Mexican Stock Exchange), at prices ranging between $63.83 and $66.21
Mexican Pesos per share.
b. As a result of the acquisition of Series "A" shares mentioned
above, CODUSA and its affiliated companies held approximately 87% of
Series "A" shares of GIDUSA, with the remaining shares available in the
public market. As of December 31, 2000, the Rincon family held 59% and
100% of the outstanding shares of GIDUSA and CODUSA, respectively.
c. At the General Extraordinary Shareholders Meeting held on October 8,
2001, the shareholders of CODUSA approved the merger of CODUSA into its
subsidiary, GIDUSA. The merger was effective for financial purposes on
October 8, 2001. In connection with the merger, the Company changed its
name to Corporacion Durango, S.A. de C.V. on February 7, 2002, when its
bylaws were amended. The merger was effected through the exchange of
shares in CODUSA for shares in GIDUSA. As a result of the merger, the
Company recorded a net decrease in shareholders' equity of $49,089 and
issued 72,257,378 common nominative shares without par value. As of
December 31, 2002 and 2001, the total number of shares outstanding was
94,072,122.
d. As a result of this merger, the financial statements for the years
ended December 31, 2001 and 2002 are presented on a consolidated basis.
The minority interest in CODUSA's consolidated financial statements
prior to the merger reflected the shareholding in GIDUSA not owned by
CODUSA. This minority interest was eliminated upon the merger.
ii. Current status of the Company
In order to expand its production plant and continue to consolidate as
a leader in the paper industry throughout Mexico and Latin America,
the Company contracted significant financing from banks in Mexico and
abroad, mainly in the U.S. Additionally, at different times it placed
certain debt bonds on the U.S. capital markets.
In 2002, the Company was severely affected by a combination of
economic factors, including a slowdown of the US and international
economy, a significant drop in the world price of paper, a drastic
reduction in the demand for manufactured products requiring the goods
supplied by the companies of the group, an increase in the cost of
raw materials, electric power, gas and labor, and the entry of
imported products into the Mexican market.
The above-mentioned negative economic events lead to a significant
reduction in the generation of cash flow by the Company during the
second half of 2002, and the Company defaulted in the payments of
interest and principal on certain debt maturing in November and
December 2002. These loans and bonds have been classified as short
term debt (see Note 10.c), as a result of which, there is negative
working capital and uncertainty as to the ability of the Company to
continue in operation as a going concern (see Note 13.IV).
As a result of the foregoing, the company began a financial
restructuring process in November 2002, by holding discussions with
the banks and bondholders in an effort to agree on a debt
refinancing plan as well as the sale of nonstrategic assets.
In April 2003, the Company entered into a "Forbearance Agreement",
with a substantial portion of the bondholders under the terms of
which such bondholders have agreed to continue discussions
regarding the terms of the recapitalization of the Company's
financial structure.
The Company's expectation is that its financial structure will be
strengthened by any such recapitalization.
NOTE 2 - BASIS OF PRESENTATION:
a. Monetary unit
Amounts in the consolidated 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
Mexican 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 have been prepared in accordance
with generally accepted accounting principles in Mexico ("Mexican GAAP")
as promulgated by the Mexican Institute of Public Accountants ("MIPA").
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 consolidation
All significant inter-company accounts and transactions have been
eliminated in the consolidation.
The consolidation was based on the audited individual financial
statements of the individual subsidiaries. The consolidated financial
statements include the assets, liabilities and results of the subsidiaries
in which the Company holds over 50% of the 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 and multi-wall sacks
and bags.
Empaques de Carton Titan, S.A. de C.V. and subsidiaries (see Note 20
subsequent events).
Durango McKinley Paper Company.
Paper
Manufacturing and selling of kraft and semikraft paper made with
virgin pulp and/or recycled paper.
Compania Papelera de Atenquique, S.A. de C.V. and subsidiaries (formerly
Compania Industrial de Atenquique, S.A. de C.V. and subsidiaries).
Industrias Centauro, S.A. de C.V.
Grupo Pipsamex, S.A. de C.V. and subsidiaries
Durango McKinley Paper Company
Other businesses
Manufacturing and selling of plywood and particleboard.
Ponderosa Industrial de Mexico, S.A. de C.V.
NOTE 3 - ACCOUNTING POLICIES:
A summary of the Company's significant accounting polices 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 amount of revenues and expenses during the
reporting periods. Actual results may differ from these estimates.
b. Recognition of the effects of inflation
The Company's consolidated financial statements have been prepared in
accordance with Bulletin B-10, "Effects of Inflation on Financial
Information" and its amendments. Bulletin B-10 requires the restatement
of all financial statement items to constant Mexican Pesos of the most
current period.
For comparative purposes, the consolidated financial statements
presented herein have been restated to Mexican Pesos as of December 31,
2002, as follows:
1. The financial statements as of December 31, 2001 have been restated
to Mexican Pesos as of December 31, 2002 by applying an inflation factor of
1.057% derived from the National Consumer Price Index ("NCPI"), published
by Banco de Mexico (the Central Bank of Mexico).
i. Statement of changes in financial position:
Bulletin B-12, "Statement of Changes in Financial Position"
("Bulletin B-12), 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 source and application of resources representing differences
between beginning and ending balances of the balance sheets in constant Mexican
Pesos, excluding the effects of holding non-monetary assets. Bulletin B-12
also requires that monetary position and foreign exchange gains (losses) be
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 conducted 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 General Consumer Price Index (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 exchange rate as of the
date of the balance sheet for the reporting period.
* The translation effects are recorded as part of shareholders' equity
in the cumulative translation adjustment of foreign subsidiaries.
d. Temporary investments
Short-term investments consist of marketable securities with maturities of
less than 3 months and are carried at market value. Gains (losses) from this
transactions are included in the income statement
e. Inventories
Inventories are valued at average cost, which does not exceed market value.
The average cost approximates the last purchase price or production cost.
f. Cost of sales
Cost of sales is determined on the estimated replacement value of the
inventory as of the date on which sales were made.
g. Investment in affiliated companies
Investments in shares of affiliated companies are recorded at cost and
restated applying factors derived from the NCPI.
h. Property, plant and equipment
Property, plant and equipment are recorded at their acquisition cost, and
are restated by applying factors derived from the NCPI at the historical
cost, except for machinery and equipment of foreign origin which are restated
by applying factors derived from the GCPI 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.
The Company capitalizes the financing cost of outstanding borrowings
directly attributable to the related projects. During 2002 the Company did
not record any amount for this concept.
i. 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
Buildings 25-50
Machinery and equipment 23-40
Office equipment 5-10
Transportation equipment 1-5
Computer equipment 1-3
j. Debt issuance cost
During 2002, the Company capitalized debt issuance cost amounting to
$215,888 ($251,503 during 2001). Debt issuance cost is amortized over the
outstanding term of the debt. In 2002 the charge for this concept was
$118,912 ($58,110 in 2001).
For the year ended December 31, 2001, the Company wrote off expenses
related to the Yankee Bond issuance with maturities in 2001 and 2003 of
$13,861 and $20,830, respectively, which are included in the financing cost.
k. 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 by applying factors derived from the NCPI and
amortized under the straight-line method over a period not to exceed two
years.
l. Pension plans, seniority premiums and indemnities
In accordance with Mexican Federal 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 (pensions and seniority premiums), both formal and
informal, is recognized as an expense 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, are charged to income in the year in which they
become payable.
A defined contribution pension plan has been established for the
U.S. subsidiaries covering all employees who meet certain eligibility
requirements. The benefits of such plan are based mainly on the employee's
years of service and compensation.
m. Payments for retirements and terminations
Payments for retirement and termination are charged to income in the period
in which they occur.
n. Derivative financial instruments
Effective on January 1, 2001, the Company adopted the guidelines
of amended Bulletin C-2, "Financial Instruments" ("Bulletin C-2"), which
provides new guidelines for the recognition and disclosure of derivative
financial instruments. Bulletin C-2 requires, for instruments not
designated as a hedge, the recognition of asset or liability derived from
the difference between acquisition cost and fair value of these instruments.
Subsequent fair value adjustments are reflected in the statement of income.
Upon adoption, the most significant effect of this new accounting bulletin
was for the accounting of equity swap share ("Equity Swap") transactions.
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 Company entered into several Equity Swap transactions with respect to its
own 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 was recorded directly in shareholders'
equity through December 31, 2000. As a result of the adoption of Bulletin
C-2, during 2001, the Company recorded $ 21,305 in the statement of income.
The contract of these financial instruments matured in May, 2002. The effects
thereof were recordedas charges to income and equity of $8,204 and $78,758,
respectively, and as credit to the liabilities for $70,554.
o. 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 cost incurred or to be incurred in the transaction
can be measured reliably.
p. Income tax and employee statutory profit sharing
The Company recognize deferred income tax through the comprehensive asset
and liability method, which consists of determining said tax by applying
the corresponding income tax rate to the temporary differences between the
book and tax values of assets and liabilities as of the date of the
financial statements.
q. Foreign currency transactions
Transactions denominated in foreign currency are recorded in Mexican Pesos at
the exchange rate in effect on the date they are consummated. Assets and
liabilities 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 as income for the year in
question.
r. 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 flows
generated by the assets and without interest charges. If the sum of the
expected future undiscounted cash flow is less than the carrying amount of the
assets, a loss is recognized for the difference between the fair value and
carrying value of the assets. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Long-lived assets for which management has committed
to a plan of disposal are recorded at the lower of the unamortized carrying
amount or fair value less disposal cost.
During 2002, the Company revised the value of its long lived assets, which was
determined with cash flow generated during the useful lives of the assets
evaluated, which ranges from 10 to 15 years after 2003. The Company recorded
$1,556,511 as an impairment reserve for fixed assets, according to the
Company's calculations (See Note 8).
s. Shareholders' equity:
The capital stock, retained earnings, additional paid-in-capital and
comprehensive income accounts include the effects of 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 amounts required to maintain the contributions and
accumulated results in constant Mexican Pesos as of December 31, 2001.
t. 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 companies to look at their internal
organizational structure and internal reporting system for the purpose of
identifying segments. (See Note 16).
u. Comprehensive income
As of January 1, 2001, Bulletin B-4, "Comprehensive Income", became
effective. This bulletin requires that the various components of
shareholders' equity resulting from non-owner transactions be shown in the
statement of changes in shareholders' equity under the item of comprehensive
income. Therefore, in order for the various items within the statement of
changes in shareholders' equity to be comparable, said statement was
restructured for prior years.
NOTE 4 - ACQUISITIONS:
a. In March 2000, the Company acquired from the Rincon family it's 59%
ownership interest in GIDUSA, resulting in negative goodwill in the amount
of $325,189. This amount was amortized fully in 2000.
b. Durango Paper Company
In August 2002, Durango Georgia Paper Company had a boiler explosion at one
of its plants located in Georgia, which made it necessary to cease
operations and gave rise to significant losses. The Company's insurance
policy did not cover these losses.
In October 2002, the Company sold the shares of Durango Paper Company (DPC),
the parent of Durango Georgia Paper Company, to Operadora Omega, S.A. de
C.V. an affiliate of the Company.
The sale was made for the amount of $508 (US$50), and gave rise to a loss of
$116,414 (US$11,202), which was considered as a special item in the statement
of income.
As a result of the sale of DPC, the Company recorded a reserve for doubtful
accounts in the amount of the account receivable from DPC as of the sale
date. This account receivable recorded amounts lent by the Company to DPC to
finance the acquisition of Gilman Paper Company. The reserved account
receivable is for $1,335,017 (US$128,834) and was recorded as a special
item in income for the period.
NOTE 5 - FOREIGN CURRENCY POSITION:
As of December 31, the Mexican Peso/U.S. Dollar exchange rate was as
follows:
U.S.
Dollars
2002 10.4393
2001 9.1695
As of December 31, 2002 and 2001, the Company had the following
foreign currency monetary assets and liabilities:
Thousands U.S. Dollars
2002 2001
Assets US$ 52,851 US$ 90,007
Current liabilities 796,841 168,683
Long-term liabilities 128,908 737,960
925,749 906,643
Net monetary position US$ 872,898 US$ 816,636
The Company's foreign currency transactions were as follows:
Year ended December 31
2002 2001
Thousands U.S. Dollars
Sales US$302,174 US$433,802
Interest income 613 2,558
Purchase of fixed assets and inventories (337,821) (456,771)
Interest expense (81,441) (111,876)
Other (20,978) (17,831)
(US$137,453) (US$150,118)
Additionally, as of December 31, 2002 and 2001, the Company had
non-monetary assets of foreign origin, in the amoun of US$800
million and US$1,072 million, respectively.
NOTE 6 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
December 31,
2002 2001
Trade $1,831,084 $2,207,881
Other 238,016 166,445
2,069,100 2,374,326
Less - Allowance for doubtful
accounts 132,058 143,716
$1,937,042 $2,230,610
NOTE 7 - INVENTORIES:
Inventories consist of the following:
December 31,
2002 2001
Finished products $320,574 $249,370
Work in process 29,487 34,881
Raw materials 327,809 448,891
Direct material and spare parts 348,976 438,178
Molds and dies, net 70,866 69,135
Merchandise in transit 147,652 183,456
Advanced payment to suppliers 56,314 75,287
Other 16,648 7,576
1,318,326 1,506,774
Less - Allowance for
obsolescence 40,893 47,177
$1,277,433 $1,459,597
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 31,
2002 2001
Land $1,095,484 $1,134,604
Buildings 3,828,640 4,264,728
Machinery and equipment 19,588,078 24,102,080
Transportation equipment,
data-processing equipment,
Furniture and other 1,790,855 1,906,989
Construction in progress 227,175 369,375
26,530,232 31,777,776
Less - Accumulated depreciation 11,910,010 15,288,792
14,620,222 16,488,984
Less - Impairment reserve 1,556,511 -
$13,063,711 $16,488,984
(1) As of December 31, 2002, the Company recorded a $1,556,511 impairment
reserve for the fixed assets of a number of subsidiaries which, according to
Company calculations, are not recoverable with the cash generated during the
useful lives of the assets evaluated, which extends from 10 to 15 years
after 2003.
The procedure for determining the effect of impairment of a fixed asset was
as follows:
The projected cash flow was determined for the remaining useful life of each
fixed asset, which was compared to the value of the assets as of December 31,
2002. A discount rate was applied to the projected cash flow, determined by
considering Company risk factors and debt level, among other items (10.4%)
and was compared to the book value at thedate of the balance sheet.
If the value of the cash flow exceeded the value of the assets, no
additional calculations were made. Otherwise, in the case of the companies
at which the cash flow was less than the value of the fixed assets, an
impairment effect was determined.
Depreciation expense for the years ended December 31, 2002 and 2001 was
$460,862 and $459,374, respectively.
NOTE 9 - OTHER ASSETS:
Other assets consist of the following:
December 31,
2002 2001
Investment in shares of affiliated companies $43,235 $40,672
Intangible pension assets - labor obligations of
the Mexican subsidiaries 74,286 83,467
Debt issuance costs 383,445 286,136
Prepaid pension cost - foreign subsidiaries - 34,005
Other 210,463 88,628
$711,429 $532,908
Total amortization expense was $135,860 and $91,025 for 2002 and 2001,
respectively. Total amortization expense includes amortization of debt
issuance cost totaling $121,293 and $58,111 for 2002 and 2001, respectively.
NOTE 10 - DEBT:
a. Short-term bank loans as of December 31, were comprised of:
December 31,
2002 2001
Euro Commercial Paper for US$5 million maturing
on February 12, 2003, bearing interest at 9.75%
per annum. $52,197
Yankee Bonds for US$250 million, with The Wells
Fargo Bank Minnesota acting as trustee maturing on
August 1, 2003, bearing interest at a fixed rate
12.625% per annum, payable semiannually. As of
December 31, 2002 the outstanding amount was
US$18.2 million.(2) 190,308 -
Senior Notes for US$301.7 million, with Wells
Fargo Bank Minnesota acting as trustee, payable
in a lump sum and maturing on August 1, 2006,
bearing interest at a fixed rate of 13.125% per
annum, payable semiannually.(2) 3,149,986 -
Euro Commercial Paper for US$5 million, maturing
in May 2002, bearing interest at 8.9% per annum. - $48,461
Senior Notes for US$10.4 million, with Wells Fargo
Bank Minnesota acting as trustee, payable in a
lump sum and maturing on August 1, 2008, bearing
interest at fixed rate of 13.5% per annum, payable
semiannually (2). 108,182 -
Senior Notes for US$175 million with Wells Fargo
Bank Minnesota acting as trustee, payable in a lump
sum and maturing on July 15, 2009 bearing interest
at a fixed rate of 13.75% per annum, payable
semiannually. (2) 1,826,878 -
Bank loan for US$50 million with JPMorgan Chase
Bank, formerly The Chase Manhattan Bank, payable
in five semiannual installments beginning on
December 5, 2000, bearing interest at LIBOR plus
1.50% per annum, payable semiannually.
Outstanding amount as of December 31, 2002 was
US$10 million. (2) 104,393 -
Bank loan for US$3.1 million with Mifel bearing
interest at LIBOR plus 4.8926% per annum. Outstanding
amount as of December 31, 2001 was US$0.8 million. - 7,707
Bank loan for US$94 million with Banamex payable in
quarterly installments from March 2003 through June
2005, bearing interest at LIBOR plus 2.80% per annum.
Outstanding amount as of December 31, 2002 was
US$75.3 million. (2) 786,451 -
Bank loan for US$35 million with Bank of America, N.A.
payable in a lump sum and maturing on January 2004,
bearing interest at LIBOR plus 3.0% per annum.
Outstanding amount as of December 31, 2001 was
US$17.4 million. - 186,223
Bank loan for US$15 million with Bank of America, N.A.
payable in a lump sum and maturing on January 2004,
bearing interest at LIBOR plus 3.5% per annum.
Outstanding amount as of December 31, 2001 was
US$6.2 million. - 66,788
Subordinated promissory note for US$24.5 million to
HG Estate maturing on December 17, 2004, bearing
interest at 10% per annum, payable semiannually.
Outstanding amount as of December 31, 2002 was
US$30.0 million, the balance includes capitalized
interest. (2) (See Note 13.I.e). 313,159 -
Notes payable for US$18.1 million to HG Estate
maturing in April, 2003 and December 2002, US$12.1
million bearing interest at 10.0% per annum and
US$6.0 million bearing interest at 13% per annum. 188,952 -
Bank loan for US$11.68 million with California
Commerce Bank payable in a lump sum and maturing in
January 2003 bearing interest al LIBOR plus 2.75%
per annum. (2) 121,931 -
Bank loan for US$7.3 million with Banamex payable in
a lump sum and maturing in June 2005 bearing interest
at a fixed rate of 4.86% per annum. Outstanding amount
as of December 31, 2002 was US$5.1 million. (2) 53,240 -
Bank loan for US$15 million with California Commerce
Bank payable in a lump sum and maturing in May 2004
bearing interest at LIBOR plus 3.25% per annum.
Outstanding amount as of December 31, 2002 was US$12.5
million. (2) 130,492 -
Direct loan for US$24 million with Bank of Albuquerque
payable quarterly maturing on May 15, 2008, bearing
interest at LIBOR plus 2.75%. Outstanding amount as
of December 31, 2002 was US$22 million. (2) 229,664 -
Bank loan for US$3 million with Bancomext S.N.C.
payable in a lump sum and maturing in 2003, bearing
interest at LIBOR plus 3.53%. 31,318 -
Other short-term debt 5,724 8,596
Total short-term debt, including debt with long-term
maturities which have been reclassified as short-term
due to defaults under the debt documentation. (2) See
subpart (d). $7,292,875 $317,775
b. Long-term debt as of December 31, was comprised of:
December 31,
2002 2001
Yankee Bonds for US$250 million with JP Morgan Chase
Bank acting as trustee, payable in a lump sum and
maturing on August 1, 2003, bearing interest at a
fixed rate of 12.625% per annum, payable semiannually.
As of December 31, 2001 the outstanding amount was
US$121.7 million. $- $1,179,633
Senior Notes for US$301.7 million with JP Morgan Chase
Bank acting as trustee, payable in a lump sum and
maturing on August 1, 2006, bearing interest at a
fixed rate of 13.125% per annum, payable semiannually. - 2,924,541
Senior Notes for US$10.4 million, and JP Morgan Chase
Bank acting as trustee, payable in a lump sum and
maturing on August 1, 2008, bearing interest at fixed
rate of 13.5% per annum, payable semiannually. - 100,441
Bank loan for US$50 million with the JPMorgan Chase
Bank, formerly the Chase Manhattan Bank,payable in
five semiannual installments beginning on December 5,
2000, bearing interest at LIBOR plus 1.50% per annum
payable semiannually. Outstanding amount as of
December 31, 2001 was US$20 million. - 193,843
Bank loan for US$11.7 million with California Commerce
Bank payable in a lump sum and maturing in January
2003, bearing interest at LIBOR plus 2.75% per annum. - 113,205
Financial lease agreement for the acquisition of
machinery for US$3.1 million with Bank of America,N.A.
maturing on February 2005, bearing interest at LIBOR
plus 3.5% per annum. Outstanding amount as of December
31, 2002 was US$0.9 million. (1) 9,583 11,937
Financial lease agreement for the acquisition of
machinery for US$29.3 million with Arrendadora Bank
of America maturing in February 2005 and August 2005,
bearing interest at LIBOR plus 3.5% per annum.
Outstanding amount as of December 31, 2002 was US$19.5
million. (1) 203,856 222,189
Financial lease agreement for the acquisition of
machinery for US$10.0 million with GE Capital Leasing
maturing in October 2008 and April 2009, bearing
interest at LIBOR plus 3.25% per annual (1).
Outstanding amount as of December 31, 2002 was
US$9.3 million. 97,184 67,048
Bank loan for $9.5 million Euros with Commerze Bank,
payable in a lump sum and maturing from January 2003
to January 2010, bearing interest at Eurolibor plus
1.15% per annum.(1) 116,479 87,649
Bank loan for US$94 million with Banamex payable in
quarterly installments maturing in June 2005, bearing
interest at LIBOR plus 2.80% per annum. Outstanding
amount as of December 31, 2002 was US$75.3 million. - 911,064
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% per annum,
collaterized with machinery and equipment.
Outstanding amount as of December 31, 2002 was
US$74.3 million. 775,491 775,372
Bank loan for US$15 million with California Commerce
Bank payable in a lump sum and maturing in May 2004,
bearing interest LIBOR plus 3.25% per annum.
Outstanding amount as of December 31, 2001 was
US$12.5 million. - 145,383
Subordinated promissory note for US$24.5 million to
HG Estate maturing on December 17, 2004, bearing
interest at 10% per annum, payable semiannually.
Outstanding amount as of December 31, 2001 was
US$30.2 million. - 322,551
Notes payable for US$18.1 million to HG Estate
maturing in April, 2003 and December 2002, US$12.1
million bearing interest at 10.0% per annum and
US$6.0 million bearing interest at 12.5% per annum. - 193,429
Bank loan for US$15.4 million, with Bancomext, S.N.C.
payable in 14 semiannually installments maturating on
September 2009, bearing interest at LIBOR plus 6.5%
per annum 160,765 149,260
Other long-term debt 3,485 145,749
1,366,843 7,543,294
Current portion of long-term debt 283,471 299,621
$1,083,372 $7,243,673
(1) The leased machinery has been pledged as collateral.
(2) Classified as a short-term debt, see point d).
As of December 31, 2002, the maturities of the long-term debt
were as follows:
Year ended
December 31 Amount
2004 $232,118
2005 216,247
2006 174,968
2007 and thereafter 460,039
$1,083,372
c. The following is an analysis of the equipment subject
to capital leases:
As of December 31,
2002 2001
Machinery and equipment $406,279 $404,503
Less: Accumulated depreciation (34,936) (24,522)
$371,343 $379,981
As of December 31, 2002, the future minimum lease payments
and the present value of the future minimum lease payments were
as follows:
Year ended
December 31 Amount
2003 $130,467
2004 76,221
2005 60,004
2006 16,561
2007 and thereafter 38,515
321,768
Less - interest 11,145
Present value of minimum lease payments $310,623
d. Short-term debt reclassification
The Yankee Bonds, Senior Notes, bank loans and financial lease
agreements contain covenants, obligations and restrictions with which the
Company and/or its subsidiaries must comply, mainly in respect of incurring
additional debt, payment of dividends and decreases in capital stock,
restrictions on transactions with related parties and the maintenance of
certain financial ratios, as well as payment of interest and principal, when
due. During November and December 2002, the Company did not pay interest
and principal due in those months under certain bank loans. As a result of
such payment defaults, the banks and bondholders had the right to accelerate
the entire amount of principal and interest. Therefore, in accordance with the
Statement C-9, such debt has been classified as short-term debt.
NOTE 11 - FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL TRANSACTIONS:
a. The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
As of December 31, 2002 and 2001, 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 carrying value of accounts receivable
represents the cash flow expected to be received by the Company.
As of December 31, 2002 and 2001, 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
including bonds are as follows:
2002 2001
Carrying Carrying
amount Fair value amount Fair value
Notes classified as a short-term (1) $5,275,354 $1,604,606 $4,204,615 $3,923,957
Variable debt (2):
Libor plus 1.5% 193,843 193,843
Libor plus 7.0% notes (2) $775,491 $ - 775,372 887,724
Financial lease agreements bearing
interest LIBOR plus 2.5% and 3.5% (2) 310,623 301,174 301,174
Libor plus 6.0% notes (2) 160,765 149,260 149,260
Libor plus 3.0% and 3.5% 145,383 145,383
Libor plus 2.8% notes 911,064 911,064
Libor plus 2.75% notes 113,205 113,205
Eurolibor plus 1.15% notes - 87,649 87,649
Notes payable 116,479 -
Subordinated promissory note bearing
interest at 10% 322,551 322,551
Other notes bearing interest at 10% to 12% 193,429 193,429
Other debt (2) 3,485 - 145,749 145,749
$1,366,843 $- $7,543,294 $7,374,988
(1) The fair value of the Notes is estimated based on quoted market
prices.
(2) As of December 2002, there are no elements for the fair value
calculation,of the existing debt. Due to the current financial situation of
the Company, there is no market for similar loans to be used for
comparative purposes.
b. As of December 31, 2001, the estimated fair value of the Company's
financial derivatives was as follows:
Carrying Fair
amount value
Equity Swap (1) $72,157 $72,157
(1) The Company entered into several equity swaps with respect to its
American Depositary Receipts ("ADRs"). The carrying value of these
contracts is as follows:
Loss from valuation of financial instruments ($71,214)
- Financial cost for period (11,179)
- Financial cost from prior periods (39,636)
- Accumulated financial cost paid 49,872
($72,157)
Balance of $72,157 as of December 31, 2001 was recorded in long-term
liabilities as derivative instruments, with a corresponding adjustment
to shareholders' equity and income statement. (See note 3.n)
The fair value of the equity swaps are estimated based on their quoted
market price.
NOTE 12 - PENSION PLANS AND SENIORITY PREMIUMS:
a. 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,
2002 2001
Current benefit obligation $179,760 $177,202
Plan assets - -
Net current liability $179,760 $177,202
Projected benefit obligation $217,098 $211,951
Unamortized transition asset (89,472) (97,807)
Unamortized differences in
assumptions and experience
adjustment (24,090) (22,416)
Plan assets - -
Projected net liability 103,536 91,728
Additional minimum liability 76,224 85,474
Labor obligations $179,760 $177,202
Intangible pension asset-labor
obligation 74,286 83,467
Amortization period (years):
Transition asset 18.5 18.5
Experience adjustment 24 24
The net cost for the year consisted of the following:
December 31,
2002 2001
Service cost $9,174 $9,471
Amortization of prior service cost 10,344 8,820
Financial cost for the year 9,040 10,010
$28,558 $28,301
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 benefits.
During 2002, due to labor contract terminations, cash severance payments were
made amounting to $11,936.
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,
2002 2001
Discount rate 5% 5%
Salary increase rate 2% 2%
b. The subsidiaries in the U.S. have established the following employee
benefit plans: 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, 2002 and 2001, total expenses related
to these plans were US$4,389 ($45,818) and US$10,852 ($115,972), respectively.
The principal financial data and significant assumptions related to the defined
benefit obligation plans related to foreign subsidiaries are as follows:
December 31,
2002 2001
Projected benefit obligation $- $520,586
Plan assets - (458,134)
Unrecognized net loss - (141,355)
Unrecognized prior service cost - (34,005)
Additional minimum liability - 175,360
Net pension (asset) liability $- $62,452
The net cost for the year consisted of the following:
December 31,
2002 2001
Service cost $- $8,564
Interest cost - 36,114
Amortization of unrecognized prior
service cost - 2,866
$- $47,544
The actuarial assumptions were used to determine the present value of
accumulated plan benefits for pension plans of foreign subsidiaries as
follows:
December 31,
2002 2001
Expected long-term rate of return of plan assets 9.00% 9.00%
Weighted average discount rate for year end funded
status of all benefits costs 7.25% 7.25%
NOTE 13 - CONTINGENCIES AND COMMITMENTS:
The Company has the following contingencies and commitments:
I. Contingencies:
a. The Company is contingently liable for indemnities payable to
employees in case of dismissal under certain circumstances as provided by the
Mexican Federal Labor Law. As of December 31, 2002, 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, if its
interpretation criteria differ from that of the Mexican tax authorities.
c. The Company has initiated an lawsuit seeking injuctive relief against
the Mexican tax authorities regarding the methodology used to determine its
employee statutory profit sharing. Management does not believe that any
liabilities relating to this claim are likely to have a material adverse
effect on the Company's consolidated financial condition or results
of operations.
d. As of the date of issuance of these financial statements, the Company
has received a notice of a lawsuit initiated by Compass Income Master Fund,
Inc. for failure to pay principal and interest in the amount of US$3,500
under the Euro Commercial Paper that matured February 12, 2003.
e. The Company has received notice of a lawsuit by HG Estate for
failure to pay principal and interest in the amount of US$48,000.
II. Going Concern:
As mentioned in Note 1.ii, there is an uncertainty about the ability
of the Company to continue in operation as a going concern.
III. Gain Contingency:
The Company filed a claim against HG Estate for fraud in connection
with the acquisition of Gilman Paper Company. Currently this claim is in
arbitration proceedings.
IV. Commitments:
a. As of December 31, 2002, the Mexican subsidiaries leased certain
equipment under noncancelable operating leases. Rental expense under these
leases was approximately $57,439 and $74,828 for the years ended December
2002 and 2001, respectively.
As of December 31, 2002, estimated future minimum lease payments
under noncancelable operating leases were as follows:
2003 $ 36,371
2004 15,115
2005 11,852
2006 8,675
2007 8,675
2008 and thereafter 26,694
Total $ 107,382
b. As of December 31, 2002, Durango McKinley Paper Company leased
certain equipment under noncancelable operating leases. Rental expense
under these leases was approximately $21,990 and $27,202 for the years
ended December 2002 and 2001, respectively.
As of December 31, 2002, estimated future minimum lease payments under
noncancelable operating leases were as follows:
2003 US$ 443
2004 214
2005 171
2006 93
2007 34
2008 and thereafter -
Total US$ 955
NOTE 14 - CAPITAL STOCK:
As of December 31, 2002, the nominal capital stock amounted $1,412,214, and
the fixed minimum portion without a right to withdrawal is $699,714,
represented by 46,610,100 common nominative Series "A" shares without par
value. The variable portion of capital stock amounted $712,500, represented by
47,462,022 common nominative Series "A" shares without par value.
a. In Mexico, income for the year is subject to legal requirements which
provide that 5% of income for each year be allocated to increasing the legal
reserve, until this reserve reaches the equivalent of one-fifth of the amount
of paid-in capital stock.
b. Dividend tax regime:
Dividends paid will be free of income tax if paid out of the Net
Taxable Income Account ("CUFIN"). A 34% rate will be paid in 2003 on the
amount exceeding the balance of the CUFIN by multiplying the dividend paid by
a factor of 1.5152 in 2003. The applicable tax will be payable by the Company,
and it may be credited against income tax that the Company is subject to in the
following three fiscal years. Dividends paid will not be subject to any tax
withholding.
c. Under Mexican corporate law, the Company is not permitted to declare or
pay dividends if the dividends from its subsidiaries are not received first.
Additionally, the Company is not permitted to declare or pay dividends as a
result of the negative covenants established in its debt instruments.
NOTE 15 - PROVISION FOR INCOME AND ASSET TAXES:
The income tax ("ISR") provision at December 31, is comprised as follows.
2002 2001
Current ISR ($5,751) ($210,522)
Asset tax (108,631) (25,297)
Deferred ISR 667,294 267,291
$552,912 $31,472
As of December 31, 2002 and 2001, the main components of the deferred income
tax are as follows:
2002 2001
Inventories $98,388 ($54,456)
Property, plant and equipment, net 9,706,261 12,277,843
Liability provisions (517,007) (469,651)
Tax loss carryforwards (3,228,147) (2,184,152)
Deferred assets 433,268 379,332
6,492,763 9,948,916
Income tax rate 32% 35%
Deferred income tax 2,077,684 3,482,121
Recoverable tax on assets (68,410) (391,753)
Income tax payable $2,009,274 $3,090,368
Of the deferred income tax recorded as of December 31, 2002, $31,342,
was recorded directly to the restatement of non-monetary assets within
shareholders' equity as it resulted from temporary differences generated by
non-monetary items, principally inventories and property, plant and equipment.
As of December 31, 2002, the Company had tax loss carryforwards in the
approximate amount of $4,999,436, which are subject to an additional NCPI
restatement and may reduce future years' taxable income for income tax purposes
as shown below:
Year of
expiration Amount
2004 $ 235,792
2005 604,751
2006 221,374
2007 158,237
2008 129,576
2009 and thereafter 3,649,706
$ 4,999,436
As of December 31, 2002, the foreign subsidiaries' tax loss
carryforwards amounted to $47,391.
Asset tax is calculated at a rate of 1.8% on the net value of certain assets
and liabilities and is due only when the asset tax exceeds the income tax
payable. The asset tax paid can be recovered over the following 10 years, if
and when income taxes exceed asset tax during such years. As of December 31,
2002, the asset tax carryforwards totaled $377,374.
As a result of the amendments to the Income Tax Law approved on January 1,
2002, beginning in 2003, the income tax rate (35%) will be reduced annually
to a nominal rate of 32% in 2005. Consequently, the effect of this gradual
decrease in the income tax rate is estimated to reduce the deferred income
tax liabilities by approximately $194,783 in 2002.
The Company is authorized by the Ministry of Finance and Public Credit to
file income tax returns on a consolidated basis with some of its Mexican
subsidiaries. Effective January 1, 1999, as a result of a change in the
income tax law, consolidated taxable income or loss methodology changed. The
most significant modifications are the following:
* Recognizing the proportional taxable income or loss of 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 of the Company and its subsidiaries, which originated
individually, and 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 rights expire.
Employee profit sharing is calculated with the ISR base, adjusted according
to the ISR law.
NOTE 16 - FINANCIAL INFORMATION BY BUSINESS SEGMENTS:
Reportable segments are those that are based on the Company's method of
internal reporting.
The Company is managed on a product basis and its reportable segments are
as follows:
Packaging -
Manufacturing and selling of corrugated containers, and multi-wall sacks
and bags.
Paper -
Manufacturing and selling of kraft and semikraft paper made of virgin pulp
or recycled paper.
Other business -
Manufacturing and selling of plywood and particleboard.
Sale Prices between segments are based on market prices. Management
evaluates each business segment according to its operating results.
For the years ended December 31, 2002 and 2001, the financial information
by business segments is as follows:
Operating Additions
Income to property,
before depreciation Depreciation
2002 Sales to Inter- and and Operating plant and
third parties segment sales Total Sales amortization amortization income equipment
Packaging $4,054,088 $89,934 $4,144,022 $699,030 $114,533 $584,497 $141,673
Paper 4,178,108 2,680,473 6,858,581 366,164 342,907 23,257 208,581
Other 266,009 43,825 309,834 54,212 17,989 36,223 91,112
Deductions (2,814,232) (2,814,232)
$8,498,205 $- $8,498,205 $1,119,406 $475,429 $643,977 $441,366
2001
Packaging $4,646,363 $90,645 $4,737,008 $674,132 $109,691 $564,441 $412,067
Paper 5,652,544 3,892,285 9,544,829 794,524 365,985 428,539 326,717
Other 233,488 44,335 277,823 57,237 16,612 40,625 146,899
Deductions (4,027,265) (4,027,265)
$10,532,395 $- $10,532,395 $1,525,893 $492,288 $1,033,605 $ 885,683
2000
Packaging $5,957,907 $93,821 $6,051,728 $870,556 $120,601 $749,955 $210,933
Paper 6,408,131 4,950,502 11,358,633 1,077,350 410,101 667,249 960,903
Other 555,833 57,793 613,626 83,251 33,981 49,270 9,670
Deductions (5,102,116) (5,102,116)
$12,921,871 $- $12,921,871 $2,031,157 $564,683 $1,466,474 $1,181,506
As of December 31, segment information related to assets and liabilities
is as follows:
Segment Segment
assets liabilities
2002
Packaging $19,508,582 $14,713,514
Paper 17,299,822 6,568,550
Other 1,743,006 1,290,250
Deductions (21,238,736) (9,689,938)
$17,312,674 $12,882,376
2001
Packaging $21,749,083 $12,546,430
Paper 22,452,085 8,585,588
Other 1,640,754 1,032,000
Deductions (24,564,391) (8,763,157)
$21,277,531 $13,400,861
2000
Packaging $18,407,451 $12,471,284
Paper 33,661,532 12,802,381
Other 1,716,652 1,093,893
Deductions (30,110,163) (10,838,185)
$23,675,472 $15,529,373
Geographical segment information is as follows:
Segment
Net fixed
sales assets
2002
Mexico $8,257,034 $12,178,153
United States 3,055,403 885,558
Eliminations (2,814,232)
$8,498,205 $13,063,711
2001
Mexico $10,411,858 $12,492,604
United States 4,147,802 3,996,380
Eliminations (4,027,265)
$10,532,395 $16,488,984
2000
Mexico $12,161,342 $13,369,846
United States 5,862,645 4,186,460
Eliminations (5,102,116)
12,921,871 $17,556,306
The financial information shown above is used by the Company's
managementin its decision making-process.
NOTE 17 - SPECIAL ITEMS:
As of December 31, 2002, special items are as follows.
Loss on sale of shares of Durango Paper Company
(Note 4,b) $116,414
Loss on allowance for doubtful accounts of Durango Paper
Company (Note 4,b) 1,335,017
Total special items $1,451,431
NOTE 18 - EXTRAORDINARY ITEMS:
As of December 31, 2002, extraordinary items are as follows:
Severance Compania Papelera de Atenquique, S.A. de C.V. (1) $157,104
Severance Ponderosa Industrial de Mexico, S.A. de C.V. (Plywood plant) (1) 11,137
Net loss on sale of certain non-strategic assets (Sky and Eastman) (2) 130,397
Total extraordinary items $298,638
(1) Early in 2001, the Company entered into negotiations with its
unions, with the objective of canceling labor contracts still in effect
after approximately 50 years regarding the operations of Compania Papelera
de Atenquique, S.A. de C.V. and Ponderosa Industrial de Mexico, S.A. de C.V.
After a few months of negotiations, such contracts were terminated and the
number of workers was reduced.
(2) In April and May 2001, certain non-strategic assets (the Sky and
Eastman divisions) of Durango Georgia Paper Company (a subsidiary of DPC)
were sold, generating a loss as the book value under Mexican GAAP was higher
than the price for which they were sold.
NOTE 19 - NEW ACCOUNTING STANDARDS:
In November 2001, the MIPA issued revised Bulletin C-9, "Liabilities,
Provisions, Contingent Assets and Liabilities and Commitments" ("Bulletin
C-9"), which supersedes existing Bulletin C-9, "Liabilities" and Bulletin
C-12, "Contingencies and Commitments". Bulletin C-9 establishes a
methodology for valuation, presentation and disclosure of liabilities and
provisions, as well as for valuation and disclosure of contingent assets and
liabilities, and for disclosure of commitments. Among other things, Bulletin
C-9 establishes guidelines for the recognition of liabilities and non-
recognition of liabilities in the event of extinguishments, restructurings or
conversion to equity. In addition, in the case of provisions, it introduces
the concept of discounting long-term provisions. With respect to contingent
liabilities, Bulletin C-9 states that all contingent liabilities that have a
probable realization must be accounted for and disclosed in the financial
statements, contingent liabilities that have a possible realization cannot be
accounted for in the financial statements, but must be disclosed, and
contingent liabilities that have a remote realization cannot be accounted for
in the financial statements and are not required to be disclosed. Bulletin
C-9 requires disclosure of committed amounts when they represent significant
fixed asset additions, contracted services and goods that exceed the
Company's immediate needs or if the commitment is considered a contracted
obligation. The provisions of Bulletin C-9 are required to be applied
beginning on January 1, 2003, although early adoption is recommended.
Management is currently evaluating the impact that the adoption of Bulletin
C-9 will have on its consolidated financial statements.
In addition, in December 2001, the MIPA issued Bulletin C-8, "Intangible
Assets" ("Bulletin C-8"), which defines intangible assets as costs
incurred and rights or privileges acquired that will generate a future
economic benefit Bulletin C-8 provides a clear definition of research and
development costs, requiring that only development costs may be deferred to
a future period. Furthermore, Bulletin C-8 states that preoperating costs
should be expensed as a period cost, unless they could be classified as
development costs. Bulletin C-8 requires that intangible assets with
indefinite useful lives should not be amortized, but should be evaluated for
impairment annually. Goodwill and intangible assets with finite useful lives
should be amortized over their useful lives. The provisions of Bulletin C-8
are required to be applied beginning on January 1, 2003, although early
adoption is recommended. Management is currently evaluating the impact that
the adoption of Bulletin C-8 will have on its consolidated financial
statements.
NOTE 20 - SUBSEQUENT EVENTS:
On February 27, 2003, Empaques de Carton Titan, S. A. de C. V., a
subsidiary, sold the assets of one of its molded division for approximately
US$53,657 ($589,140), obtaining a profit of $316,057. The assets sold were
as follow:
Land $36,961
Building 27,652
Machinery and equipment 373,518
Inventories 18,312
Others 132,697
$589,140
Additionally, according to the purchase agreement, Empaques de Carton Titan,
S.A. de C.V. transferred to the buyer certain accounts receivable and
trade accounts payable, in order to continue with the production and selling
of molded products.
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.
Date: May 12, 2003 By /s/ Mayela Rincon de Velasco
Durango, Mexico --------------------------------
Name: Mayela Rincon de Velasco
Title: Chief Financial Officer