20-F 1 form20-f.htm ANNUAL REPORT Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

Commission File Number: 1-10905
 
Vitro, S.A. de C.V.
(Exact name of Registrant as specified in its charter)

Vitro, S.A. de C.V.
(Translation of Registrant’s name into English)
United Mexican States
(Jurisdiction of incorporation or organization)

Ave. Ricardo Margáin Zozaya 400, Col. Valle del Campestre,
San Pedro Garza García, Nuevo León, 66265 México
(Address 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
Shares of Series “A” common stock, no par value
New York Stock Exchange*
Ordinary Participation Certificate, each representing one share of Series “A” common stock
 
New York Stock Exchange*
American Depositary Shares, evidenced by American Depositary Receipts, each representing three Ordinary Participation Certificates
New York Stock Exchange
___________________
*
Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the 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:
 
11% Guaranteed Senior Notes due 2007
 
The number of outstanding shares of each of the Registrant’s classes of capital stock
as of December 31, 2004:
295,727,910 shares of Series “A” common stock, no 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    r
     
Indicate by check mark which financial statement item the Registrant has elected to follow:
 
Item 17       r
 
Item 18   x
     







TABLE OF CONTENTS
When updating this TOC, doublecheck Heading 1 entries (i.e. Part I, Part II, etc.) because, though properly set up, they sometimes come into the TOC with a dot leader and page #. If this happens, manually delete dot leader and page #.


   
Page
 
 
Presentation of Certain Information
 
1
 
 
Forward-Looking Statements
 
3
 
Item 1. Identity of Directors, Senior Management and Advisers
 
4
 
Item 2. Offer Statistics and Expected Timetable
 
4
 
Item 3. Key Information
 
5
 
 
Risk Factors
 
5
 
 
Exchange Rates
 
13
 
 
Selected Consolidated Financial Information
 
14
 
Item 4. Information on the Company
 
19
 
 
Organizational Structure
 
19
 
 
Business
 
21
 
Item 5. Operating and Financial Review and Prospects
 
39
 
 
Operating Results
 
40
 
 
Liquidity and Capital Resources
 
51
 
 
Off-Balance Sheet Arrangements
 
63
 
 
Tabular Disclosure of Contractual Obligations
 
64
 
 
Accounting Considerations
 
65
 
 
Research and Development
 
70
 
Item 6. Directors, Senior Management and Employees
 
70
 
 
Directors and Senior Management
 
71
 
 
Board Practices
 
81
 
 
Share Ownership
 
83
 
 
Employees
 
85
 
Item 7. Major Shareholders and Related Party Transactions
 
85
 
 
Major Shareholders
 
86
 
 
Related Party Transactions
 
88
 

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Item 8. Financial Information
 
88
 
Item 9. The Offer and Listing
 
90
 
 
Listing Details
 
90
 
 
Markets
 
92
 
Item 10. Additional Information
 
93
 
 
Mexican Corporate Law and By-Laws
 
93
 
Material Contracts
 
104
 
 
Exchange Controls
 
105
 
 
Material Tax Consequences
 
106
 
 
Where You Can Find More Information
 
110
 
 
Differences in Corporate Governance Practices
 
111
Item 11. Quantitative and Qualitative Disclosures About Market Risk
 
113
 
Item 12. Description of Securities Other than Equity Securities
 
116
 
Item 13. Defaults, Dividend Arrearages and Delinquencies
 
116
 
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
 
116
 
Item 15. Controls and Procedures
 
116
 
Item 16. Reserved
 
117
 
Item 16A. Audit Committee Financial Expert
 
117
 
Item 16B. Code of Ethics
 
117
 
Item 16C. Principal Accountant Fees and Services
 
117
 
Item 16D. Exemption from the Listing Standards for Audit Committees
 
118
 
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
118
 
Item 17. Financial Statements
 
118
 
Item 18. Financial Statements
 
119
 
Item 19. Exhibits
 
120
 
     

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PRESENTATION OF CERTAIN INFORMATION
 
Vitro, S.A. de C.V. is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of the United Mexican States, or “Mexico,” and is a holding company that conducts substantially all of its operations through its subsidiaries. In this annual report, except when indicated or the context otherwise requires, (a) the words “Vitro” and “our holding company” refer to Vitro, S.A. de C.V. and not its consolidated subsidiaries and (b) the words “we,”“us,”“our” and “ours” refer to Vitro, S.A. de C.V. together with its consolidated subsidiaries. However, it should always be understood that each subsidiary of Vitro and each other entity with which Vitro consolidates is an independent legal entity with its own accounting, corporate structure and records, executives and employees. References in this annual report to business units are to combinations of various consolidated entities that have been grouped together for management and presentation purposes.
 
References in this annual report to “pesos” or “Ps.” are to the lawful currency of Mexico. References to “U.S. dollars,”“dollars” or “$” are to dollars of the United States of America.
 
Our consolidated financial statements are expressed in Mexican pesos and are prepared in accordance with accounting principles generally accepted in Mexico, which we refer to as “Mexican GAAP,” which differs in certain significant respects from accounting principles generally accepted in the United States of America, which we refer to as the “United States”, which we refer to as “U.S. GAAP.” Note 22 to our consolidated financial statements for the year ended December 31, 2004 provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us.
 
All the peso amounts contained in this annual report are restated in constant pesos as of December 31, 2004, except where otherwise indicated.
 
This annual report contains translations of certain constant peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These convenience translations should not be construed as representations that the constant peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the specified rate indicated or at all. The exchange rate used in preparing our consolidated financial statements and in preparing convenience translations of such information into U.S. dollars is the exchange rate calculated and published by the Banco de México, Mexico’s central bank, in the Diario Oficial de la Federación for the conversion of U.S. dollar-denominated amounts into pesos, which we refer to as the “Free Exchange Rate.” As of December 31, 2004, and March 31, and May 31, 2005, the Free Exchange Rate was 11.1495 pesos per U.S. dollar, 11.1783 pesos per U.S. dollar and 10.9160 pesos per U.S. dollar, respectively. As of December 31, 2004, and March 31, and May 31, 2005, the noon buying rate for Mexican pesos reported by the Federal Reserve Bank of New York, which we refer to as the “Noon Buying Rate,” was 11.15 pesos per U.S. dollar, 11.18 pesos per U.S. dollar and 10.91 pesos per U.S. dollar, respectively.
 
For purposes of this annual report, we consider our “export sales” to be (i) sales of products by our Mexican subsidiaries to third parties outside Mexico, (ii) sales of products by our Mexican subsidiaries to our foreign subsidiaries that do not act as our distributors (principally, Vitro America, Inc., which was formerly known as VVP America, Inc. and which we refer to as “Vitro America”) and (iii) sales of products by our foreign distribution subsidiaries (principally Vitro Packaging, Inc., which we refer to as “Vitro Packaging,” Crisa Industrial, LLC, which we refer to as “Crisa Industrial,” and Crisa Texas Limited, which we refer to as “Crisa Texas”) to third parties outside Mexico. Sales of products manufactured or processed by our subsidiaries outside Mexico (principally by Vitro America, Empresas Comegua, S.A., which we refer to as “Comegua,” and Vitro Cristalglass, S.L., which was formerly known as Cristalglass Vidrio Aislante S.A. and which we refer to as “Cristalglass”) are not considered “export sales.”
 
Under Mexican corporate law, shares of our Series “A” common stock, which we refer to as “Shares,” held by our Stock Option Trust are considered issued and outstanding and therefore are entitled to receive dividends and vote on matters on which other of our Shares are entitled to vote. However, for accounting purposes, our Shares held by our Stock Option Trust are considered treasury stock and therefore not outstanding. Thus, for purposes of calculating net income (loss) from continuing operations per share, net income (loss) from discontinued operations per share and diluted and basic net income (loss) per share, as well as for purposes of determining shareholders’ equity, we considered those of our Shares held by our Stock Option Trust as treasury stock. In addition, 39,150,000 Shares are held by our pension plans in trust. Those Shares are treated as outstanding for all purposes.
 
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We use the term “joint venture” to refer to companies which are not our wholly owned subsidiaries and in which we, directly or indirectly, either have management control or share management control with one or more third parties. We believe that our use of the term “joint venture” is consistent with international business practices. However, our “joint ventures” are not necessarily “Joint Ventures” as defined in International Financial Reporting Standards.
 
References in this annual report to “CNBV” are to the Comisión Nacional Bancaria y de Valores of Mexico.
 
References in this annual report to “UDI” are to Unidades de Inversión, which is a unit based on inflation rates an inflation-indexed monetary unit.
 
Certain amounts included in this annual report may not sum due to rounding.
 

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FORWARD-LOOKING STATEMENTS
 
This annual report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future prospects, developments and business strategies.
 
These forward-looking statements are identified by our use of terms and phrases such as “anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“predict,”“project,”“will,”“goals,”“target,”“strategy” and similar terms and phrases, and may include references to assumptions. These statements are contained in the sections entitled “Item 3. Key Information—Risk Factors,”“Item 4. Information on the Company,”“Item 5. Operating and Financial Review and Prospects” and other sections of this annual report.
 
These forward-looking statements reflect our best assessment at the time and thus involve uncertainty and risk. Therefore, these forward-looking statements are qualified by reference to the cautionary statements set forth in this annual report. It is possible that our future financial performance may differ materially from our expectations because of a variety of factors, some of which include, without limitation, the following:
 
·  
debt repayment and access to credit;
 
·  
foreign currency exchange fluctuations relative to the U.S. dollar or the Mexican peso;
 
·  
changes in capital availability or cost, including interest rate or foreign currency exchange rate fluctuations;
 
·  
the general political, economic and competitive conditions in markets and countries where we have operations, including competitive pricing pressures, inflation or deflation and changes in tax rates;
 
·  
consumer preferences for forms of packaging that are alternatives to glass containers;
 
·  
capacity utilization of our facilities;
 
·  
fluctuations in the price of raw materials and labor costs;
 
·  
availability of raw materials;
 
·  
cost and availability of energy;
 
·  
transportation costs and availability;
 
·  
consolidation among competitors and customers;
 
·  
lifting of trade barriers and enforcement of measures against unfair trade practices;
 
·  
the ability to integrate operations of acquired businesses;
 
·  
the ability to hire and retain experienced management;
 
·  
the performance by customers of their obligations under purchase agreements; and
 
·  
the timing and occurrence of events which are beyond our control.
 
Any forward-looking statements in this annual report are based on certain assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the current circumstances. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. You are therefore cautioned not to place undue reliance on such forward-looking statements. While we continually review trends and uncertainties affecting our results of operations and financial position, we do not intend to update any particular forward-looking statements contained in this document.
 

3


 
  
 
 
Item 1.   Identity of Directors, Senior Management and Advisers
 
Not applicable
 
 
Item 2.   Offer Statistics and Expected Timetable
 
Not applicable
 
4

 
Item 3.   Key Information
 
RISK FACTORS
 
You should consider the risks described below and the other information appearing in this annual report, including our consolidated financial statements and the notes thereto. In general, investing in the securities of issuers in emerging market countries such as Mexico involves certain risks not typically associated with investing in the securities of issuers in the United States. The risks described below are intended to highlight risks that are specific to us, but are not the only risks that we face. Additional risks and uncertainties, including those generally affecting the industries in which we operate, the countries where we have a presence or risks that we currently deem immaterial, may also impair our business.
 
The information in this annual report includes forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including, those described in this section, under the sections entitled “Item 4.  Information on the Company” and “Item 5.  Operating and Financial Review and Prospects” and elsewhere in this annual report. See “Forward-Looking Statements.”
 
For purposes of this section, when we state that a risk, uncertainty or problem may, could or would have an “adverse effect” on us, we mean that the risk, uncertainty or problem may, could or would have an adverse effect on our business, results of operations, financial position, liquidity or prospects, except as otherwise indicated or as the context may otherwise require.
 
Factors Relating to Us
 
We may be unable to repay our debt, access credit or pursue business opportunities because of our leverage and debt service requirements.
 
We are highly leveraged. As of December 31, 2004, our total consolidated indebtedness was approximately Ps. 16,798 million ($1,507 million). As of such date, our consolidated off-balance sheet financings were approximately Ps. 1,171 million ($105 million). Our interest expense on debt for the year ended December 31, 2004, was approximately Ps. 1,628 million ($146 million), while our operating income was approximately Ps. 1,570 million ($141 million).
 
In addition, a significant portion of our indebtedness is short-term debt. See "―A significant portion of our indebtedness is short-term debt."
 
Our leverage adversely affects our ability to service, finance future operations, make acquisitions and capital expenditures, compete effectively against better-capitalized competitors and withstand downturns in our business. Our level of indebtedness could increase our vulnerability to adverse general economic and industry conditions, including increases in interest rates, foreign currency exchange rate fluctuations and market volatility.
 
Our ability to make scheduled payments on and refinance our indebtedness when due depends on, and is subject to, our financial and operating performance, which is subject to prevailing economic conditions and financial, business and other factors, the availability of financing in the Mexican and international banking and capital markets, our ability to sell assets and operating improvements. We cannot assure you that we will be able to refinance our indebtedness.
 
In addition, we operate in capital-intensive industries and require ongoing investments in our capital assets and technology improvements. Over the past few years, funds for such investments and for working capital needs, acquisitions and dividends have been provided by a combination of cash generated from operations and the incurrence of short- and long-term debt. To the extent that cash generated from operations is insufficient, we may need to incur further indebtedness for similar uses in the future. We cannot assure you that we will be able to incur indebtedness on favourable terms to us or at all, which could impair our ability to make capital investments, to maintain our capital assets or to take advantage of significant business opportunities that may arise.
 
5

 
A significant portion of our indebtedness is short-term debt.

As of December 31, 2004 and May 31, 2005, approximately Ps. 3,269 million ($293 million) and approximately Ps. 4,080 million ($374 million), respectively, of our indebtedness was short-term debt, including the current portion of our long term debt. Our lenders are not obligated to refinance this debt as it matures during the course of the year. Our ability to refinance our short-term debt depends on our ability to achieve an appropriate combination of financing from third parties, access to capital markets, assets sales and operating improvements. The failure to repay short-term indebtedness would trigger acceleration and enforcement rights in respect of substantially all our indebtedness.
 
Pricing pressures by OEMs may affect our operating margins and results of operations; the North American automotive industry is experiencing one of its worst crises in recent years.
 
Certain of our flat glass products sold to original equipment manufacting, which we refer to as “OEMs” in the automotive industry are sold under global purchase agreements, which are entered into after completion of a bidding process. Such automotive OEMs have significant buying power which, coupled with substantial competition, puts pressure on prices and margins relating to products supplied under the global purchase agreements. As a result, even if we were awarded the right to sell to an automotive OEM under a global purchase agreement, we may sell at operating margins that are lower than margins generally achievable from sales to other flat glass customers.  The automotive OEM business line represented approximately 12% of our consolidated net sales for the year ended December 31, 2004.
 
The automotive industry is currently facing difficult market conditions. North American automobile manufactures have experienced slower demand and increased pricing pressures on their products. The difficult market conditions in the automotive industry could continue to lead to additional pricing pressure on our products and loss of sales volume, either of which would have an adverse effect on us.
 
We face lower operating margins and decreased profitability due principally to increasing costs and competition.
 
The gradual reduction by the Mexican government over the past few years of import duties and tariffs for glass and glass packaging products to historically low levels, the investment by our competitors and vertically integrated customers in glass manufacturing facilities in Mexico and increased imports of low-cost competitive products into several of our important markets (principally the United States and Mexico) have created severe competitive challenges for us. These events have had an adverse effect on us by driving down our prices, and in some cases sales volumes, and decreasing our operating margins and profitability. For example, while in 1999 our gross margin and operating margin were 33% and 16%, respectively, by 2004 our gross margin and operating margin had decreased to 26% and 6%, respectively. See “—Item 5. Operating and Financial Review and Prospects - Operating Results - Operating Income - Glass Containers - Changes in Depreciation Methods.”. As market conditions continue to deteriorate, we are faced with determined competitors that are financially better positioned than us to withstand the ongoing and challenging economic conditions. Loss of existing or future market share to competitors may adversely affect our performance and, to the extent that one or more of our competitors becomes more successful than us with respect to any key competitive factor, our results of operations, financial position and liquidity could be adversely affected.
 
Some of the components of our cost of goods sold are subject to significant market price variations. For instance, market prices of natural gas, which is an input that represented approximately 6% of our consolidated cost of goods sold in 2004, have experienced significant price increases since 2000. Since the price of natural gas in Mexico is tied to the price of natural gas in southern Texas, which in turn is fully exposed to market factors such as demand in the United States or the amount of available natural gas reserves, we are fully exposed to such price variations and we cannot assure you that market hedges will be available at favorable conditions to us. In fact, as the price of natural gas has significantly increased in recent years, we have not been able to raise our products’ prices to fully reflect those increases, which has adversely affected our results of operations and liquidity. Other potential sources of significant variations in our costs are electric power, labor, packaging and freight costs.
 
 
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We may not comply with covenants in the debt instruments governing a substantial portion of our indebtedness.
 
Under the terms of the debt instruments governing a substantial portion of our indebtedness, we are and some of our subsidiaries separately are required to comply with various financial covenants, including debt to EBITDA ratio, leverage ratio, interest coverage ratio and liquidity ratio covenants. In addition, the debt instruments governing a substantial portion of our indebtedness also contain various restrictive covenants including limitations on our ability to pay dividends, make certain investments, sell or pledge assets and incur additional indebtedness. The restrictions on our debt instruments could:
 
·  
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
 
·  
limit our ability to access cash from our subsidiaries and, thus, repay our debt or satisfy other holding company obligations; and
 
·  
limit our ability to fund future operations, acquisitions or meet extraordinary capital needs.
 
The failure to comply with the covenants contained in a debt instrument could result in the relevant lender or noteholders having the right to declare the indebtedness governed by that debt agreement or instrument to be in default, to accelerate the maturity of such indebtedness or to take other enforcement action against us, as well as triggering acceleration and enforcement rights under our other debt agreements or instruments. Any such default, acceleration or other action would have an adverse effect on us.
 
As a result of the deterioration in our results of operations and the increase in our leverage, it has been difficult for us to maintain compliance with such financial and other covenants contained in our debt agreements and instruments. During 2001, 2002 and 2003 we and some of our subsidiaries were required to seek amendments and waivers with respect to several of our financial and other covenants contained in our debt agreements and instruments and in one of our accounts receivable factoring programs. During 2005, we and some of our subsidiaries have continued to need amendments and waivers with respect to our debt agreements and instruments. We expect that we will need additional amendments and waivers in the future. Our ability to obtain such amendments and waivers will depend upon our results of operations and our ability to sell assets to reduce our leverage.
 
There can be no assurance that we will be able to obtain such future amendments or waivers or be successful in taking other actions to avoid potential defaults under such covenants. The failure to obtain such amendments or waivers would have an adverse effect on us.
 
        Certain of our and our subsidiaries indentures and credit facilities restrict our ability to incur additional debt, other than debt which refinances existing debt among others, if we or our subsidiaries fail to comply with certain financial ratios. As of December 31, 2004 and March 31, 2005, we did not meet certain of those financial ratios. We expect not to meet certain of those financial ratios as of June 30, 2005.
 
We have customers that are significant to us and the loss of all or a portion of their business would have an adverse effect on us.
 
Because of the relative importance of our largest customers, our business is exposed to a certain degree of risk related to customer concentration. Although no single customer accounted for more than 4% of our consolidated net sales in 2004, we have customers that are significant to our business units and us. Our three largest customers accounted for approximately 10% of our consolidated net sales in 2004. Given that our profitability depends on our maintenance of a high capacity utilization rate, the loss of all or a portion of the sales volume from a significant customer would have an adverse effect on us. Among our most significant customers are automotive OEMs and beer bottlers.
 
At our holding company level, we depend on interest, fees, dividends and tax refunds.
 
Our holding company derives substantially all of its revenue from interest, fees and dividends paid to it by our subsidiaries, as well as consolidated tax refunds. In the year ended December 31, 2004, a majority of the revenue received by our holding company was derived from interest and management, administrative and other fees paid to
 
 
7

 
it by our subsidiaries. Our holding company’s remaining revenue was derived from dividends paid to it by our subsidiaries and from tax refunds resulting from the tax consolidation of Vitro and our subsidiaries under Mexican tax law. Accordingly, in paying the principal of, premium, if any, interest on, and additional amounts, if any, with respect to our indebtedness, we will rely on income from interest, fees and dividends from our subsidiaries, as well as tax refunds and income from the disposition of one or more of our subsidiaries, interests therein or assets thereof.
 
Our subsidiaries’ ability to pay such dividends or make such distributions will be subject to (i) the cash flows generated by their operations and borrowings, (ii) in certain circumstances, restrictions contained in their debt instruments and joint venture agreements, (iii) such subsidiaries’ shareholders’ (including our joint venture partners, when applicable) approval of the payment of such dividends at such subsidiaries’ general ordinary shareholders’ meetings, (iv) such subsidiaries having net income and the requisite amount of paid-in capital required under Mexican law and their estatutos sociales, which we refer to as “by-laws” and (iv) applicable laws. During 2001, 2002, 2003 and 2004, our principal subsidiaries were restricted from paying dividends to us by their credit facilities or indentures. See “—We may not comply with covenants in the debt instruments governing a substantial portion of our indebtedness.” Certain of our joint venture agreements require the consent of all joint venture participants for certain significant operating and management decisions, including the payment of dividends. For additional information with respect to dividend payment limitations under our debt instruments and joint venture agreements, see “Item 5.  Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
 
Downturns in the economies in which we operate may negatively affect the demand for our products and our results of operations.
 
Demand for our flat glass, glass containers and glassware products is affected by general economic conditions in the markets in which we operate, principally Mexico, the United States and Europe. As a result, demand for our products and, consequently, our results of operations have been and may be negatively affected by the downturn in the economies in which we operate.
 
A downturn in the Mexican economy, from which we derived approximately 44% of our consolidated net sales in the year ended December 31, 2004, would reduce the demand for our products and negatively impact our results of operations. Similarly, a prolonged economic downturn in the United States, from which we derived approximately 45% of our consolidated net sales in 2004, would have an adverse impact on the export and foreign subsidiary sales of our Flat Glass, Glassware and Glass Containers business units.
 
Economic downturns in Mexico and the United States may also subject us to increased foreign currency exchange rate and interest rate risks and impair our results of operations and our ability to raise capital or service our debt.
 
Changes in the relative value of the peso to the U.S. dollar may have an adverse effect on us.
 
Changes in the relative value of the peso to the U.S. dollar have an effect on our results of operations. In general, as described more fully in the following paragraphs, a real devaluation of the peso will likely result in an increase of our operating margins and a real appreciation of the peso will likely result in a decrease in our operating margins, in each case, when measured in pesos. This is so because the aggregate amount of our consolidated net sales denominated in or affected by U.S. dollars exceeds the aggregate amount of our costs of goods sold and our general, administrative and selling expenses denominated in or affected by U.S. dollars.
 
A substantial portion of the sales generated by our Mexican and U.S. subsidiaries are either denominated in or affected by the value of the U.S. dollar. The prices of a significant number of the products we sell in Mexico, in particular those of flat glass for automotive uses, capital goods, certain glassware products and most chemical and packaging products, are linked to the U.S. dollar. In addition, substantially all of our export sales are invoiced in U.S. dollars and subsequently translated into pesos using the exchange rate in effect at the time of the transaction. The translated U.S. dollar sales of our Mexican subsidiaries are then restated into constant pesos using the Mexican Consumer Price Index, which we refer to as “INPC,” as of the date of the most recent balance sheet included in those financial statements. As a result, when the peso devalues in real terms against the U.S. dollar, as was the case in 2002 and 2003, the same level of U.S. dollar sales as in a prior period will result in higher constant peso revenues in the more recent period. Conversely, when the peso appreciates in real terms against the U.S. dollar, as was the
 
 
8

 
case in 2004, the same level of U.S. dollar sales as in a prior period will result in lower constant peso revenues in the more recent period. Moreover, because a material portion of our cost of goods sold, including labor costs, and general, administrative and selling expenses are invoiced in pesos and are not directly affected by the relative value of the peso to the U.S. dollar, the real appreciation or devaluation of the peso relative to the U.S. dollar has a significant effect on our operating margins at least in the short term.
 
Further, a strong peso relative to the U.S. dollar makes the Mexican market more attractive for importers and competitors that might not otherwise sell in the Mexican market. A strong peso relative to the U.S. dollar also makes those of our products whose prices are denominated in or are affected by the value of the U.S. dollar less competitive or profitable. When the peso appreciates in real terms, with respect to such products, we must either increase our prices in U.S. dollars, which makes our products less price-competitive, or bear reduced operating margins when measured in pesos. Given the competitive nature of the industries in which we operate, in the past we have had to reduce our operating margins for such products in response to appreciation of the peso relative to the U.S. dollar. In the year ended December 31, 2004, the appreciation of the peso in real terms had an adverse effect on our operating margins and may continue to do so in the future.
 
Inflation and foreign currency exchange rate fluctuations may have an adverse effect on our total financing cost.
 
Our total financing cost includes (i) net interest expense, (ii) the net effect of inflation on our monetary assets and liabilities and (iii) the net effect of changes in nominal foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies. Net interest expense is calculated as the nominal amount of interest expense incurred by us with respect to our short- and long-term debt and off-balance sheet financings minus the nominal amount of interest income generated by us with respect to our monetary assets.
 
Inflation affects our total financing cost. During periods of inflation, the principal amount of our monetary debt will generally be reduced in real terms by the rate of inflation. The amount of such reduction will result in a gain from monetary position. This gain is offset by the reduction in real terms in the value of the monetary assets we held during such period. Historically, our monetary liabilities have exceeded our monetary assets and, thus, we have tended to experience monetary gains during periods of inflation. Declining levels of inflation since 1999 have resulted in lower monetary gains.
 
In addition, our total financing cost is impacted by changes in the nominal value of the peso relative to the U.S. dollar. Foreign currency exchange gains or losses included in our total financing cost result primarily from the impact of nominal changes in the U.S. dollar-peso exchange rate on our and our Mexican subsidiaries’ U.S. dollar-denominated monetary liabilities (such as U.S. dollar-denominated debt and accounts payable arising from imports of raw materials and equipment) and assets (such as U.S. dollar-denominated cash, cash equivalents and accounts receivable from exports). Because our U.S. dollar-denominated monetary liabilities have historically been significantly in excess of our U.S. dollar-denominated monetary assets, the nominal devaluation or appreciation of the peso relative to the U.S. dollar has historically resulted in foreign currency exchange losses and gains, respectively. Accordingly, in 2002 and 2003, the nominal devaluation of the peso relative to the U.S. dollar resulted in foreign currency exchange losses. The nominal appreciation of the peso relative to the U.S. dollar would have resulted in a foreign currency exchange gain in 2004, but with the unwind of the currency exchange swaps in May 2004, we recorded a net exchange loss.
 
We may be adversely affected by increases in interest rates.
 
Interest rate risk exists primarily with respect to our floating-rate peso- and dollar-denominated debt, which debt generally bears interest based on the Mexican equilibrium interbank interest rate, which we refer to as the “TIIE,” or the London interbank offered rate, which we refer to as “LIBOR.” As of May 31, 2005, our floating-rate peso- and dollar-denominated debt amounted to approximately Ps. 1,469 million and $520 million. If TIIE or LIBOR rates increase, our ability to service our debt will be adversely affected.
 
9

 
Substitution trends in the glass containers industry may continue to adversely affect our business.
 
Glass containers have been, and continue to be, subject to competition from alternate forms of packaging, including plastic containers, aluminum cans and laminated paper containers. In mature glass containers markets, such as in the United States, demand for glass containers began a sustained long-term decline in the 1970s. In connection with such decline, the glass containers industry experienced a reduction in capacity and consolidation among glass containers producers. The remaining glass containers producers in mature markets have faced, and continue to face, pricing pressures as a result of competition from other forms of packaging. In Mexico, which is becoming a mature market, increased competition from alternate forms of packaging, particularly plastic, aluminum cans and laminated paper containers, has adversely affected, and may continue to adversely affect, our prices and operating margins, principally with respect to glass containers for the beer, soft drinks and food industries. The Glass Containers business unit represented approximately 41% of our consolidated net sales in 2004.
 
Because certain of our subsidiaries conduct all or a portion of their business through joint ventures and partially depend on our partners for new technology, the loss of our joint venture agreements may adversely affect our business.
 
Sales attributable to our joint ventures represented approximately 61% of our consolidated net sales for the year ended December 31, 2004. In the future, certain of our partners may prefer to conduct business in Mexico directly (as opposed through our joint venture) and to terminate their relationships with us. In particular, the easing of limitations on foreign investment in Mexico and the reduction of import duties and tariffs by the Mexican government have reduced barriers to entry to the Mexican market for non-Mexican companies.
 
Although a number of our joint venture agreements contain non-competition provisions that restrict, subject to certain exceptions and limitations, our joint venture partners from engaging in the production and distribution of the joint venture’s products in specific markets during the term of the agreement and for a limited period following the termination of such agreement (other than through the joint venture vehicle), our joint venture agreements generally contain provisions for termination under certain circumstances. If a termination were to occur, we cannot assure you we could find an equivalent partner or achieve the affected joint venture’s objective on our own. Such events could have an adverse effect on us.
 
Additionally, notwithstanding that our business units conduct certain limited research and development activities, we generally do not develop our own proprietary technology. Although our business units’ products and manufacturing processes are not in constant need of technological improvements and innovations, they do, from time to time, require access to new technology necessary to improve their manufacturing processes and product lines to more effectively compete in both the Mexican and other markets. The main portion of such technological needs is satisfied through the acquisition of technology from third parties through joint ventures, technology licenses, technology transfers, technical assistance or similar arrangements.
 
We could be unsuccessful in renewing or maintaining our joint ventures, technology licenses or other agreements or arrangements on terms equivalent to the existing ones, in forming similar alliances with other partners or in developing equivalent technologies independently. The failure to continue some of our joint ventures or to acquire technology from third parties may have an adverse effect on us.
 
Factors Relating to Mexico and the Global Economy
 
Economic developments in Mexico and the United States affect our business.
 
Starting in 2001, amid concerns of a global economic slowdown and a recession in the United States, Mexico experienced an economic slowdown. The economic slowdown in the Mexican economy continued through 2002 and 2003. In 2002 and 2003, real GDP grew by 0.8% and 1.4%, respectively, annual inflation was 5.7% and 4.0%, respectively, and the peso experienced a nominal devaluation relative to the U.S. dollar of 13.8% and 7.6%, respectively. In 2004, economic activity in Mexico grew at a faster rate. Mexico’s real GDP grew by 4.4% in 2004, while inflation was 5.2% and the peso experienced a nominal appreciation relative to the U.S. dollar of 0.8%. According to Mexico’s Instituto Nacional de Estadística, Geografía e Informática, Mexico’s real GDP grew by 2.4% in the first quarter of 2005, on an annualized basis.
 
10

 
In 2001, the United States’ real GDP growth rate also showed a marked slowdown. During 2002, 2003 and 2004, the United States’ real GPD growth rates recovered steadily to 1.9%, 3.0% and 4.4%, respectively. The U.S. Bureau of Economic Analysis estimates that the annualized real GDP growth rate in the United States was 3.5% during the first quarter of 2005. For 2002, 2003 and 2004, respectively, inflation in the United States was 2.4%, 1.9% and 3.3%.
 
Although recent economic activity seems to be increasing in Mexico and the United States, the Mexican and United States economies may not continue to grow at similar rates as they have grown in the past, and the economic slowdown described above, which had a significant impact on our results of operations in the past, may continue to adversely affect our results of operations and liquidity.
 
The majority of our manufacturing facilities are located in Mexico. For each of the years ended December 31, 2002, 2003 and 2004, approximately 46%, 45% and 44%, respectively, of our consolidated net sales resulted from sales to parties located within Mexico. In the past, inflation has led to high interest rates on peso-denominated obligations and devaluations of the peso. During the 1980s, government control over foreign currency exchange rates adversely affected our consolidated net sales and operating margins. Inflation itself, as well as governmental efforts to reduce inflation, has had significant negative effects on the Mexican economy in general and on Mexican companies, including us. Inflation in Mexico decreases the real purchasing power of the Mexican population, and the Mexican government’s efforts to control inflation by tightening the monetary supply have historically resulted in higher financing costs, as real interest rates have increased. Such policies have had and could have an adverse effect on us.
 
Future economic developments in or affecting Mexico or the United States could adversely affect us and our ability to obtain financing.
 
Political events in Mexico could affect Mexican economic policy and adversely affect us.
 
The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Mexican governmental actions concerning the economy could have a significant impact on Mexican private sector entities in general, as well as on market conditions and prices and returns on Mexican securities, including our securities.
 
Mexican political events may also significantly affect our operations and the performance of Mexican securities, including our securities. In the Mexican national elections held on July 2, 2000, Vicente Fox of the Partido Acción Nacional, which we refer to as the “PAN,” won the presidency. His victory ended more than 70 years of presidential rule by the Partido Revolucionario Institucional, which we refer to as the “PRI.” Neither the PRI nor the PAN secured a majority in either house of the Mexican Congress.
 
President Fox assumed office on December 1, 2000. While the transition from the previous administration was smooth, since assuming office, President Fox has encountered strong opposition to some of his proposed reforms from both houses of Congress, where opposition parties such as the PRI and the Partido de la Revolución Democrática have frequently joined forces to block PAN initiatives. Further, on July 6, 2003, Mexican Congressional elections were held. The results of such elections were a reduction in the number of Congressional seats held by the PAN and an increase in the number of Congressional seats held by the PRI, among others. These events intensified the legislative gridlock in the Mexican Congress and led to a further slowdown in the progress of political reforms in Mexico. This gridlock could have an adverse effect on us.
 
Presidential and Federal Congressional elections in Mexico are scheduled for July 2006. Those elections could cause additional political and economic instability as has occurred in the past. Also, once the President and the representatives are elected, there could be significant changes in laws, public policies and/or regulations that could adversely affect Mexico's political and economic situation, which could adversely affect our business.
 
Social and political instability in Mexico or other adverse social or political developments in or affecting Mexico could adversely affect us and our ability to obtain financing. It is also possible that political uncertainty may adversely affect Mexican financial markets.
 
 
11

 
 
Developments in other emerging market countries may adversely affect our business or the market price of our securities.
 
The market price of securities of Mexican companies is, to varying degrees, affected by economic and market conditions in other emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Mexico, investors’ reactions to developments in such countries may have an adverse effect on the market price of securities of Mexican companies, including ours. In late October 1997, prices of Mexican securities dropped substantially, precipitated by a sharp drop in the price of securities traded in Asian markets. Similarly, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil in the second half of 1998 and, to a lesser extent, the economic crisis in Argentina in 2002. The market price of our securities could be adversely affected by future events elsewhere, especially in other emerging market countries.
 
If foreign currency exchange controls and restrictions are imposed, we may not be able to service our debt in U.S. dollars, which exposes investors to foreign currency exchange risk.
 
In the past, the Mexican economy has experienced balance of payments deficits, shortages in foreign currency reserves and other problems that have affected the availability of foreign currencies in Mexico. The Mexican government does not currently restrict or regulate the ability of persons or entities to convert pesos into U.S. dollars. However, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not institute a restrictive foreign currency exchange control policy in the future. Any such restrictive foreign currency exchange control policy could prevent or restrict access to U.S. dollars and limit our ability to service our U.S. dollar-denominated debt.
 
Our financial statements may not give you the same information as financial statements prepared under United States accounting rules.
 
Mexican companies listed on the Bolsa Mexicana de Valores, which we refer to as the “Mexican Stock Exchange,” including us, must prepare their financial statements in accordance with Mexican GAAP. Mexican GAAP differs in certain significant respects from U.S. GAAP, including the treatment of minority interests, workers’ profit sharing, capitalization of interest and consolidation of subsidiaries. In addition, under Mexican GAAP, the effects of inflation must be reflected in accounting records and in published financial statements. Moreover, the effects of inflation accounting under Mexican GAAP, except for the restatement of fixed assets purchased outside Mexico and the restatement of prior period financial statements as they relate to foreign subsidiaries, are not eliminated in the reconciliation to U.S. GAAP. For this and other reasons, the presentation of financial statements and reported earnings prepared in accordance with Mexican GAAP may differ materially from the presentation of financial statements and reported earnings prepared in accordance with U.S. GAAP. Note 22 to our consolidated financial statements for the year ended December 31, 2004, provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us.
 


12

 

 
EXCHANGE RATES
 
The following table sets forth, for each year in the five year period ended December 31, 2004, the high, low, average and annual period-end Noon Buying Rates, all expressed in pesos per U.S. dollar. No representation is made that the peso or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or pesos, as the case may be, at the rates indicated, at any particular rate or at all.
 

 
Noon Buying Rate(1) 
Year ended December 31,
   
High
   
Low
   
Average
   
Period-End
 
                           
                           
2000
   
Ps.9.84
   
Ps.9.20
   
Ps.9.47
   
Ps.9.61
 
2001
   
9.97
   
9.00
   
9.35
   
9.16
 
2002
   
10.43
   
9.00
   
9.75
   
10.43
 
2003
   
11.41
   
10.11
   
10.79
   
11.24
 
2004
   
11.64
   
10.81
   
11.29
   
11.15
 
____________
(1)   Source: Federal Reserve Bank of New York
 
The following table sets forth, for each month in the six-month period ended on May 31, 2005 and the first 24 days of June 2005, the high and low Noon Buying Rates, all expressed in pesos per U.S. dollar.
 

 
 
Noon Buying Rate(1)
  
    High     
Low
 
               
December 2004
   
Ps.11.328
   
Ps.11.111
 
January 2005
   
11.411
   
11.171
 
February
   
11.206
   
11.043
 
March
   
11.329
   
10.975
 
April
   
11.229
   
11.036
 
May
   
11.033
   
10.885
 
June (through June 24, 2005)
   
10.883
   
10.759
 
____________
(1) Source: Federal Reserve Bank of New York

13


SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
The following table presents selected consolidated financial information and other data for each of the periods presented. This information and data should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the notes thereto included elsewhere in this annual report and the information under the section entitled “Item 5. Operating and Financial Review and Prospects.” Our consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Note 22 to our consolidated financial statements for the year ended December 31, 2004 provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us.
 
We have completed a number of dispositions recently. See “Item 4. Information on the Company—Business—Divestitures.”
 
Financial data expressed in pesos and set forth in the following table for each year in the five year period ended December 31, 2004 has been restated in millions of constant pesos as of December 31, 2004.
 

 
As of or for the year ended December 31, 
     
2000
   
2001
   
2002
   
2003
   
2004
   
2004
 
 
(Ps. millions)(1) 
$
( millions(1)(2
))
Income Statement Data:
                                     
                                       
Mexican GAAP:
                                     
                                       
Net sales
   Ps.
 27,634
   Ps.
 27,317
   Ps.
26,901
   Ps.
26,238
   Ps.
26,181
 
$
2,348
 
Cost of sales
   
18,958
   
19,222
   
19,150
   
18,969
   
19,261
   
1,728
 
                                       
Gross profit
   
8,676
   
8,095
   
7,751
   
7,269
   
6,920
   
620
 
Selling, general and administrative expenses
   
5,265
   
5,473
   
5,479
   
5,309
   
5,350
   
479
 
                                       
Operating income
   
3,411
   
2,622
   
2,272
   
1,960
   
1,570
   
141
 
Financing cost:
                                     
Interest expense, net
   
2,482
   
2,027
   
1,647
   
1,882
   
2,057
   
184
 
Exchange loss (gain), net
   
122
   
(633
)
 
1,687
   
822
   
78
   
7
 
Gain from monetary position
   
1,425
   
715
   
851
   
599
   
730
   
65
 
Total financing cost
   
1,179
   
675
   
2,483
   
2,105
   
1,405
   
126
 
Other expenses, net(4)
   
476
   
890
   
454
   
156
   
141
   
13
 
Income (loss) before taxes and workers’ profit sharing
   
1,756
   
1,053
   
(665
)
 
(301
)
 
24
   
2
 
Income and asset tax
   
639
   
391
   
(504
)
 
54
   
(52
)
 
(5
)
Workers’ profit sharing
   
355
   
104
   
52
   
40
   
120
   
11
 
                                       
Net income (loss) from continuing operations
   
762
   
558
   
(213
)
 
(395
)
 
(44
)
 
(4
)
Net income (loss) from discontinued operations(5)
   
231
   
207
   
(128
)
 
0
   
0
   
0
 
                                       
Gain on disposal of discontinued operations(5)
   
0
   
0
   
506
   
0
   
0
   
0
 
Net income (loss)(5)
   
993
   
765
   
165
   
(395
)
 
(44
)
 
(4
)
Net income (loss) of majority interest(5)
   
416
   
235
   
(5
)
 
(596
)
 
(267
)
 
(24
)
                                       
Net income (loss) from continuing operations per share
   
2.74
   
1.95
   
(0.77
)
 
(1.44
)
 
(0.16
)
 
(0.02
)
Net income (loss) from discontinued operations per share(5)
   
0.83
   
0.72
   
1.37
 
 
0.00
   
0
   
0
 
Diluted and basic net income (loss) of majority interest per share(5)
   
1.49
   
0.83
   
(0.01
)
 
(2.17
)
 
(0.98
)
 
(0.09
)
                                       
U.S. GAAP:
                                     
                                       
Net sales
   Ps.
26,715
   Ps.
 25,347
   Ps.
25,798
   Ps.
25,812
   Ps.
 25,752
 
$
2,310
 
Operating income
   
2,308
   
1,818
   
1,432
   
1,513
   
816
   
73
 
Net income (loss) from continuing operations
   
487
   
194
   
(679
)
 
(751
)
 
(256
)
 
(23
)
Net income (loss)(5)
   
720
   
423
   
(576
)
 
(751
)
 
(256
)
 
(23
)
                                       
Net income (loss) from continuing operations per share
   
1.75
   
0.68
   
(2.47
)
 
(2.73
)
 
(0.60
)
 
(0.08
)
Net income (loss) from
discontinued operations per
share(5)
    0.84      0.80      0.37      0.00      0.00      0.00   
Diluted and basic net
income  (loss) per share(5)
    1.75      .68      (2.47    (2.73  )   (0.94 )    (0.08  )
__________________
 
                                     
 
 
14

 
 


Balance Sheet Data:
                                     
                                       
Mexican GAAP:
                                     
                                       
Continuing operations:
                                     
Cash and cash equivalents
   Ps.
936
  Ps. 
1,205
   Ps.
2,484
  Ps. 
1,474
   Ps.
2,828
 
$
254
 
Current assets
   
8,593
   
8,197
   
10,231
   
9,299
   
10,517
   
943
 
Total assets
   
34,018
   
32,590
   
33,430
   
32,412
   
31,231
   
2,801
 
Current liabilities
   
8,785
   
10,599
   
10,084
   
9,402
   
7,773
   
697
 
Total debt
   
17,903
   
15,956
   
16,692
   
16,649
   
16,798
   
1,507
 
Total liabilities
   
25,777
   
23,742
   
23,675
   
23,366
   
23,078
   
2,070
 
Stockholders’ equity(5)
   
10,357
   
11,050
   
9,755
   
9,046
   
8,153
   
731
 
Minority interest in consolidated subsidiaries(5)
   
3,882
   
4,171
   
3,056
   
3,023
   
2,804
   
251
 
Majority stockholders’ equity(5)
   
6,475
   
6,879
   
6,699
   
6,023
   
5,349
   
480
 
                                       
Discontinued Operations:(5)
                                     
Total assets
   Ps.
4,995
   Ps.
4,862
   Ps.
0
   Ps.
0
   Ps.
0
 
$
0
 
Total liabilities
   
2,879
   
2,660
   
0
   
0
   
0
   
0
 
                                       
U.S. GAAP:
                                     
                                       
                                       
Total assets
   Ps.
40,068
   Ps.
37,994
   Ps.
33,476
   Ps.
 32,910
   Ps.
31,715
 
$
2,845
 
Total liabilities
   
28,583
   
26,720
   
24,128
   
23,893
   
23,648
   
2,121
 
Net assets
   
11,484
   
11,273
   
9,348
   
9,017
   
8,067
   
723
 
Capital stock
   
6,784
   
6,784
   
6,784
   
6,784
   
6,784
   
608
 
Stockholders’ equity
   
7,513
   
7,106
   
6,365
   
5,820
   
5,057
   
454
 
                                       
                                       
Other Data:
                                     
                                       
Mexican GAAP:
                                     
                                       
Capital expenditures
   Ps.
1,046
   Ps.
940
   Ps.
1,136
   Ps.
1,871
   Ps.
1,453
 
$
130
 
Depreciation and amortization
   
2,136
   
2,150
   
2,122
   
2,062
   
2,247
   
202
 
                                       
Total Shares issued at end of period(6)
   
324.0
   
324.0
   
324.0
   
324.0
   
324.0
       
Total Shares held in Stock Option Trust at end of period(6)
   
1.8
   
24.7
   
24.7
   
24.7
   
22.8
       
Total Shares held as treasury stock at end of period(6)
   
25.6
   
25.6
   
23.3
   
28.3
   
28.3
       
Total Shares issued and outstanding at end of period(6)
   
296.6
   
273.7
   
276.0
   
271.1
   
273.0
       
Average total Shares outstanding during period(6)
   
278.4
   
286.1
   
275.4
   
275.2
   
271.8
       
                                       
                                       
                                       
Inflation and Foreign Currency Exchange Rate Data:
                                     
                                       
Percentage of change in INPC(7)
   
9.0
%
 
4.4
%
 
5.7
%
 
4.0
%
 
5.2
%
     
Peso/dollar exchange rate at the end of period(8)
   Ps.
9.6098
   Ps.
9.1695
   Ps.
10.4393
   Ps.
11.2372
   Ps.
11.1495
       
Average exchange rate(9)
   Ps.
9.4673
   Ps.
9.3274
   Ps.
9.7455
   Ps.
10.8251
   Ps.
11.3091
       
__________________
 
                                     
 

(1)
Except per share amounts, number of shares and inflation and foreign currency exchange rate data.
(2)
Peso amounts have been translated into U.S. dollars, solely for the convenience of the reader, at the rate of 11.1495 pesos per one U.S. dollar, the Free Exchange Rate on December 31, 2004.
(3)
The gain (loss) from monetary position reflects the result of holding monetary assets and liabilities during periods of inflation. Values stated in current monetary units decrease in purchasing power over time. This means that losses are incurred by holding monetary assets over time, whereas gains are realized by maintaining monetary liabilities.
(4)
Other expenses, net, reflects, among others, (i) write-off and loss from sale of assets in the amount of Ps. 447 million, Ps. 129 million and Ps. 329 million for the years ended December 31, 2002, 2003 and 2004,

 
15

 
 

 
respectively, (ii) gains from the sale of subsidiaries and associated companies in the amount of Ps.72 million, Ps.37 million and Ps.488 million for the years ended December 31, 2002, 2003 and 2004, respectively, and (iii) restructuring charges in the amount of Ps.103 million, Ps.98 million and Ps.243 million for the years ended December 31, 2002, 2003 and 2004, respectively. The restructuring charges relate to the downsizing and streamling of corporate services and organization at some of our business units.
(5)
On July 3, 2002, we sold our controlling 51% interest in Vitromatic, our joint venture with Whirlpool that engaged in the production and distribution of household appliances, to Whirlpool for $148.3 million in cash. At the time of the transaction, approximately $67 million of our consolidated debt and approximately $97 million of our consolidated off-balance sheet financings were obligations of Vitromatic. Consequently, upon the consummation of the sale of our interest in Vitromatic, our consolidated debt and off-balance sheet financings were reduced by approximately $67 million and approximately $97 million, respectively. Our consolidated financial statements and all other financial and statistical data included in this annual report have been restated to reflect Vitromatic as a discontinued operation for all periods presented in this annual report, unless otherwise indicated. Therefore, Vitromatic’s results of operations are reflected in the line item entitled “Net income (loss) from discontinued operations” in our consolidated statement of operations. Financial data included in this annual report have been restated to present as a discontinued operation the assets of Vitromatic in the line items entitled “Total assets of discontinued operations” and the liabilities of Vitromatic in the line items entitled “Total liabilities of discontinued operations”. Financial and statistical data for all periods presented in this annual report do not include the results of operations of discontinued operations, except (i) for financial and statistical data relating to discontinued operations, (ii) net income and net income of majority interest and (iii) as otherwise specified.
(6)
Millions of shares.
(7)
Calculated using year-end INPC of the most recent year divided by the year-end INPC of the previous year.
(8)
Based on the Free Exchange Rate at the end of the period.
(9)
Calculated using the average of Free Exchange Rates on the last day of each month during the period.
 
 
 
16

 
 

Dividends per Share
 
The following table sets forth, for each year in the five year period ended December 31, 2004, the dividends and dividends per share Vitro declared and paid with respect to such year, expressed in pesos and U.S. dollars. All peso amounts contained in the table below are stated in nominal pesos.
 

Fiscal Year
with Respect to Which Dividend was Declared
Month Dividend was Declared
Total Dividend Amount(1)
Dividends per Share
Dividend per Share(2)
Month Dividend was Paid
   
(Ps. millions)
 
     
2000
April 2001
               Ps.149
                 Ps.0.50
$0.0539
May 2001
2000
April 2001
149
0.50
0.0539
(3)
2001
March 2002
75
0.25
0.0256
June 2002
2002
March 2003
108
0.36
0.0338
April 2003
2003
March 2004
89
0.30
0.0267
April 2004
2004
March 2005
90
0.30
0.0268
April 2005
_________________
 
(1)
For purposes of calculating the dividends per Share, we considered our total dividend amount. Shares held by the Stock Option Trust are not treated as treasury stock. Therefore, the total dividend amount includes dividends paid with respect to the Shares held by the Stock Option Trust.
(2)
For purposes of calculating the dividends paid in U.S. dollars per Share, we divided the dividends paid in Mexican peso per share by the Free Exchange Rate as of the date on which such dividend was declared.
(3)
On March 17, 2005, the shareholders of Vitro revoked the payment of this dividend.
 
17

Item 4.   Information on the Company
 
ORGANIZATIONAL STRUCTURE
 
The following chart presents the organizational structure of our business units, our principal subsidiaries and our direct or indirect percentage equity ownership in such subsidiaries as of June 24, 2005.
 
 Vitro, S.A. de C.V.(1)
(México)
 
FLAT GLASS BUSINESS UNIT
 
GLASS CONTAINERS BUSINESS UNIT
 
GLASSWARE BUSINESS UNIT
Vitro Plan, S.A. de C.V.
(subholding company)
(65%)(2)
(Mexico)
 
Vitro Vidrio y Cristal, S.A. de C.V.
(99.9%)(12)
(Mexico)
 
Distribuidora de Vidrio de México, S.A. de C.V.
(99.9%)(12)
(Mexico)
 
Vitro Automotriz, S.A. de C.V.
(99.9%)(12)
(Mexico)
 
Distribuidora Nacional de Vidrio, S.A. de C.V.
 (99.9%)(12)
(Mexico)
 
Vidrio Plano de Mexico, S.A. de C.V.
(99.9%)12)
(Mexico)
 
Vitro Flex, S.A. de C.V.
(62%)(3)(12)
(Mexico)
 
Vitro AFG, S.A. de C.V.
(50%)(4)(12)
(Mexico)
 
Cristales Automotrices, S.A. de C.V.
(51%)(5)(12)
(Mexico)
 
Vitro America, Inc.
(100%)(12)
(Delaware)
 
Vitro Cristalglass, S.L.
(60%)(6)(12)
(Spain)
 
Vitro Chaves, S.A.
(60%)(7)
(Portugal)
 
Vitro Colombia, S.A.
(100%)(12)
(Colombia)
 
Química M, S.A. de C.V.
(51%)(8)(12)
(Mexico)
 
Vitro Envases Norteamérica, S.A. de C.V. (subholding company)
(100%)
(Mexico)
 
Compañía Vidriera, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera Monterrey, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera Guadalajara, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera Los Reyes, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera México, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera Querétaro, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Vidriera Toluca, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Empresas Comegua, S.A.
(49.7%)(9)(13)
(Panama)
 
Vitro Packaging, Inc.
(100%)(13)
(Delaware)
 
Vidrio Lux, S.A.
(100%)(13)
(Bolivia)
 
Industria del Álcali, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
Fabricación de Máquinas, S.A. de C.V.
(99.9%)(13)
(Mexico)
 
 
Vitrocrisa Holding, S. de R.L. de C.V.
(subholding company)
(51%)(10)
(Mexico)
 
Vitrocrisa, S. de R.L. de C.V.
(99.9%)(14)
(Mexico)
 
Vitrocrisa Comercial, S. de R.L. de C.V.
(99.9%)(14)
(Mexico)
 
Crisa Industrial, LLC
(51%) (11)
(Delaware)
 
Crisa Texas Limited dba Crisa Ltd.
(100%)
(Texas)
 
Fabricación de Cubiertos, S.A. de C.V.
(100%)
(Mexico)
 
 
 
(1) Vitro, S.A. de C.V. is our legal and commercial name.
(2) Joint venture between Vitro, S.A. de C.V. and Pilkington plc.
(3) Joint venture between Vitro Plan, S.A. de C.V. and Fairlane Holdings, Inc., a subsidiary of Visteon Automotive Systems Inc.
(4) Joint venture between Vitro Plan, S.A. de C.V. and AFG Industries Inc.
(5) Joint venture between Vitro Plan, S.A. de C.V. and a group of individual investors.
(6) Joint venture between Vitro Plan, S.A. de C.V. and a group of individual investors.
(7) Joint venture between Vitro Cristalglass, S.L. and a group of individual investors.
(8) Joint venture between Vitro Plan, S.A. de C.V. and Solutia, Inc.
(9) Joint venture between Centro de Tecnología Vidriera Ltd., a wholly owned subsidiary of Vitro Envases Norteamérica, S.A. de C.V., Cervecería Centroamericana,  
        S.A. and Cervecería de Costa Rica, S.A.
(10) Joint venture between Vitro, S.A. de C.V. and Libbey Europe, B.V., a wholly owned subsidiary of Libbey, Inc.
(11) Joint venture between Vitro, S.A. de C.V. and LGA4 Corp., a wholly owned subsidiary of Libbey, Inc.
(12) Percentage owned by Vitro Plan, S.A. de C.V., the holding company for our Flat Glass business unit.
(13) Percentage owned by Vitro Envases Norteamérica, S.A. de C.V., the holding company of our Glass Containers business unit.
(14) Percentage owned by Vitrocrisa Holding, S. de R. L. de C.V., the holding company of our Glassware business unit.
 
 
 
18

 

BUSINESS
 
Business Overview
 
Vitro, S.A. de C.V. is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico and is a holding company that conducts substantially all of its operations through subsidiaries. Our predecessor was incorporated in Mexico in 1909 as Vidriera Monterrey, S.A. de C.V., which we refer to as “Vimosa,” and, based on our consolidated net sales of Ps.26,181 million ($2,348 million) in 2004, we believe that we are the largest manufacturer of flat glass, glass containers and glassware in Mexico. Our principal executive offices are located at Ave. Ricardo Margáin Zozaya 400, Col. Valle del Campestre, San Pedro Garza García, Nuevo León, 66265 Mexico, telephone number (52-81) 8863-1200. Our agent for service of process, exclusively for actions brought by the Securities and Exchange Commission, which we refer to as the “SEC,” pursuant to the requirements of the U.S. federal securities laws, is CT Corporation System, 111 Eighth Avenue, New York, New York 10011.
 
Our consolidated net sales for the year ended December 31, 2004 totaled Ps.26,181 million ($2,348 million). As of December 31, 2004, our total assets were Ps.31,231 million ($2,801 million). We have manufacturing facilities in eight countries, distribution centers throughout the Americas and Europe and export our products to over 70 countries. In 2004, 44% and 45% of our consolidated net sales were sales made in Mexico and the United States, respectively.
 
We have successfully established numerous joint ventures and technology-sharing relationships with leading United States and European companies including Pilkington plc, which we refer to as “Pilkington,” and Libbey, Inc., which we refer to as “Libbey.” Sales attributable to our joint ventures represented approximately 61% of our consolidated net sales in 2004.
 
Our operations are currently organized into three operating business units: the Flat Glass business unit (representing approximately 49% of our consolidated net sales in 2004), the Glass Containers business unit (representing approximately 41% of our consolidated net sales in 2004) and the Glassware business unit (representing approximately 10% of consolidated net sales in 2004).
 
Our Flat Glass business unit focuses on the manufacturing, processing and distribution of flat glass for the construction and automotive industries. Based on the Flat Glass business unit’s net sales of Ps.12,699 million ($1,139 million) in 2004, we believe the business unit is the largest flat glass producer in Mexico, the second largest in Latin America, and one of the largest distributors of flat glass products in the United States. Our Flat Glass business unit includes (i) Vitro Vidrio y Cristal, S.A. de C.V., which we refer to as “Vidrio y Cristal,” our subsidiary that manufactures and distributes a majority of our flat glass products for the Mexican construction industry, (ii) Vitro Automotriz, S.A. de C.V., which we refer to as “VAU,” our subsidiary that manufactures a majority of our flat glass products for the Mexican automotive industry and Distribuidora Nacional de Vidrio, S.A. de C.V., which we refer to as “Dinavisa,” our subsidiary that distributes flat glass products for the Mexican automotive industry, (iii) Vitro Flex, S.A. de C.V., which we refer to as “Vitro Flex,” our joint venture with Fairlane Holdings, Inc., a subsidiary of Visteon Automotive Systems Inc., which we refer to collectively as “Visteon,” that is engaged in the manufacturing and distribution of flat glass products for the automotive market, which we substantially sell to Ford Motor Co., (iv) Vitro AFG, S.A. de C.V., which we refer to as “Vitro AFG,” our joint venture with AFG Industries Inc. a subsidiary of Asahi, Inc., which we refer to as “AFG Industries,” that is engaged in the manufacturing of flat glass products, which are sold on a 50-50 basis to AFG Industries and us, (v) Cristales Automotrices, S.A. de C.V., which we refer to as “Cristales Automotrices,” our joint venture with a group of individual investors that conducts our automotive replacement glass installation business in Mexico City and its surrounding states, (vi) Vitro America, our subsidiary that conducts a substantial majority of our flat glass operations in the United States, (vii) Cristalglass, our joint venture with a group of individual investors that is engaged in the manufacturing and distribution of flat glass products for the Spanish, French and Portuguese construction industry, (viii) Vitro Chaves, S.A., which we refer to as “Vitro Chaves,” a joint venture of Cristalglass with a group of individual investors that is engaged in the manufacturing and distribution of flat glass products for the Portuguese construction industry, (ix) Vitro Colombia, S.A., which we refer to as “Vitro Colombia,” our subsidiary that conducts our Colombian flat glass operations and (x) Química M, S.A. de C.V., which we refer to as “Quimica M,” our joint venture with Solutia Inc., which we refer to as “Solutia,” that
 

19


is engaged in the manufacturing and distribution of polyvinyl butyral, which is an inner layer of plastic film used in the manufacture of clear and shaded windshields. Visteon holds a 38% interest in Vitro Flex, Solutia holds a 49% interest in Quimica M and AFG Industries holds a 50% interest in Vitro AFG. Groups of individual investors own a 49% interest in Cristales Automotrices, a 40% interest in Cristalglass and a 40% interest in Vitro Chaves.
 
Our Glass Containers business unit manufactures and distributes soda lime glass containers for the soft drink, beer, food, liquor and wine, pharmaceutical and cosmetics industries, as well as raw materials, machinery and molds for the glass industry, and, based on its net sales of Ps.10,702 million ($960 million) in 2004, we believe the Glass Containers business unit is the largest glass containers producer in Mexico and Central America. The Glass Containers business unit includes (i) Compañía Vidriera, S.A. de C.V., which we refer to as “COVISA,” our subsidiary that conducts a substantial majority of our glass containers operations in Mexico, (ii) Empresas Comegua, S.A., which we refer to as “Comegua,” our joint venture with Cervecería Centroamericana, S.A., which we refer to as “Cerveceria Centroamericana,” and Cervecería de Costa Rica, S.A., which we refer to as “Cerveceria de Costa Rica,” which, based on Comegua’s net sales of Ps.1,131 million ($101 million) in 2004, we believe is the largest glass containers producer in Central America (together, Cerveceria Centroamericana and Cerveceria de Costa Rica hold a 50.3% interest in Comegua), (iii) Vitro Packaging, our glass containers distribution subsidiary in the United States, (iv) Vidrio Lux, S.A., which we refer to as “Vilux,” our subsidiary engaged in the manufacturing and distribution of glass containers in Bolivia and neighbouring countries, (v) Industria del Álcali, S.A. de C.V., which we refer to as “Alcali,” our subsidiary engaged in the manufacturing of soda ash, sodium bicarbonate, calcium chloride and salt, (vi) Comercializadora Álcali, S.A. de C.V., which we refer to as “Comercializadora,” our subsidiary engaged in the distribution of the products manufactured by Alcali and (vii) Fabricación de Máquinas, S.A. de C.V., which we refer to as “FAMA,” our subsidiary engaged in the manufacturing of capital goods such as glass forming machines and molds .
 
Our Glassware business unit, a joint venture with Libbey, Inc., focuses on the manufacturing and distribution of glassware, flatware, stemware, bakeware and home decor products for the consumer segment, glassware and flatware for the food service segment and coffee carafes, blender jars, lids, meter covers, candle holders and lighting products for the industrial segment, in each case, of the glassware industry. Based on its net sales of Ps.2,726 million ($245 million) in 2004, we believe that the Glassware business unit is the largest producer of glassware in Mexico. The Glassware business unit also includes Fabricación de Cubiertos, S.A. de C.V., which we refer to as “FACUSA,” our subsidiary that engages in the manufacturing and distribution of metal flatware for food services.
 
 
On April 1, 2005, we sold 100% of our interests in Plásticos Bosco, S.A. de C.V. and Inmobiliaria de La Suerte, S.A. de C.V., which we refer to collectively as “Bosco,” our subsidiaries engaged in the manufacturing and distribution of plastic tubes and disposable thermofold ware and industrial products, to Convermex, S.A. de C.V., which we refer to as “Convermex,” for $10 million in cash. In 2004, Bosco had consolidated net sales of approximately Ps. 422 million and a consolidated operating loss of approximately Ps.10 million. The consolidated net sales and operating loss of Bosco were approximately Ps.101 million and Ps.6 million, respectively, during the period beginning on January 1, 2005 and ending on April 1, 2005. Unless otherwise specified, financial and statistical data for all periods presented in this annual report beginning prior to April 1, 2005 include the results of operations and financial position of Bosco. 
 
On September 27, 2004, we sold our 50% interest in Vitro American National Can, S.A. de C.V. and Vancan, S.A. de C.V., which we refer to collectively as “Vancan,” our joint venture with Rexam, Inc., which we refer to as “Rexam”, engaged in the manufacturing and distribution of aluminum containers, to Rexam for $22.6 million in cash after certain price adjustments. In 2003, our 50% interest in Vancan had consolidated net sales of approximately Ps.424 million and a consolidated operating income of approximately Ps.48 million, respectively. The consolidated net sales and operating income of our 50% interest in Vancan were approximately Ps. 312 million and Ps. 32 million, respectively, during the period beginning on January 1, 2004 and ending on September 30, 2004. Unless otherwise specified, financial and statistical data for all periods presented in this annual report beginning prior to September 30, 2004 include the results of operations and financial position of Vancan.
 

20


On April 2, 2004, we sold our 60% interest in Vitro OCF, S.A. de C.V., which we refer to as “Vitro OCF,” our joint venture with Owens Corning engaged in the manufacturing and distribution of fiberglass and fiberglass products, to Owens Corning for $71.5 million in cash, approximately $5.4 million of which was placed in escrow to secure certain potential indemnification obligations of ours relating to the sale. Pursuant to the terms of the sale, we repaid Vitro OCF’s and its subsidiaries’ bank debt (which was reflected on our consolidated balance sheet) of approximately $22 million immediately prior to the sale. We used the remaining proceeds of the sale received by us at closing to reduce our consolidated indebtedness. Accordingly, after the sale, our consolidated indebtedness was reduced by approximately $66 million. The consolidated net sales and operating income of Vitro OCF were approximately Ps.201 million and Ps.47 million, respectively, during the period beginning on January 1, 2004 and ending on April 2, 2004. In 2003, Vitro OCF had consolidated net sales and operating income of approximately Ps.733 million and Ps.181 million, respectively. Unless otherwise specified, financial and statistical data for all periods presented in this annual report beginning prior to April 2, 2004 include the results of operations and financial position of Vitro OCF.
 
On September 10, 2003, we sold 100% of the outstanding shares of Envases Cuautitlán, S.A. de C.V., which we refer to as “ECSA,” one of our subsidiaries engaged in the manufacturing and distribution of plastic products, to a subsidiary of Phoenix Capital Limited for approximately $18 million, $15 million of which we received at closing and $2 million of deferred purchase price were paid on May 20, 2005. The remaining $1 million is still in escrow. We have requested the release from escrow, but the purchaser has opposed the release, claiming its right to certain price adjustments. We are currently evaluating our options. The net sales and operating income of ECSA were approximately Ps. 147 million and Ps.9 million, respectively, during the period beginning on January 1, 2003 and ending on September 10, 2003. Unless otherwise specified, financial and statistical data for all periods presented in this annual report beginning prior to September 10, 2003 include the results of operations and financial position of ECSA.
 
On July 3, 2002, we sold our controlling 51% interest in Vitromatic, S.A. de C.V., which together with its subsidiaries we refer to as “Vitromatic” or the “Acros-Whirlpool business unit,” our joint venture with Whirlpool Corporation, which we refer to as “Whirlpool,” engaged in the production and distribution of household appliances, to Whirlpool for $148.3 million in cash. At the time of the transaction, approximately $67 million of our consolidated debt and approximately $97 million of our consolidated off-balance sheet financings were obligations of Vitromatic. Consequently, upon the consummation of the sale of our interest in Vitromatic, our consolidated debt and off-balance sheet financings were reduced by approximately $67 million and approximately $97 million, respectively. Our consolidated financial statements and all other financial and statistical data included in this annual report have been restated to reflect Vitromatic as a discontinued operation for all periods presented in this annual report, unless otherwise indicated. Therefore, Vitromatic’s results of operations are reflected in the line item entitled “Net income (loss) from discontinued operations” in our consolidated statement of operations. Financial data included in this annual report have been restated to present as a discontinued operation the assets of Vitromatic in the line items entitled “Total assets of discontinued operations” and the liabilities of Vitromatic in the line items entitled “Total liabilities of discontinued operations”. Financial and statistical data for all periods presented in this annual report do not include the results of operations of discontinued operations, except (i) for financial and statistical data relating to discontinued operations, (ii) net income and net income of majority interest and (iii) as otherwise specified.
 
On April 15, 2002, we sold our 51% interest in Ampolletas, S.A., which we refer to as “ASA,” to Gerresheimer Glass AG for $13.4 million in cash. At the time of the transaction, approximately $6.5 million of our consolidated debt were obligations of ASA. Consequently, upon the consummation of the sale of our interest in ASA, our consolidated debt was reduced by approximately $6.5 million. ASA is engaged in the manufacturing of borosilicate glass products for laboratory and pharmaceutical use, such as ampoules, vials and syringes.
 
On May 21, 2001, we sold our 50% interest in Regioplast, S.A. de C.V., which we refer to as “Regioplast,” our joint venture with Owens-Illinois, Inc., which we refer to as “Owens-Illinois,” that engaged in the production and distribution of plastic bottles and caps, including non-refillable closures, for $8 million in cash. Since its inception in 1993, Regioplast had been managed by Owens-Illinois.
 

21


Our Operating Business Units
 
Our operations are currently organized into three operating business units: the Flat Glass business unit (representing approximately 49% of our consolidated net sales in 2004), the Glass Containers business unit (representing approximately 41% of our consolidated net sales in 2004) and the Glassware business unit (representing approximately 10% of our consolidated net sales in 2004).
 
The organization of our operations into business units allows us to focus on the needs of distinct end-markets, diversifies our revenue base and enables us to take advantage of our expertise in the efficient production of glass products. In addition, our operations at the corporate level continue to provide us with certain administrative, technical and corporate services, including management information systems, human resources, finance, treasury, accounting and consolidation, procurement, labor and employee benefits, quality control, environmental compliance, industrial safety, communications and legal services.
 
Flat Glass
 
Based on the Flat Glass business unit’s net sales of Ps.12,699 million ($1,139 million) in 2004, we believe the business unit is the largest flat glass producer in Mexico, the second largest in Latin America and one of the largest distributors of flat glass products in the United States. Based on the number of molding furnaces the business unit currently operates in Mexico, we believe it is also a major manufacturer of safety glass products for the automotive OEM and replacement markets in Mexico. In 2004, this business unit accounted for 49% of our consolidated net sales. During the same period, approximately 26% of the net sales of the Flat Glass business unit came from exports and approximately 49% came from sales by our foreign subsidiaries that are part of the business unit.
 
The Flat Glass business unit focuses on the manufacturing, processing and distribution of flat glass for the construction and automotive industries and has a production capacity of over 620,000 tons of float glass per year, of which 75,000 tons are contributed by our share of Vitro AFG, our joint venture with AFG Industries. In 2004, approximately 62% of the business unit’s Ps.12,699 million ($1,139 million) consolidated net sales were to the construction industry and approximately 38% of such consolidated net sales were to the automotive industry.
 
Since 1965, Pilkington, a leading manufacturer of flat glass in the world, has been our partner, holding a 35% interest in Vitro Plan, the holding company for our Flat Glass business unit. Pilkington has also been an important provider of technology to our Flat Glass business unit. Our Flat Glass business unit’s customer base includes General Motors, Ford, DaimlerChrysler, Volkswagen and Nissan in the automotive industry, and several large domestic and foreign companies in the construction industry.
 
In Mexico, our Flat Glass business unit manufactures, processes, distributes and installs flat glass for the construction and automotive markets. The business unit’s Mexican operations include nine manufacturing facilities, including four float glass tanks, and approximately nine distribution and 150 installation centers, of which approximately 62 are owned by us and approximately 88 are franchises owned by third parties.
 
Vitro Flex, our joint venture with Visteon, manufactures and distributes flat glass products principally for the automotive OEM market. Substantially all of Vitro Flex’s production is distributed to Ford through Visteon.
 
On June 19, 2002, Vitro Plan entered into an agreement with AFG Industries, a subsidiary of Asahi to convert our glass container facility in Mexicali, Mexico into a flat glass facility. The converted facility began operations in November of 2003 as Vitro AFG and its production principally supplies flat glass to the western United States and Mexico. The converted facility has a flat glass production capacity of approximately 150,000 metric tons per year. One half of the flat glass produced by this facility is sold to each of AFG Industries and us under take-or-pay agreements.
 
We also have a significant presence in the United States’ flat glass market through our subsidiary Vitro America. Vitro America processes, distributes and installs flat glass products for the construction and automotive markets in the United States. It operates in 24 states through eight manufacturing facilities, 36 distribution centers and 113 installation centers.
 

22


On May 4, 2001, we expanded our flat glass operations into Europe through the acquisition of 60% of the outstanding shares of common stock of Cristalglass, a processor and distributor of value-added flat glass mainly for the Spanish, French and Portuguese construction industry. Cristalglass has six processing facilities located in Spain. On December 27, 2002, we continued our expansion of our flat glass operations in Europe through the acquisition of 60% of the outstanding shares of common stock of Vitro Chaves (formerly Vidraria Chaves), a Portuguese processor and distributor of glass and glazing products for the Portuguese construction industry.
 
The Flat Glass business unit has joint ventures with Visteon through Vitro Flex, with AFG Industries through Vitro AFG and with Solutia through Quimica M. We have also partnered with groups of individual investors with respect to Cristales Automotrices, Cristalglass and Vitro Chaves.
 
Glass Containers
 
Based on the Glass Containers business unit’s net sales of Ps. 10,702 million ($960 million) in 2004, we believe it is the largest glass containers producer in Mexico and Central America. In 2004, this business unit accounted for 41% of our consolidated net sales. During the same period, approximately 28% of the net sales of the Glass Containers business unit came from exports and approximately 11% came from sales by our foreign subsidiaries that are part of the business unit.
 
The Glass Containers business unit produces soda lime glass containers for the soft drink, beer, food, liquor and wine, pharmaceutical and cosmetics industries and has a production capacity of approximately 5,200 tons of glass per day. In addition, our Glass Containers business unit manufactures and distributes (i) soda ash, sodium bicarbonate, calcium chloride and salt and (ii) capital goods such as glass forming machines and molds. Its customers include leading companies such as Coca-Cola, Pepsi, Grupo Modelo, Nestlé, Procter & Gamble, Gerber, Avon, Coty Revlon and Grupo Domecq.
 
The Glass Containers business unit operates eight manufacturing facilities in Mexico, two in Central America and one in Bolivia. The business unit, which exports containers for the soft drinks, liquor and wine, pharmaceutical and cosmetic industries to the United States through our subsidiary Vitro Packaging, has six sales offices, two design centers and one distribution center in the United States. It also includes Comegua, our joint venture with Cerveceria Centroamericana and Cerveceria de Costa Rica. Based on Comegua’s net sales of Ps.1,131 million ($101 million) in 2004, we believe it is the largest glass containers producer in Central America.
 
Glassware
 
Based on the Glassware business unit’s net sales of Ps.2,726 million ($245 million) in 2004, we believe the business unit is the largest producer of glassware in Mexico. In 2004, this business unit accounted for 10% of our consolidated net sales. During the same period, approximately 33% of the net sales of the Glassware business unit came from exports.
 
The Glassware business unit focuses on the manufacturing and distribution of glassware, flatware, stemware, bakeware and home decor products for the consumer segment, glassware and flatware for the food service segment and coffee carafes, blender jars, lids, meter covers, candle holders and lighting products for the industrial segment, respectively, of the glassware industry. This business unit has a production capacity of 1.7 million units per day. Since 1997, Libbey, a leading producer of tableware in North America, has been our partner, holding a 49% interest in Vitrocrisa Holding, S. de R.L. de C.V., the holding company for our Glassware business unit. The business unit’s customer base includes leading global manufacturers such as Sunbeam and Hamilton Beach/Proctor-Silex and retailers such as Wal-Mart, HEB and other leading Mexican supermarket chains such as Gigante and Soriana.
 
The business unit has two manufacturing facilities in Mexico, ten distribution centers and 14 outlet stores located throughout Mexico and one assembly facility that is also located in Mexico. The Glassware business unit exports its products through Crisa Industrial, a joint venture with Libbey, to OEMs, mostly in locations in the United States and China, and distributes its products to other markets in the United States and Canada through our joint venture partner, Libbey.
 
The Glassware business unit is also responsible for the operation of our metal flatware manufacturing and distribution business, which is conducted through our wholly owned subsidiary, FACUSA.
 

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Our Products
 
The following table sets forth our principal products, customers and end-users, sales regions and joint venture partners by business line.
 

Business Unit
 
Products
 
Customers and
 
End-Users
 
Sales
 
Regions
 
Joint
 
Venture Partners
 
Flat Glass:
 
       
Construction Glass
 
Float glass, rolled glass, architectural tempered safety glass, insulated glass units
 
Construction industry, furniture manufacturers, distributors and installers
Mexico, the United States, Canada, Europe, Asia and Central and South America
Pilkington, AFG Industries
Automotive Glass
 
Windshields, side laminated glass, rear and side tempered glass and polyvinyl butyral
 
Automotive OEMs, automotive replacement glass market, distributors and installers
Mexico, the United States, Canada and Central and South America
Pilkington, Visteon and Solutia
Glass Containers:
 
       
Glass Containers
 
Soda lime glass containers
 
Soft drink, beer, food, liquor and wine, pharmaceutical and cosmetics industries
 
Mexico, the United States, the Caribbean, Central and South America and Europe
Cerveceria Centroamericana and Cerveceria de Costa Rica
Raw Materials
 
Soda ash, sodium bicarbonate, calcium chloride and salt
 
Glass manufacturers and detergent producers
Mexico, the United States and South America
 
Machinery and Molds
 
Glass forming machines, castings for glass molds, machinery parts and electronic controls
 
Flat Glass business unit, Glass Containers business unit, Glassware business unit, glass manufacturers and other third-party manufacturers
Mexico, the United States and Central and South America
 
         
Glassware:
 
       
Glassware
 
Glassware, flatware, stemware, bakeware, home decor products, coffee carafes, blender jars, lids, meter covers, candle holders and lighting products
 
Commercial distributors, supermarkets, discount stores, consumer and industrial markets, institutional food service customers, hotels and restaurants and retail customers
Mexico, the United States, Canada, the Middle East, Europe, Central and South America and China
Libbey
         
Metal Flatware
 
Metal flatware
 
Commercial distributors
Mexico
 

See “Item 5. Operating and Financial Review and Prospects—Results of Operations,”“Item 18. Financial Information—Export Sales” and notes 12 and 19 of our consolidated financial statements included elsewhere in this annual report for a breakdown of our consolidated net sales by business unit and geographic market for each year in the three year period ended December 31, 2004.
 
Our Operations
 
Flat Glass Business Unit
 
The Flat Glass business unit’s holding company is Vitro Plan. Vitro Plan began operations in Mexico in 1936, and since 1965, has been jointly owned by Vitro (65%) and Pilkington (35%). The Flat Glass business unit focuses on the manufacturing, processing and distribution of flat glass for the construction and automotive industries and has a production capacity of over 620,000 tons of float glass per year, of which 75,000 tons are contributed by the
 

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business unit’s share at the furnace operated by Vitro AFG, its joint venture with AFG Industries. In 2004, approximately 62% of the business unit’s consolidated net sales were to the construction industry and approximately 38% to the automotive industry. See “Item 3. Key Information—Risk Factors—Pricing pressures by OEMs may affect our operating margins and results of operations; the North American automotive industry is experiencing one of its worst crises in recent years.”
 
Flat Glass is the largest business unit of Vitro, having accounted for 49% of our consolidated net sales in 2004. In 2004, the Flat Glass business unit’s net sales were Ps. 12,699 million ($1,139 million) and its export sales were $294 million. During 2004, approximately 26% of the business unit’s net sales were derived from export sales and 49% were derived from its foreign subsidiaries.
 
Since 1965, Pilkington, has been our partner, holding a 35% interest in Vitro Plan. Pilkington has also been an important provider of technology to the business unit. See “—Research and Development”. The business unit’s customer base includes several large distributors and installers in the construction industry in Mexico and abroad, several automotive manufacturers such as General Motors, Ford, DaimlerChrysler, Volkswagen and Nissan, several large furniture manufacturers, and distributors and installers in the automotive replacement industry.
 
As of December 31, 2004, the Flat Glass business unit’s total assets were Ps.12,173 million ($1,092 million). The business unit owns over 250 operating centers, including four flat glass furnaces in Mexico, eight processing facilities in the United States, six processing facilities in Spain and one in Portugal. In 2004, its float glass furnaces produced approximately 626,000 tons of flat glass, which we believe represented approximately 56% of the float glass produced in Mexico and 8% of the total installed capacity in the NAFTA region.
 
In Mexico, the Flat Glass business unit manufactures, processes, distributes and installs flat glass for the construction and automotive markets. Its Mexican operations include, as of December 31, 2004, four float glass furnaces, four processing facilities, 9 distribution centers and 150 installation centers of which 62 are owned by the business unit and 88 are franchises owned by third parties. Vitro Flex, the business unit’s joint venture with Visteon, manufactures and distributes flat glass products principally for the automotive OEM market. Substantially all of Vitro Flex’s production is distributed to Ford through Visteon.
 
The Flat Glass business unit’s strategy is to:
 
·      
focus on higher-margin products in the markets it currently serves;
 
·      
maintain its leading position in the Mexican flat glass market including the Mexican automotive replacement market;
 
·      
maintain its relationship with automotive OEMs in Mexico and the United States;
 
·      
consolidate its presence as a processor and distributor in the United States;
 
·      
increase its presence in Spain, Portugal and other markets in Europe;
 
·      
leverage the “Vitro” brand name;
 
·      
strengthen its financial position; and
 
·      
reduce costs and enhance operating efficiencies;
 
On June 19, 2002, Vitro Plan entered into an agreement with AFG Industries to convert a glass container facility in Mexicali, Mexico into a flat glass facility. The converted facility began operations in November of 2003 and has a flat glass production capacity of approximately 150,000 metric tons per year. One half of the flat glass produced by this facility is sold to each of AFG Industries and Vitro Plan under take-or-pay agreements.
 
The Flat Glass business unit also has a significant presence in the United States’ flat glass market through its subsidiary Vitro America. Vitro America processes, distributes and installs flat glass products for the construction and automotive markets in the United States. It operates in 24  States in the U.S. through eight processing facilities, 36 distribution centers and 113 installation centers. A portion of the glass processed by Vitro America is produced by the business unit in Mexico, and the balance is purchased from unaffiliated third parties. In 2004, approximately 70% of Vitro America’s glass purchases in terms of volume were supplied from the business unit’s Mexican subsidiaries.
 

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On May 4, 2001, our Flat Glass business unit expanded its operations into Europe through the acquisition of 60% of the outstanding shares of common stock of Vitro Cristalglass, a processor and distributor of value-added flat glass for mainly the Spanish, French and Portuguese construction industry. On December 27, 2002, it continued its expansion of flat glass operations in Europe through the acquisition, by Vitro Cristalglass, of 60% of the outstanding shares of common stock of Vitro Chaves (formerly Vidraria Chaves), a Portuguese processor and distributor of glass and glazing products for the Portuguese construction industry. Our Flat Glass business unit has seven processing facilities and two distribution facilities in Spain and Portugal.
 
Our Flat Glass business unit has joint ventures with Visteon through Vitro Flex, with AFG Industries through Vitro AFG and with Solutia through Química M. It has also partnered with groups of individual investors in Cristales Automotrices, Vitro Cristalglass and Vitro Chaves.
 
Recently, our Flat Glass business unit’s strategy has emphasized production-retail integration. The business unit rolled out two novel commercial networks—Vitrocar and Vitromart—dedicated to Mexico’s automotive and construction sectors. The Vitromart network consists of 150 of the business unit’s largest distributors of flat glass for the construction industry as part of a network with standardized branding, marketing efforts, store design, similar product lines and systems. Through this project, the business unit will be able to strengthen relationships with its customers, reach its end customer and leverage its brand name. Vitrocar is the biggest automotive glass installation chain in Mexico. Vitrocar operates 150 installation centers throughout Mexico, of which 62 are owned by us and 88 are franchised. Vitrocar is also the only automotive glass installation chain in Mexico that services customers directly from manufacturing facilities. Vitrocar has agreements with every insurance company operating in Mexico in order to provide a complete service to such companies clients.
 
On April, 2005, our Flat Glass business unit underwent important changes in management aimed at rationalizing its management structure. José Domene, who is our COO, assumed the position of President of Vitro Plan on an interim basis, replacing Fernando Flores, who retired. Mr. Domene will combine this position with his COO position in Vitro.
 
Exports and Foreign Subsidiaries’ Sales
 
Export sales from the Flat Glass business unit’s operations in Mexico were approximately $294 million in 2004. A majority of these export sales were sales by the business unit’s Mexican subsidiaries to automotive OEMs in the United States. Sales of the business unit’s foreign subsidiaries were $535 million in 2004, of which Vitro America contributed $464 million. The sum of the Flat Glass business unit’s export sales to the United States and the sales by its foreign subsidiaries in the United States accounted for approximately 62% of the Flat Glass business unit’s net sales during 2004.
 
Mexican Operations
 
We believe that the Flat Glass business unit is the largest flat glass producer in Mexico based on the business unit’s net sales in Mexico in 2004. In 2004, the Mexican subsidiaries of the Flat Glass business unit which serve the Mexican construction and automotive industries, had consolidated net sales of approximately Ps. 3,124 million ($280 million), of which approximately 48% were to the construction industry and 52% were to the automotive industry. The principal products that the Flat Glass business unit produces and distributes for the construction industry in Mexico are float glass, rolled glass and tempered architectural safety glass, principally for commercial and residential uses. The Flat Glass business unit also produces mirrors, insulating glass, tempered glass, tabletops and coated glass. For the Mexican automotive industry, the business unit produces safety glass products such as windshields. The business unit is expanding its production to higher value-added products, such as insulated glass windows, mirrors and tempered and laminated products.
 
The Flat Glass business unit’s flat glass products are produced using the float method, which involves pouring molten glass over a molten tin bath. The business unit operates two float glass tanks near Monterrey, Mexico, one float glass tank in Mexico City, Mexico and one float glass tank in Mexicali, Mexico. Our total production capacity is over 620,000 tons of float glass per year, of which 75,000 tons are contributed by our share of Vitro AFG, our joint venture with AFG Industries. In addition, the Flat Glass business unit operates four processing facilities in Mexico for the automotive OEM market and the automotive glass replacement market, including Vitro Flex’s facility located near Monterrey, Mexico. During the first quarter, these facilities were operating at approximately 93% of their capacity. All but one of the Flat Glass business unit’s facilities have obtained ISO 9001 Certification.
 

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The Flat Glass business unit sells its construction products in Mexico to builders, glass installers and distributors of glass products through its own sales force, except for the business unit’s skylight products, which are marketed by a group of independent manufacturers’ representatives. The business unit’s sales force markets its construction products to a large number of distributors and is supported by a technical support department that offers technical advice to construction glass installers. With respect to automotive products, the Flat Glass business unit’s Mexican operation sells directly to automotive OEMs in Mexico and the United States, while the automotive glass replacement market is serviced through the business unit’s distribution centers throughout Mexico, independent distributors and installers and Cristales Automotrices, the business unit’s joint venture engaged in installing automotive replacement glass in Mexico.
 
Visteon is the largest customer of the business unit’s automotive safety glass products, which purchases these products for use in Ford’s assembly plants in Mexico and the United States. In October 2003, Ford announced an expansion of its assembly plant in Hermosillo, Mexico, which was originally built in 1986. The approximate investment is projected to be $1.8 billion and the total plant manufacturing capacity will increase to 800,000 units. Ford is one of the business unit’s largest clients for Automotive OEM glass, especially through Vitro Flex, its joint venture with Visteon, and the Flat Glass business unit expects to benefit from this expansion after winning contracts for new platforms that will be assembled at Hermosillo. In addition, the Flat Glass business unit sells automotive safety glass products to other automobile manufactures in Mexico (including sales relating to the orders made under Pilkington’s global supply agreements with such automobile manufacturers), the United States and other markets.
 
In order to better serve their customers, the Flat Glass business unit has designated commercial executives to serve as individualized customer service representatives for the business unit’s principal purchasers of construction products and established account plans for automotive OEMs. OEM account plans consist of staff whose time is exclusively dedicated to major OEMs and who provide specialized assistance in the areas of engineering, service and sales. The business unit maintains nine distribution centers throughout Mexico where customers of both construction and automotive products can access information about the availability of products on a real-time basis.
 
Polyvinyl Butyral
 
 
United States Operations
 
The United States operations of the Flat Glass business unit are conducted through Vitro America, which, based on its consolidated net sales in 2004, one of the largest distributors of flat glass products in the United States. In 2004, Vitro America had consolidated net sales of approximately $464 million, of which approximately 79% were to the construction industry and approximately 21% were to the automotive replacement market.
 
Vitro America purchases flat glass as raw material from our Mexican subsidiaries and from United States manufacturers and uses it to process tempered, spandrel, insulated, laminated mirrors and other products. Approximately 70% of the purchases of flat glass, in terms of volume, of Vitro America in 2004 related to products manufactured by our Mexican subsidiaries and 30% related to products purchased from third parties. These products are sold directly to distributors as well as to end-buyers through Vitro America’s own distribution centers and retail shops. Vitro America also distributes and sells to furniture manufacturers in the United States a significant number of custom-made glass tabletops produced by the Flat Glass business unit’s manufacturing plants in Mexico. Additionally, Vitro America engages in the design, manufacture and installation of custom skylights in the United States and several other countries. Vitro America also distributes to the United States automotive replacement market a full line of automotive glass products, including windshields and side and back windows for American and foreign cars and trucks.
 
Vitro America operates eight processing centers, 36 distribution centers and 113 installation centers in the United States. Vitro America sells its construction products to builders and glass installers, which employ its products in industrial and commercial projects such as skyscrapers and other buildings, through its own distribution network and retail stores. Vitro America sells its automotive products to the replacement market through its own distribution network and retail stores.
 
Vitro America has undertaken a three-year transformation process designed to streamline the organization and instill a more customer and results-oriented culture in its workforce.  Teams of internal and external consultants and vendors are evaluating and reorganizing its installation, processing and corporate processes.  These teams have identified and initiated a number of projects with an aim to place Vitro America as a leader among the distributors, processors and installers of flat glass in the United States.
 

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European Operations
 
The Flat Glass business unit competes in the European flat glass construction market through Cristalglass and Vitro Chaves. Cristalglass processes and distributes flat glass mainly for the Spanish, French and Portuguese construction industry through six processing facilities (including four double glazing facilities) and one distribution center located in Spain. Vitro Chaves manufactures and distributes flat glass products in Portugal through one facility. In 2004, Cristalglass and Vitro Chaves had consolidated net sales of approximately Ps. 1,353 million ($121 million) and Ps. 111 million ($10 million), respectively. Most of the sales of Cristalglass are of insulated glass windows, a value-added product, which are distributed to builders and distributors by Cristalglass’ own sales force. Vitro Chaves’ main products are insulated and laminated glass for the construction industry, which are distributed through its own and Cristalglass’ distribution network.
 
Central and South American Operations
 
Through its Colombian subsidiary, Vitro Colombia, and, to a lesser extent, through its subsidiaries in Ecuador, Pananá and Venezuela, the Flat Glass business unit processes tempered and laminated glass for the automotive replacement, construction and specialty markets in Central and South America. Vitro Colombia has one processing facility which is located in Colombia. In 2004, Vitro Colombia and its subsidiaries had consolidated net sales of approximately Ps. 248 million ($22 million). Vitro Colombia is expanding into the OEM automotive glass market in Colombia and other Andean Pact nations as well as into the automotive replacement market in South America. Vitro Colombia markets its products through a network of independent distributors to small- and medium-sized builders.
 
Competition
 
In Mexico, the Flat Glass business unit faces competition in the construction industry mainly from Compagnie de Saint Gobain, which we refer to as “Saint Gobain,” Guardian Industries Corporation, which we refer to as “Guardian”, and from imports of glass products. With respect to automotive safety glass, the business unit’s principal competition includes Saint Gobain, Guardian, PPG Industries, Asahi, Pilkington, Visteon and imports of low-volume automotive glass products that are being utilized in new automotive designs produced in Mexico. Guardian, which since 1999 competed with the business unit as an importer of flat glass products, has recently completed the construction of a flat glass furnace in Queretaro, which is estimated to be able to produce 180,000 tons of flat glass per year. In addition to its float glass capacity, Saint Gobain operates an automotive glass manufacturing facility located in Cuautla, Mexico. In Mexico, the Flat Glass business unit competes primarily on price, service and quality. See “Item 3. Key Information—Risk Factors—We face lower operating margins and decreased profitability due principally to increasing costs and competition.”
 
The Flat Glass business unit faces competition in the United States from a variety of flat glass manufacturers in the United States, as well as from a large number of medium- and small-sized producers and distributors of flat glass products. The Flat Glass business unit competes for customers in the United States primarily on the basis of breadth of geographic distribution capabilities, service (on a full line of products) price and quality.
 
In Europe, the Flat Glass business unit faces competition in the niche markets that it serves from several small- and medium-sized distributors, as well as Saint Gobain. In Central and South America, its main competitors are Guardian, Pilkington and Saint Gobain.
 
Glass Containers Business Unit
 
Our Glass Containers business unit manufactures and distributes soda lime glass containers for the food, beverage, pharmaceutical and cosmetics industries, as well as raw materials, machinery and molds for the glass industry, and, based on its net sales of Ps. 10,702 million ($960 million) in 2004, we believe the Glass Containers business unit is the largest glass containers producer in Mexico and Central America. The Glass Containers business unit includes (i) COVISA, our subsidiary that conducts a substantial majority of our glass containers operations in Mexico, (ii) Comegua, our joint venture with Cervecería Centroamericana and Cervecería de Costa Rica, which, based on Comegua’s net sales of Ps. 1,131 million ($101 million) in 2004, we believe is the largest glass containers producer in Central America (together, Cerveceria Centroamericana and Cerveceria de Costa Rica hold a 50.3% interest in Comegua), (iii) Vitro Packaging, our glass containers distribution subsidiary in the United States,
 

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(iv) Vilux, our subsidiary engaged in the manufacturing and distribution of glass containers in Bolivia and neighboring countries, (v) Alcali, our subsidiary engaged in the manufacturing of soda ash, sodium bicarbonate, calcium chloride and salt, (vi) Comercializadora, our subsidiary engaged in the distribution of the products manufactured by Alcali and (vii) FAMA, our subsidiary engaged in the manufacturing and distribution of capital goods such as glass forming machines and molds.
 
As of December 31, 2004, our Glass Containers business unit’s total assets were Ps. 12,722 million ($1,141 million). The business unit owns eight manufacturing facilities in Mexico, two in Central America and one in Bolivia. In 2004, our Glass Container business unit’s manufacturing facilities in Mexico produced approximately 3,700 tons of glass per day, which we believe represented approximately 88% of the non-captive glass container market in Mexico and approximately 3% of the glass container market in the United States, in each case in terms of units. We define a non-captive market to exclude buyers (such as beverage and beer bottlers) that are supplied glass containers by their affiliates. In Mexico, the business unit has two design centers, one of which specializes in the cosmetics and pharmaceuticals market. In addition, its subsidiary VGD Soluciones Integrales de Diseño, SA de C.V. which we refer to as “VGD” designs advertising materials, racks, shelves and web pages to assist customers in their marketing programs.
 
The Glass Containers business unit’s business strategy is to maintain its leadership position in the glass containers sector of the rigid packaging industry in Mexico and Central America and to increase sales in the United States. Among the business unit’s key competitive strengths are its productivity, quality levels, wide variety of glass colors and decorative alternatives, its versatile production processes and the vertical integration with raw materials, machinery and molds. The business unit’s high levels of productivity and quality, as well as its ability to rapidly meet changes in demand, allows it to aggressively compete with other container technologies in Mexico and offer value-added products at attractive prices in the United States and other export markets. The versatility and flexibility of the business unit’s production processes are reflected in the business unit’s ability to offer customers special glass colors and fast turnarounds on small production runs on a cost-efficient basis, as well as decorating and labelling processes, including “plastishield,” adhered ceramic labels and heat transfer labels. In addition, we believe that the location of the business unit’s facilities is a competitive strength that has helped us implement our business strategy. The business unit’s capacity to produce short runs with a wide variety of colors, shapes and decorations, its innovative designs and its “One Stop Shop” concept, which provides its customers with a complete packaging solution, including glass containers, closures, carriers, labels and boxes, also enables it to compete effectively in value-added markets.
 
The business unit has reduced the product development cycle for glass containers from 12 to eight weeks, which response time is shorter than the response time of some of the other world-class producers of glass containers. Similarly, the business unit’s technological expertise permits the introduction of new products with innovative customized images in order to meet the design requirements of its customers. In 2002, approximately 8% of the Glass Containers business unit’s Mexican subsidiaries’ sales were derived from products introduced in 2002. By 2004, approximately 26% of its Mexican subsidiaries’ sales were derived from products introduced in 2004. By providing quality glass containers to its customers, the Glass Containers business unit has developed long-lasting relationships with leading customers such as Grupo Modelo, Coca-Cola, Gerber, Bacardi, Nestlé, Avon, Grupo Domecq, Procter & Gamble, Pepsi, Coty, Revlon and Estée Lauder.
 
Traditionally, the Glass Containers business unit has had access to technology that we believe is state-of-the-art in the glass containers industry. For the production of glass bottles, the Glass Containers business unit utilizes its own technology, some of which has been patented, and technology provided by Owens-Illinois pursuant to a series of technical assistance agreements that began in 1964 and expired in September 1999. We currently have the right to use the technology provided to us by Owens-Illinois under these technical assistance agreements for which we pay royalties. Our glass containers labelling capability includes state-of-the-art technology in organic paints. This process, which is called Ultraviolet Cure, was developed to further our continuous efforts to grow in high-margin niche markets by providing value-added products. We are currently the only glass containers manufacturer in the Americas with this type of high-speed decoration process capable of applying up to six colors at high speeds. We are currently waiting for patent approval on our formula for this type of paint, which is more environmentally friendly than similar products in the market. We are currently supplying this type of decoration to customers such as Coca-Cola.
 

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Sales of the Glass Containers business unit in the beer and soft drinks segments in Mexico are seasonal, with hot weather positively affecting our sales. As a result, second and third quarter sales are typically higher than sales in the first and fourth quarters. Accordingly, the Glass Containers business unit generally builds its inventory of soda lime glass containers during the fourth and first quarters in anticipation of seasonal demand.
 
In Mexico, the business unit has 22 furnaces in six glass container manufacturing facilities, each located near a major customer. We estimate that in 2004 the business unit’s manufacturing facilities produced approximately 51% of the glass tonnage melting capacity in Mexico, and that we sold 88% of the glass container units on the Mexican non-captive market in 2004.
 
In the United States, the business unit’s distributor, Vitro Packaging, has two design centers, six sales offices and one distribution center, all strategically located to serve its target markets. In 2004, we believe the business unit’s imports into the United States represented approximately 25% of all sales of imported glass containers into the United States, which would make it the largest glass container importer into the United States in terms of sales.
 
In Central America, Comegua owns two manufacturing facilities, one located in Guatemala and one in Costa Rica, each with approximately 750 tons per day of melting capacity. Comegua also has a design center located in Guatemala. In Bolivia, the business unit owns and operate a facility with a glass melting capacity of approximately 80 tons per day.
 
Our Glass Containers business unit manufactures glass containers for both high-volume markets and value-added markets. We refer to markets that demand high volumes of standard products at competitive prices as high-volume markets, and we refer to markets that require shorter production runs of highly designed products and involve premium pricing as value-added markets. Recently, the business unit’s business strategy has emphasized the introduction of products into value-added markets, in addition to retaining our market share in the Mexican high volume markets. The specialty nature of the products sold in value-added markets allows the business unit to charge higher per unit prices for these products. Sales to high-volume markets continue to make up the bulk of the business unit’s sales volume and allows it to improve its fixed cost absorption.
 
Exports and U.S. Operations
 
Total export sales of the Glass Containers business unit, which do not include the sales of our Central and South American operations, amounted to $266 million in 2004. The large majority of the export sales of the business unit are made to the United States, principally through our distribution subsidiary in the United States, Vitro Packaging, which also sources a small amount of the glass containers it sells from third parties. The Glass Containers business unit increased export sales into the United States by offering value-added specialty products, particularly to the cosmetics market and to wine and liquor bottlers in the western United States. The business unit also produces special promotional containers for soft drink bottlers in the United States. Approximately 40% of the Glass Containers business unit’s net sales are made outside of Mexico.
 
Mexican Operations
 
We believe that the Glass Containers business unit is the largest glass containers producer in Mexico based on the business unit’s net sales in 2004. In 2004, the Glass Containers business unit’s sales of glass containers to the Mexican market were Ps. 6,486 million ($582 million). The Glass Containers business unit produces soda lime glass containers at six manufacturing facilities located throughout Mexico and has a production capacity of approximately 4,400 tons of glass per day in Mexico. The business unit’s facilities are located in close proximity to major customers, ensuring heightened responsiveness to customer design and production requirements and lower transportation costs. All of the Glass Containers business unit’s facilities in Mexico have obtained ISO 9001 certification. During the first quarter of 2005, these facilities were operating at approximately 86% of their capacity. We also own two cullet-processing plants, one of which is leased to a third party which, in turn, supplies us the cullet. In the cullet processing plants, scrap or broken glass is gathered for re-melting and mixed with virgin raw materials in order to obtain cost reductions in the production process without affecting the quality of the products. Although there are currently no mandatory recycling laws in Mexico similar to those in force in the United States or in other countries, we conduct campaigns throughout Mexico to collect glass containers.
 

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The Glass Containers business unit’s customers include leading companies such as Coca-Cola, Pepsi, Grupo Modelo, Nestlé, Procter & Gamble, Gerber, Avon, Coty, Grupo Domecq, Revlon and Estée Lauder. In Mexico, the Glass Containers business unit relies primarily on its own sales and marketing force, utilizing outside sales representatives to service customers with smaller volume demand. The business unit has implemented an online system for sharing information with customers. From their respective offices, the business unit’s customers can access product information, place orders, check inventories, trace shipments and consult account statements. Our “One Stop Shop” concept, which provides our customers with a complete packaging solution, including containers, closures, carriers, labels and boxes, enables us to compete effectively in value-added markets. We have selectively implemented this concept within Mexico, the United States and Central America.
 
Central and South American Operations
 
Comegua, a joint venture in which we hold a 49.7% interest, is a Panamanian holding company that operates manufacturing facilities in Guatemala and Costa Rica and supplies glass containers to the soft drink, food, beer and wine markets throughout Central America and the Caribbean. Comegua’s consolidated net sales in 2004 were approximately Ps. 1,131 million ($101 million).
 
We also own 100% of the common stock of Vilux, a company that owns and operates what we believe is the largest glass containers manufacturing facility in Bolivia based on its 2004 production capacity. Vilux’s net sales in 2004 were approximately Ps. 79 million ($7 million). Vilux distributes glass containers for the soft drink, food, beer, wine and liquor and pharmaceutical industries throughout Bolivia, southern Peru and northern Argentina.
 
Raw Materials, Machinery and Molds
 
Our raw materials operations are carried out by our subsidiary Alcali. Alcali’s net sales in 2004 were approximately Ps. 1,061 million ($95 million). Alcali’s principal products are soda ash, sodium bicarbonate, calcium chloride and salt for industrial and commercial consumption. Most of Alcali’s soda ash production, which is used in the manufacture of glass, detergents and tripolyphosphates, is sold to third parties. Alcali competes in the soda ash sector with the American Natural Soda Ash Corporation, which we refer to as “Ansac,” a United States exporter of natural soda ash. Alcali maintains a separate sales and marketing force for its products, which are distributed directly to its customers.
 
Our machinery and molds operations are conducted through our subsidiary FAMA. FAMA was founded in 1943 to source our needs for molds and machinery for our glass manufacturing operations. It had net sales of approximately Ps. 399 million ($36 million) for the year ended December 31, 2004. FAMA produces state-of-the-art glass-forming machines for our use. In addition, FAMA produces castings of special alloys for glass molds and for different types of machinery and parts for machinery used in the oil industry. FAMA also produces mold equipment for the glass industry and ancillary equipment for the glass, packaging and other industries, as well as electronic controls for machinery operating and process controls for glass-forming machines. Finally, FAMA manufactures annealing lehrs for the float and hollow glass industries. FAMA’s products are mainly sold to us. FAMA generally competes with major international manufacturers of machinery and equipment for the glass industry.
 
Competition
 
Although based on the business unit’s net sales in 2004 of Ps. 10,702 million ($960 million) we believe the Glass Containers business unit is the principal supplier of glass containers in Mexico, it competes with various smaller domestic manufacturers as well as with the glass containers operations of the two major Mexican beer producers. Glass containers in Mexico also compete with alternative forms of packaging, including metal, plastic, paper and cardboard laminated containers, such as tetra-pack. In the soft drink industry, the Glass Containers business unit has faced increasing competition from returnable and non-returnable polyethylene therephtalate containers, which we refer to as “PET,” as well as, to a lesser extent, from aluminum cans. In particular, since 1993 the shift of soft drink and food containers from glass to PET has continued, albeit at a slower rate in recent years. Although the business unit has introduced several types of returnable and non-returnable glass containers for soft drinks, the demand for returnable PET containers could continue to grow at the expense of demand for glass containers. In response to the trend in soft drinks and food containers from glass to PET, we continue to implement
 

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measures to offset the effect of PET substitution, including improving operating efficiencies, new product presentations and customer service.
 
In Mexico, the business unit competes for customers primarily on the basis of service (focusing on on-time deliveries and design), quality (including the ability to conform to a wide variety of specifications) and scale (including the ability to assure customers of the capacity necessary to support their growth).
 
The Glass Containers business unit faces greater competition in the United States than in Mexico, mainly from Saint Gobain and Owens-Illinois. Saint-Gobain, the world's second largest flat glass and glass container manufacturer, has announced that it may initiate the construction of a plant for the production of glass containers for the cosmetics and perfumes industry. Saint-Gobain has announced it will invest approximately $80 million in such plant.

However, the business unit has utilized its competitive strengths to supply a variety of higher margin, value-added products, including specialty food, beverage, cosmetics, wine and liquor glass containers, and to increase its production expertise and flexibility, thereby allowing it to realize higher operating margins relative to traditional products. The business unit’s ability to offer cost-effective short production runs, quick turn-around of new products, an extensive glass color selection, diverse labeling capabilities and unique container designs are all examples of the application of its competitive strengths. The Glass Containers business unit competes primarily on quality, design and price in the United States. In Central America, the Glass Containers business unit competes with a number of smaller regional manufacturers.
 
Glassware Business Unit
 
Our Glassware business unit focuses on the manufacturing and distribution of glassware, flatware, stemware, bakeware and home decor products for the consumer segment, glassware and flatware for the food service segment and coffee carafes, blender jars, lids, meter covers, candle holders and lighting products for the industrial segment, in each case, of the glassware industry. Based on its net sales of Ps. 2,726 million ($245 million) in 2004, we believe that the Glassware business unit is the largest producer of glassware in Mexico. The Glassware business unit also includes FACUSA, our subsidiary that engages in the manufacturing and distribution of metal flatware for food services. As of December 31, 2004, our Glassware business unit’s total assets were Ps. 2,922 million ($262 million).
 
The business strategy of the Glassware business unit is to strengthen its glass product business, with an emphasis on developing its high value-added and industrial product lines, through the introduction of new products. For example, in 2002, approximately 16% of the Glassware business unit’s net sales were derived from products introduced that year, while, by 2004, 33% of its net sales were derived from products introduced in 2004. The business unit is focusing on attempting to reduce the time of a new product development, improve service to its customers and increase the number of products developed per year. The business unit utilizes a variety of marketing research tools, including consumer focus groups, point of sale analysis and customer usage and habit studies, to stay informed of changes in customers’ product preferences. It is also constantly evaluating methods to simplify its distribution channels so as to get closer to the end user of its products. We believe that by doing these things we will better satisfy consumer demands, thus increasing our customer’s satisfaction with our products.
 
The Glassware business unit’s sales in Mexico tend to increase during the second and fourth quarters, as some of its products are sold as gifts and therefore are in higher demand on certain dates, particularly during April and November. Also, the promotional segment of the market tends to increase its demand in those years during which important events such as the Olympic Games or soccer’s World Cup are held.
 
Exports
 
Total exports sales of the Glassware business unit amounted to $78 million in 2004, or approximately 33% of its net sales. The Glassware business unit’s operations in the United States and Canada are conducted through Crisa Texas Limited and Crisa Industrial. Crisa Texas’ principal products are glassware, dinnerware and home decor products and it sells glassware products to Libbey, our joint venture partner, for the consumer and food service markets in the United States and Canada. The Glassware business unit exports its products to OEMs mostly located in the United States and China, through Crisa Industrial, a joint venture with Libbey. Crisa Industrial’s principal products are coffee carafes, blender jars, lids and lighting products.
 
 
 
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We believe that the Glassware business unit is the largest producer of glassware in Mexico based on its net sales to the Mexican market of Ps. 1,819 million ($163 million) in 2004. The Glassware business unit’s principal products include glassware, dinnerware, stemware, bakeware and home decor products for the consumer segment, glassware and flatware for the food service segment and coffee carafes, blender jars, lids, meter covers and lighting products for the industrial segment, in each case, of the glassware industry.
 
The Glassware business unit manufactures its glass products in its two facilities in Mexico and has a production capacity of over 1.7 million units per day. The business unit also manufactures flatware products in another facility located in Mexico. All of the Glassware business unit’s facilities have obtained ISO 9001 certification. During the first quarter of 2005, these facilities were operating at approximately 69% of their capacity.
 
The business unit has ten distribution centers and 14 outlet stores located throughout Mexico and one assembly facility. The business unit relies exclusively on its own sales and marketing force in Mexico, which markets the products directly or through wholesale commercial distributors, supermarkets and department, discount and outlet stores and direct consumer marketing efforts.
 
Competition
 
The business unit’s glass dinnerware products compete with ceramic products produced by several other Mexican and international manufacturers. Also, in recent years, imports from China into the United States of products that are competitive with the Glassware business unit’s products have increased. In addition, certain customers of the Glassware business unit have relocated some of their operations to China thus reducing their purchases from the business unit. The Glassware business unit differentiates itself primarily through its quality, service, breadth of product line and price.
 
Our Raw Materials
 
Soda Ash, Sand and Feldspar
 
The most important raw materials we utilize are soda ash, which we largely purchase from Ansac, silica sand and feldspar. In 1997, we entered into a ten year supply agreement with Unimin Corporation, which we refer to as “Unimin,” whereby we have committed to purchase, and certain of Unimin’s subsidiaries are committed to sell, our requirements of silica sand and feldspar at the then current market prices. Alcali has, to a large extent, the production capacity to supply the soda ash required by our glass making operations in Mexico. To the extent that any of our Mexican subsidiaries require silica sand or soda ash of a different grade than that produced by Unimin or by Ansac and Alcali, such companies may acquire such silica sand or soda ash from various suppliers in the United States. We are not dependent on any single supplier for any of the raw materials utilized in our operations.
 
Energy
 
Beginning in April 2003, certain of our subsidiaries agreed to purchase, in the aggregate, approximately 110 megawatts of electrical power and approximately 1.3 million tons of steam per year pursuant to a 15 year “take-or-pay” power purchase agreement with Tractebel Energía S. de R.L. de C.V., which we refer to as “Tractebel Energia.” Whirlpool and Vitro OCF, together, were required to purchase approximately 10 megawatts of electrical power. Thus, after their divestiture, we are currently obliged to purchase approximately 100 megawatts of electrical power. The price at which we are required to purchase electrical power and steam is based on variables, such as inflation, the peso/U.S. dollar exchange rate and the price of natural gas, whose future value is uncertain.
 
Fuel
 
The percentage of consumption hedged can vary from 10% to 100% of the estimated consumption. The percentage of consumption hedged and the hedged prices, change constantly according to market conditions based on the Company’s needs and to the use of alternative fuels within its production processes. As of December 31, 2004, the Company had hedges equivalent to 55% of estimated natural gas consumption for 2005.
 

33


In order to protect against the volatility of natural gas prices, as of May 31, 2005, we had hedges on the price of natural gas for approximately 7,280,000 MMBTUs or approximately 52% of our consumption needs in Mexico for the remainder of the year ending December 31, 2005. The hedges were entered into with Petróleos Mexicanos, which we refer to as “Pemex,”Cargill and Citibank and entitle us to purchase gas at an average price of $7.32 per MMBTU. As of May 31, 2005, the closing price of natural gas on the New York Mercantile Exchange was $6.78 per MMBTU. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Natural Gas Price Risk.” We have never suffered a material interruption in our natural gas supply from Pemex.
 
In addition, we have developed a technology that allows us to choose among natural gas, petroleum coke, or any mixture of them, as fuel for our furnaces. This technology has been installed in 22% of the Glass Containers business unit’s furnaces and in one furnace of our Flat Glass business units. We have as with all new technologies experienced small problems with its implantation. We are working on solving this difficulties. We intend to install this technology in other furnaces. Assuming current prices for natural gas and electricity continue, we expect that this technology will reduce our cost of energy.
 
We believe that natural gas and petroleum coke will continue to be available from various suppliers in the amounts we require.
 

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Our Capital Expenditures
 
Our capital expenditures program is currently focused on technological upgrades to and maintenance of, our manufacturing facilities. Our capital expenditures program also contemplates the purchase and maintenance of environmental protection equipment required to meet applicable environmental laws and regulations as such may be in effect from time to time.
 
The following table sets forth, for the periods presented, our capital expenditures by business unit. Financial data set forth in the following table has been restated in millions of constant pesos as of December 31, 2004.
 

   
Year ended on December 31,
 
Business Unit
 
2002
 
2003
 
2004
 
 
 
(Ps. millions) 
                     
Flat Glass
   Ps.
330
   Ps.
910
   Ps.
560
 
Glass Containers
   
647
   
809
   
672
 
Glassware
   
137
   
116
   
132
 
Corporate
   
22
   
36
   
89
 
Total
   Ps.
1,136
   Ps.
1,871
   Ps.
1,453
 

 
During 2005, we expect to make capital expenditures in excess of $100 million as follows:
 
·  
purchase of molds and racks required for introduction of new automotive glass products. We estimate capital expenditures of approximately $19 million;
 
·  
refurbish and provide needed maintenance to certain of our furnaces, including one of our float glass furnaces and one of our glassware furnaces, both located in Monterrey, Mexico.  We estimate capital expenditures of approximately $14 million;
 
·  
the remaining capital expenditures in 2005 will be applied to (i) maintaining or upgrading the installed technology of several ofour other facilities, (ii) purchasing equipment and making other expenditures relating to obtaining Industria Limpia (Clean Industry) certificates for each of our Mexican facilities and (iii) purchasing and maintaining environmental protection equipment required to continue to meet applicable environmental laws and regulations; and
 
·  
adjust the production capacity of certain of our facilities.
 
We expect to finance the capital expenditures discussed above with cash flow generated by our operations.
 
See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a discussion of our principal capital expenditures during the last three full fiscal years.
 
Our Property, Plant and Equipment
 
All of our assets and property are located in Mexico, the United States, Central and South America and Europe. On December 31, 2004, the net book value of all land and buildings, machinery and equipment and construction in progress was Ps. 18,482 million ($1,657 million), of which approximately Ps. 15,963 million ($1,432 million) represented assets located in Mexico, approximately Ps. 260 million ($23 million) represented assets located in the United States, approximately Ps. 1,715 million ($153 million) represented assets located in Central and South America and approximately Ps. 544 million ($49 million) represented assets located in Europe.
 
 
The following table sets forth, for the periods presented, the average capacity utilization for periods indicated and location of each of our business unit’s principal manufacturing facilities.
 
 
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Business Unit
Average Capacity Utilization (1)(3)
as of December 31, 2004
Average Capacity Utilization (2)(3)
as of March 31, 2005
Number of Facilities by City or Country
       
Flat Glass
107%(3)
93%
Monterrey (4)
Mexico City (3)
Puebla
Mexicali
United States (10)
Colombia (8)
Spain (6)
Portugal
       
Glass Containers
85%
86%
Monterrey (3)
Guadalajara
Mexico City (2)
Queretaro
Toluca
Costa Rica
Guatemala
Bolivia
       
Glassware
76%
69%
Monterrey (3)

(1)  
Average for the twelve-month period ended December 31, 2004.

(2)  
Average for three-month period ended March 31, 2005.

(3) 
Capacity utilization may sometimes be greater than 100% because pulling capacity is calculated based on a certain number of changes in glass color and thickness determined by historical average.
 
We also maintain over 100 sales offices and warehouses in Mexico and over 180 warehouses, sales offices and retail shops in the United States, most of which are leased.
 
We believe that all our facilities are adequate for our present needs and suitable for their intended purpose and that our manufacturing facilities are generally capable of being utilized at a higher capacity to support increases in demand.
 
See “—Our Capital Expenditures” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital expenditures.
 
Environmental Matters
 
Our Mexican operations are subject to both Mexican federal and state laws and regulations relating to the protection of the environment. The primary federal environmental law is the Ley General de Equilibrio Ecológico y Protección al Ambiente pursuant to which rules have been promulgated concerning water pollution, air pollution, noise pollution and hazardous substances. The Mexican federal government has also enacted regulations concerning imports and exports of hazardous materials and hazardous wastes. In addition, in 1995, Mexico promulgated environmental regulations that established a series of increasingly stringent air emission standards for glass manufacturing operations. We expect to spend approximately $1 million in capital expenditures over the next year to comply with these and other environmental regulations as they become effective or are modified. We may, however, incur amounts greater than currently estimated due to changes in law and other factors beyond our control.
 
The Mexican federal authority in charge of overseeing compliance with the federal environmental laws is the Secretaría del Medio Ambiente y Recursos Naturales, which we refer to as “SEMARNAT.” An agency of SEMARNAT, the Procuraduría Federal de Protección al Ambiente, which we refer to as “PROFEPA,” has the authority to enforce the Mexican federal environmental laws. As part of its enforcement powers, PROFEPA can bring civil and criminal proceedings against companies and individuals that violate environmental laws and has the
 

36


authority to close facilities not in compliance with federal environmental laws. Furthermore, in special situations or certain areas where federal jurisdiction is not applicable or appropriate, the state and municipal authorities can regulate and enforce certain environmental regulations, as long as they are consistent with federal law.
 
We believe we are in substantial compliance with environmental laws in Mexico applicable to our operations. Moreover, in 1998, our subsidiaries initiated a voluntary environmental auditing program, which was approved by PROFEPA. An independent auditor certified by PROFEPA has completed environmental audits of 19 of our 20 facilities in Mexico. Seventeen of these 19 facilities have already obtained PROFEPA’s certification of Industria Limpia or “Clean Industry,” which is a certification of our compliance with certain environmental laws, and the remaining two have satisfied all necessary conditions and made the necessary changes for such certification, and they are just in the process of receiving such certificate. To meet all the requirements of the environmental audit and obtain Industria Limpia certificates for these remaining facilities by 2005, these facilities incurred in a cost of approximately $1 million.
 
In addition, we have implemented energy conservation, emissions reduction and water management programs at our Mexican facilities. In the last six years, these programs have reduced our energy consumption by approximately 29%, our nitrogen dioxide and particulate emissions by approximately 25% and our water consumption by approximately 11%, in each case, per ton of glass melted. Since glass manufacturing is an energy and resource intensive process, these programs have reduced our operating costs.
 
Our foreign operations, to the extent they have manufacturing and processing facilities, are subject to federal, state and local laws relating to the protection of the environment of the country in which such operations are conducted. From time to time, we conduct environmental assessments of our foreign operations, some of which are currently underway, to determine whether we are in compliance with applicable foreign environmental laws. We believe each such operation is in substantial compliance with the applicable foreign environmental laws. Although there can be no assurance, we do not believe that continued compliance with Mexican and foreign environmental laws applicable to our operations will have a material adverse effect on our financial position or results of operations.
 
 
 
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Item 5.   Operating and Financial Review and Prospects
 
You should read this discussion in conjunction with, and this discussion is qualified in its entirety by reference to, our consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report. Our consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Note 22 to our consolidated financial statements for the year ended December 31, 2004 provides a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us. This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including without limitation those set forth in “Item 3. Key Information—Risk Factors” and the other matters set forth in this annual report. See “Forward-Looking Statements.”
 
OPERATING RESULTS
 
Factors Affecting Our Results of Operations
 
Our statement of operations is affected by, among other factors, (i) the level of demand for our products in the countries in which we operate, (ii) our costs of production, which principally consist of costs of raw materials, labor, energy and depreciation, of which raw materials and labor are sensitive to inflation, (iii) the relationship between the peso and the U.S. dollar, (iv) financing costs, which are incurred in both pesos and U.S. dollars and (v) increased competition in our domestic market and abroad. See “Item 3. Key Information—Risk Factors—Pricing pressures by OEMs may affect our operating margins and results of operations; the North American automotive industry is experiencing one of its worst crises in recent years,”“Item 3. Key Information—Risk Factors—We face lower operating margins and decreased profitability due principally to increasing costs and competition,”“Item 3. Key Information—Risk Factors— We have customers that are significant to us and the loss of all or a portion of their business would have an adverse effect on us,”“Item 3. Key Information—Risk Factors—Downturns in the economies in which we operate may negatively affect the demand for our products and our results of operations,”“Item 3. Key Information—Risk Factors—Changes in the relative value of the peso to the U.S. dollar may have an adverse effect on us,”“Item 3. Key Information—Risk Factors—Inflation and foreign currency exchange rate fluctuations may have an adverse effect on our total financing cost,”“Item 3. Key Information—Risk Factors—We may be adversely affected by increases in interest rates,” and “Item 3. Key Information—Risk Factors—Substitution trends in the glass containers industry may continue to adversely affect our business.”
 
We have completed a number of dispositions recently. See “Item 4. Information on the Company—Business—Divestitures.”
 
Trend Information

Stronger growth in the Mexican and U.S. economies had a positive impact on our sales in 2004. Although the Mexican and U.S. economies continued to grow in the first half of 2005, we cannot predict how those economies will continue to perform. See “Item 3. Key Information—Risk Factors—Downturns in the economies in which we operate may negatively affect the demand for our products and our results of operations,” and “Item 3. Key Information—Risk Factors— Economic developments in Mexico and the United States affect our business.” At the same time, our Flat Glass business unit has continued to face pricing pressures in recent months in its Mexican markets, particularly in the construction markets, as well as reduced volumes in the Mexican construction market. We anticipate that these pricing pressures will continue. In 2004, reduced sales prices in the construction segment of the Flat Glass business unit were offset by higher sales volume in the automotive segment of the market. However, the North American automotive industry is experiencing one of its worst crises in recent years. See “Item 3. Key Information—Risk Factors—Pricing pressures by OEMs may affect our operating margins and results of operations; the North American automotive industry is experiencing one of its worst crises in recent years.” As a result, our sales to automobile manufacturers could lead to additional price pressures and a loss of sales volume. Additionally, the increase in the price of certain of our raw materials, in particular natural gas, and the services we use could have a negative impact on our results of operations. In particular, if the natural gas prices remain at current levels our results of operations will be negatively affected.
 
Economic developments in Mexico and the United States affect our business
 
A substantial portion of our operations are in Mexico and a substantial majority of our consolidated net sales are made in Mexico and the United States. Therefore, economic conditions in Mexico and the United States have a significant effect on our business, results of operations and financial position.
 
General
 
In 2001, amid concerns of a global economic slowdown and a recession in the United States, Mexico started experiencing an economic slowdown. In 2001, Mexico’s real GDP declined by 0.3%, although inflation declined to 4.4% and the peso appreciated, in nominal terms, 4.6% relative to the U.S. dollar. The economic slowdown in the Mexican economy continued through 2002 and 2003. In 2004, GDP growth rates recovered. In 2002, 2003 and 2004, real GDP grew by 0.8%, 1.4% and 4.4%, respectively, annual inflation was 5.7%, 4.0% and 5.2%, respectively and the peso experienced a nominal devaluation relative to the U.S. dollar of 13.8% and 7.6% in 2002 and 2003, respectively, and a nominal appreciation of 0.8% in 2004. According to Mexico’s Instituto Nacional de Estadística, Geografía e Informática, Mexico’s real GDP grew by 2.4% on an annualized basis in the first quarter of 2005.
 
In 2001, the United States’ real GDP growth rate showed a marked slowdown, growing by only 0.5%. During 2002, 2003 and 2004, the United States’ real GPD growth rates recovered steadily to 1.9%, 3.0% and 4.4%,
 

38


respectively. The U.S. Bureau of Economic Analysis estimates that the annualized real GDP growth rate in the United States was 3.5% during the first quarter of 2005. For 2002, 2003 and 2004, respectively, inflation in the United States was 2.4%, 1.9% and 3.3%.
 
Although recent economic activity seems to be increasing in Mexico and the United States, the Mexican and United States economies may not continue to grow slower growth rates or a general economic decline would negatively impact our business and our results of operations.
 
The majority of our manufacturing facilities are located in Mexico. For each of the years ended December 31, 2002, 2003 and 2004, approximately 46%, 45% and 44%, respectively, of our consolidated net sales resulted from sales to parties located within Mexico. In the past, inflation has led to high interest rates on peso-denominated obligations and devaluations of the peso. During the 1980s, government control over foreign currency exchange rates adversely affected our net sales and operating margins. Inflation itself, as well as governmental efforts to reduce inflation, has had significant negative effects on the Mexican economy in general and on Mexican companies, including us. Inflation in Mexico decreases the real purchasing power of the Mexican population, and the Mexican government’s efforts to control inflation by tightening the monetary supply have historically resulted in higher financing costs, as real interest rates have increased. Such policies have had and could continue to have an adverse effect on us.
 
Trade Liberalization
 
Steps taken by Mexico since the 1980s to reduce import barriers and open its economy to foreign competition, such as becoming a signatory to the General Agreement on Tariffs and Trade, which we refer to as “GATT,” and a member of the North American Free Trade Agreement, which we refer to as “NAFTA,” led to a substantial increase in imports into Mexico. During 2000 and 2001, as the peso continued to appreciate in real terms, the trade balance of Mexico reached deficits of $8.0 billion and $9.7 billion, respectively. During 2002 and 2003, despite the real devaluation of the peso, the trade balance of Mexico reached a deficit of $7.9 billion and $ 8.6 billion. During 2004, as the peso appreciated in real terms against the dollar, the trade balance of Mexico reached a deficit of $8.7 billion. We cannot predict the behavior of the Mexican trade balance in the future or the country’s ability to finance a trade deficit, if any. With the liberalization of the Mexican economy and the implementation of NAFTA, other free trade agreements entered into by Mexico with the European Union, Chile, Costa Rica, Nicaragua, Colombia, Venezuela, Bolivia and Israel and a multilateral free trade agreement which became effective on January 1, 2001 with Guatemala, El Salvador and Honduras, manufacturers, such as us and certain of our domestic customers, have come under increased competitive pressure from imported goods. The reduction and phase-out of import duty rates has generally limited our flexibility to adjust pricing levels to offset the effects of devaluation and inflation in Mexico.
 
On the other hand, the trade liberalization seen in the past few years between Mexico and its trading partners has reduced the import duties and tariffs our exported products pay upon entry to foreign countries that are signatories to free trade agreements with Mexico and the amount of regulation and delay experienced in connection with the exports of our products to such countries. In addition, the lower tariffs paid by goods imported into Mexico, has reduced the cost of the raw materials that we import for our operations. We believe that implementation of the free trade agreements will enhance our ability and the ability of certain of our domestic customers to increase the exports of our and their respective products to the countries that are signatories to these agreements.
 
Inflation and Foreign Currency Exchange Rate Fluctuations
 
The following table sets forth, for the periods presented, certain information relating to inflation and foreign currency exchange rates.
 

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For the year ended
December 31,
 
  2002
   2003
 2004
 
Nominal peso devaluation (appreciation) relative to the U.S. dollar(1)
13.8%
7.6%
(0.8%)
Mexican inflation (based on changes in INPC) (1)
5.7%
4.0%
5.2%  
U.S. inflation (based on changes in Consumer Price Index)(2) 
2.4%
1.9%
3.3%  
Inflation differential (Mexican vs. United States)(1)(2)(3)
3.2%
2.1%
1.8%  
Real peso devaluation (appreciation) relative to the U.S. dollar(4)
10.3%
5.4%
(2.6%)
Free Exchange Rate as of year end(1) 
Ps. 10.4393
Ps. 11.2372
Ps. 11.1495
Mexican GDP growth rate(5)
0.8%
1.4%
4.4%
______________
(1) Source: Banco de México
(2) Source: U.S. Bureau of Labor Statistics
(3) Compounded
(4) Peso devaluation (appreciation) in real terms = - ((Nominal peso devaluation +1) / (Inflation differential +1)) - 1
(5) Source: Instituto Nacional de Estadística, Geografía e Informática
 
Effects of Inflation and Foreign Currency Exchange Rate Fluctuations on Operating Margins
 
Changes in the relative value of the peso to the U.S. dollar have an effect on our results of operations. In general, as described more fully in the following paragraphs, a real devaluation of the peso will likely result in an increase of our operating margins and a real appreciation of the peso will likely result in a decrease in our operating margins, in each case, when measured in pesos. This is so because the aggregate amount of our consolidated net sales denominated in or affected by U.S. dollars exceeds the aggregate amount of our costs of goods sold and our general, administrative and selling expenses denominated in or affected by U.S. dollars.
 
A substantial portion of the sales generated by our Mexican and U.S. subsidiaries are either denominated in or affected by the value of the U.S. dollar. The prices of a significant number of the products we sell in Mexico, in particular those of flat glass for automotive uses, capital goods, certain glassware products and most chemical and packaging products, are linked to the U.S. dollar. In addition, substantially all of our export sales are invoiced in U.S. dollars and subsequently translated into pesos using the exchange rate in effect at the time of the transaction. The translated U.S. dollar sales of our Mexican subsidiaries are then restated into constant pesos using INPC, as of the date of the most recent balance sheet included in those financial statements. As a result, when the peso devalues in real terms against the U.S. dollar, as was the case in 2002 and 2003, the same level of U.S. dollar sales as in a prior period will result in higher constant peso revenues in the more recent period. Conversely, when the peso appreciates in real terms against the U.S. dollar, as was the case in 2004, the same level of U.S. dollar sales as in a prior period will result in lower constant peso revenues in the more recent period. Moreover, because a material portion of our cost of goods sold, including labor costs, and general, administrative and selling expenses are invoiced in pesos and are not directly affected by the relative value of the peso to the U.S. dollar, the real appreciation or devaluation of the peso relative to the U.S. dollar has a significant effect on our operating margins at least in the short term.
 
Further, a strong peso relative to the U.S. dollar makes the Mexican market more attractive for importers and competitors that might not otherwise sell in the Mexican market. A strong peso relative to the U.S. dollar also makes those of our products whose prices are denominated in or are affected by the value of the U.S. dollar less competitive or profitable. When the peso appreciates in real terms, with respect to such products, we must either increase our prices in U.S. dollars, which makes our products less price-competitive, or bear reduced operating margins when measured in pesos. Given the competitive nature of the industries in which we operate, in the past we have chosen to reduce our operating margins for such products in response to appreciation of the peso relative to the U.S. dollar. In the year ended December 31, 2004, the appreciation of the peso in real terms had an adverse effect on our operating margins and may continue to do so in the future. Sales of products manufactured, processed or sold by us outside Mexico (principally, by Vitro America, Vitro Packaging, Comegua, and Cristalglass), as well as such
 

40


subsidiaries’ expenses, are restated during a financial reporting period by adjusting such amount for the inflation observed in the country in which the subsidiary operates and then translated into pesos at the exchange rate in effect at the end of the period. Since such subsidiaries’ revenues and expenses are generally both earned and incurred in the same currency the devaluation or appreciation of the peso has a much more limited effect on the operating margins of such subsidiaries. However, profits, as reported in real peso terms, are substantially impacted by the devaluation or appreciation of the peso relative to the appropriate currency.
 
Effect of Inflation and Foreign Currency Exchange Rate Fluctuations on Total Financing Cost
 
Our total financing cost includes (i) net interest expense, (ii) the net effect of inflation on our monetary assets and liabilities and (iii) the net effect of changes in nominal foreign currency exchange rates on monetary assets and liabilities denominated in foreign currencies. Net interest expense is calculated as the nominal amount of interest expense incurred by us with respect to our short- and long-term debt and off-balance sheet financings minus the nominal amount of interest income generated by us with respect to our monetary assets.
 
Inflation affects our total financing cost. During periods of inflation, the principal amount of our monetary debt will generally be reduced in real terms by the rate of inflation. The amount of such reduction will result in a gain from monetary position. This gain is offset by the reduction in real terms in the value of the monetary assets we held during such period. Historically, our monetary liabilities have exceeded our monetary assets and, thus, we have tended to experience monetary gains during periods of inflation. Declining levels of inflation since 1999 have resulted in lower monetary gains.
 
Our total financing cost is also impacted by changes in the nominal value of the peso relative to the U.S. dollar. Foreign currency exchange gains or losses included in total financing cost result primarily from the impact of nominal changes in the U.S. dollar-peso exchange rate on our and our Mexican subsidiaries’ U.S. dollar-denominated monetary liabilities (such as dollar-denominated debt and accounts payable arising from imports of raw materials and equipment) and assets (such as dollar-denominated cash and cash equivalents and accounts receivable from exports). Because our U.S. dollar-denominated liabilities have historically been significantly in excess of our dollar-denominated monetary assets, the devaluation or appreciation of the peso resulted in exchange losses and gains, respectively. Accordingly, in 2002 and 2003, the nominal devaluation of the peso relative to the U.S. dollar resulted in foreign currency exchange losses. The nominal appreciation of the peso relative to the U.S. dollar resulted in a foreign currency exchange gain in 2004, but with the unwind of the currency exchange swaps in May 2004, we recorded a net exchange loss.
 
Results of Operations
 
The following table sets forth, for the periods presented, selected items of our consolidated statement of operations calculated as a percentage of our consolidated net sales.
 

 
For the year ended December 31,
 
2002
2003
2004
 
Net sales
100.0%
100.0%
100.0%
Cost of goods sold
71.2
72.3
73.6
Gross profit
28.8
27.7
26.4
General, administrative and selling expenses
20.4
20.2
20.4
Operating income
8.4
7.5
6.0
Total financing cost
9.2
8.0
5.4
Net income (loss)
0.6
(1.5)
(0.2)

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The following table sets forth, for the periods presented, the consolidated net sales (before elimination of interdivisional sales and other), export sales and operating income (before corporate and other eliminations) of each of our business units, as well as the contribution to our consolidated results of operations, in percentage terms, of the consolidated net sales (after elimination of interdivisional sales), export sales and operating income (after corporate and other eliminations) of each of our business units. The following table does not include the results of discontinued operations. Peso amounts set forth in the following table have been restated in millions of constant pesos as of December 31, 2004.
 

 
For the year ended December 31,
 
2002
2003
2004
2004
 
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
 
 
(Ps. millions, except for percentages)
($ millions)(1)
Net sales
             
Flat Glass
Ps. 13,061
48%
Ps.13,059
49%
Ps.12,699
49%
$ 1,1399
Glass Containers
11,058
41%
10,451
40%
10,702
41%
9600
Glassware
2,878
11%
2,755
11%
2,726
10%
2455
Interdivisional sales and
other
(96)
0%
(27)
0%
54
0%
44
Consolidated  net sales
Ps.26,901
100%
Ps.26,238
100%
Ps.26,181
100%
$ 2,3488
 
 
($ millions, except for percentages)
 
Export sales
             
Flat Glass
$ 272
46%
$ 254
44%
$ 294
46%
 
Glass Containers
236
40%
248
43%
266
42%
 
Glassware
78
13%
78
13%
78
12%
 
Consolidated exports
$ 586
100%
$ 579
100%
$ 637
100%
 
 
 
(Ps.millions, except for percentages)
($ millions)(1)
Operating income (loss)
             
Flat Glass
Ps.1, 013
45%
 Ps.1,101
56%
Ps. 854
54%
$ 777
Glass Containers
1,308
58%
814
42%
794
51%
711
Glassware
287
13%
196
10%
83
5%
77
Corporate and other
eliminations
(336)
(16)%
(151)
(8)%
(161)
(10)%
(14)))
Consolidated operating income
Ps.2,272
100%
Ps.1,960
100%
Ps.1,570
100%
$ 1411
______________
(1) Peso amounts have been translated into U.S. dollars, solely for the convenience of the reader, at the rate of 11.1495 pesos per one U.S. dollar, the Free Exchange Rate on December 31, 2004.
 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
 
Net Sales
 
Our consolidated net sales decreased 0.2% to Ps.26,181 million for the year ended December 31, 2004 from Ps.26,238 million for the year ended December 31, 2003. This decrease was primarily attributable to our divestiture of our 60% interest in Vitro OCF, which we sold on April 2, 2004, our divestiture of our 50% interest in Vancan, which we sold on September 27, 2004 and our divestiture of our 100% interest in ECSA, which we sold on September 10, 2003 (see “Item 4. Information on the Company—Business—Divestitures”). On a comparable basis (excluding companies divested in 2003 and 2004) our sales grew 2.6% to approximately Ps. 25,729 million for the year ended December 31, 2004 from approximately Ps. 25,086 million for the year ended December 31, 2003. This increase was primarily attributable to (i) an increase in our Glass Containers business unit’s sales in our beer, wine, liquor and cosmetics business lines, (ii) the increase in sales volume of our automotive division and (iii) an increase in our Glassware business unit’s sales primarily due to the export sales growth in the commercial segment, as well as higher sales of candle holders in Mexico. Those increases were offset, in part, by lower prices in the construction segment of the Flat Glass business unit and declines in (i) prices in the returnable soft drink business lines products of the Glass Containers business unit and (ii) sales volume in the Glass Containers business unit's soft drink and pharmaceutical business lines.
 
For the year ended December 31, 2004, our consolidated export sales were $637 million, an increase of 10% when compared to approximately $579 million for the same period of 2003, principally due to the increase of exports of our Flat Glass business unit to the United States. Our export sales represented approximately 28% of our consolidated net sales for the year ended December 31, 2004. More than 80% of our consolidated net sales for the year ended December 31, 2004 were either denominated in or sensitive to the value of the U.S. dollar. This is due to the fact that, in addition to exports and foreign subsidiaries’ sales, the prices of a significant portion of our products in Mexico are generally determined with reference to U.S. dollar-based prices.
 
Flat Glass Business Unit
 
Net sales of our Flat Glass business unit were approximately Ps. 12,699 million for the year ended December 31, 2004, a decrease of 2.8% from Ps. 13,059 million for the same period in 2003. On a comparable basis (excluding Vitro OCF) the business unit's net sales grew 1.4% to approximately Ps. 12,498 million for the year ended December 31, 2004 from approximately Ps. 12,326 million for the year ended December 31, 2003. This increase was mainly due to higher sales in the automotive division, particularly in export sales, which posted strong sales numbers on increasing OEM volumes and auto glass replacement export sales volume. Our construction glass division in Mexico experienced a decline in net sales (despite a larger sales volume) as added competition from the new Guardian furnace in Queretaro, Mexico and imports from Asia drove prices of the business unit's products downward.
 
Export sales of the Flat Glass business unit were approximately $294 million in the year ended December 31, 2004, an increase of 15.4% when compared to approximately $254 million for the same period in 2003. This increase was largely due to an increased sales volume of the business unit’s automotive division, especially as it obtained new OEM contracts. The business unit’s Automotive division accounted for 92% of the increase in export sales.
 
Glass Containers Business Unit
 
Net sales of our Glass Containers business unit increased 2.4% to approximately Ps. 10,702 million for the year ended December 31, 2004 from approximately Ps. 10,451 million for the same period in 2003. On a comparable basis (excluding Vancan) the business unit's net sales grew 3.6% to approximately Ps. 10,390 million for the year ended December 31, 2004 from approximately Ps. 10,027 million for the year ended December 31, 2003. This increase in our business unit’s sales primarily due to an increase in sales volume in the business unit's beer, wine, liquor and cosmetics business lines and was offset by a decline in sales volume in the business unit's soft drinks and
 

43


pharmaceutical business lines and a decline in prices in the returnable soft drink business lines’ products. The decrease in sales volume to the business unit's soft drink bottler customers was due to the continuous increase in the market share of alternative forms of packaging in those business lines.
 
For the year ended December 31, 2004, export sales of the Glass Containers business unit amounted to approximately $266 million, an increase of 7.2% from approximately $248 million for the same period in 2003. This was mainly due to higher sales volume in the business unit's cosmetics and wine and liquor business lines.
 
Glassware Business Unit
 
Net sales of our Glassware business unit amounted to approximately Ps. 2,726 million for the year ended December 31, 2004, a decrease of 1.1% from approximately Ps. 2,755 million for the same period in 2003. The decrease was primarily due to the divestiture of ECSA on September 10, 2003, which had net sales of approximately Ps. 147 million in the period beginning on January 1, 2003 and ending on September 10, 2003. On a comparable basis, the business units sales increased due to higher export sales in the commercial segment, as well as higher sales of candle holders in Mexico.
 
Export sales of the Glassware business unit increased 1.0% from approximately $77.5 million for the year ended December 31, 2003 to approximately $78.2 million for the same period in 2004.
 
Operating Income
 
Our consolidated operating income decreased 19.9% from approximately Ps. 1,960 million for the year ended December 31, 2003 to approximately Ps. 1,570 million for the same period in 2004. On a comparable basis (excluding companies divested in 2003 and 2004) our operating income decreased 13.3% to approximately Ps. 1,491 million for the year ended December 31, 2004 from approximately Ps. 1,721 million for the year ended December 31, 2003. This decrease was due to an increase in cost of sales from Ps. 18,969 million for the year ended December 31, 2003, to Ps. 19,261 million for the year ended December 31, 2004, due primarily to (i) an increase in energy prices, which were partially mitigated through our price-hedging strategy and the benefits provided by the petroleum coke project in the Monterrey flat glass and glass container furnaces; (ii) decreased operating margins in our Flat Glass business unit; (iii) our modifying in 2004 our depreciation and capitalization policy for molds, consistent with the glass container industry practices, which reduced their useful life from eight to three years and generated an additional charge of approximately Ps.65 million; and (iv) an increase of approximately Ps.41 million in selling, general and administrative expenses due to higher freight and distribution expenses.
 
Flat Glass Business Unit
 
Operating income of the Flat Glass business unit amounted to Ps. 854 million for the year ended December 31, 2004, a decrease of 22.4% from Ps. 1,101 million for the same period in 2003. On a comparable basis (excluding Vitro OCF) the business unit's operating income decreased 12.5% to approximately Ps. 809 million for the year ended December 31, 2004 from approximately Ps. 924 million for the year ended December 31, 2003. This decrease was due mainly to a general decrease in the operating margins of the business unit as a result of (i) increased cost of sales in all of its business lines during 2004, due mainly to higher gas and fuel prices and (ii) in the construction segment of the business unit, also, lower prices in substantially all of the business lines products. The decrease was partially offset by the business unit's increased net sales and decreased operating expenses, though it was not enough to maintain operating margins at the 2003 levels.
 
Glass Containers Business Unit
 
The operating income of our Glass Containers business unit decreased 2.5% from approximately Ps. 814 million for the year ended December 31, 2003 to approximately Ps. 794 million for the same period in 2004. On a comparable basis (excluding Vancan) the business unit's operating income decreased 0.5% to approximately Ps. 762 million for the year ended December 31, 2004 from approximately Ps. 731 million for the year ended December 31, 2003. This decrease was mainly due to the modification
 

44


of our depreciation and capitalization policy for molds in 2004, which was consistent with the glass container industry practices, reducing their useful life from eight to three years.
 
Glassware Business Unit
 
For the year ended December 31, 2004, operating income of our Glassware business unit was approximately Ps. 83 million, a decrease of 57.7% from approximately Ps. 196 million for the same period of 2003. On a comparable basis (excluding ECSA) our operating income decreased 55.6% to approximately Ps. 83 million for the year ended December 31, 2004 from approximately Ps. 186 million for the year ended December 31, 2003. This decrease in the business unit’s operating income resulted primarily from the high energy costs and an increase in the packaging and transportation costs.
 
Total Financing Cost
 
Our total financing cost decreased by approximately Ps. 700 million from approximately Ps. 2,105 million for the year ended December 31, 2003 to approximately Ps. 1,405 million for the same period in 2004. This decrease in total financing cost was primarily due to (i) a lower exchange loss of approximately Ps. 78 million in 2004 compared to an approximately Ps. 822 million exchange loss in 2003 due primarily to the 0.8% revaluation of the Mexican peso against the U.S. dollar during 2004 compared to the 7.6% devaluation of the Mexican peso against the U.S. dollar during 2003, which was partially offset by the loss derived from the unwind of the currency exchange swaps made in May 2004 and (ii) an increase on gain from monetary position of approximately Ps. 131 due to the higher inflation during 2004 than in 2003. The net decrease in our financial costs was partially offset by and increase of Ps.117 million related to the unwind of interest rate cap at Vitro on May 2004, and a decrease of Ps.74 million in our interest income.
 
Taxes and Workers’ Profit Sharing
 
For the year ended December 31, 2004, we recorded an expense of Ps. 68 million from income tax, tax on assets and workers’ profit sharing, as compared to an expense of Ps. 94 million for the same period in 2003. The decline was principally a decrease in deferred income taxes for the tax rate reduction to 30% in 2005, 29% in 2006 and 28% in 2007 and beyond.
 
Other expenses, net

Other expenses, net, decreased approximately Ps. 15 million from Ps. 156 million for the year ended December 31, 2003 to Ps. 141 million for the same period in 2004. During the year 2004, our restructuring charges increased Ps. 145 million to Ps. 243 million from Ps. 98 million in 2003. This increase is the result of a three-year transformation process at Vitro America designed to streamline the organization and as a cost reducing measure.  Additionally, we had an increase in write-off and loss from sale of assets of Ps. 200 million from Ps. 129 million for the year ended December 31, 2003 to Ps. 329 million for the same period in 2004. These increases were more than offset by a gain of Ps. 451 million in gain from sale of subsidiaries and associated companies from a gain of Ps. 37 million for the year ended December 31, 2003 to a gain of Ps. 488 million for the same period in 2004, which resulted from the sales of Vitro OCF and Vancan during 2004.
 
Net loss
 
We had a reduction in net loss of approximately Ps. 351 million from approximately Ps. 395 million for the year ended December 31, 2003 to approximately Ps. 44 million for the same period in 2004. This reduction resulted mainly from the decrease in total financing costs and taxes and worker’s profit sharing.
 
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
 
Net Sales
 
Our consolidated net sales decreased 2.5% to approximately Ps. 26,238 million for the year ended December 31, 2003 from approximately Ps. 26,901 million for the year ended December 31, 2002. This decrease was primarily attributable to (i) an approximately 55% decline in our Glass Containers business unit’s sales volume in the beer segment due to reduced purchasing from the business unit’s main customer in that segment in connection with the expansion of the customer’s internal glass bottle production capacity, (ii) an approximately 8% decline in our Glassware business unit’s sales volume in Mexico, primarily due to lower sales volume in Mexico and competition from Chinese imports, (iii) lower prices due to pricing pressures in many of our business units’ markets, (iv) a continued slowdown in the United States non-residential construction market that negatively impacted Vitro America’s net sales, whose business is basically focused on the commercial segment of the construction market and (v) our divestiture of our 100% interest in ECSA, which we sold on September 10, 2003 (see “Item 4. Information on the Company—Business—Divestitures”), and our divestiture of ASA, which we sold on April 15, 2002 (see “Item 4. Information on the Company—Business—Divestitures”). This decline was partially offset by (i) increased sales volume in our Flat Glass business unit’s Mexican markets, resulting in approximately 10.7% more tons of flat glass sold to Mexican construction and other non-automobile customers during 2003 than in 2002, (ii) increased sales volumes by our Flat Glass business unit to both the Mexican and U.S. automotive replacement markets—
 

45


approximately 6% and 18% more units in Mexico and the United States, respectively, (iii) higher sales in the United States by our Glass Container business unit due to a shift towards higher-priced products and (iv) an increase in sales volume in Europe by our Flat Glass business unit due to the award of significant contracts to our Spanish subsidiary Cristalglass and the increased market penetration in Portugal.
 
For the year ended December 31, 2003, our consolidated export sales were $579 million, a decrease of 1.2% when compared to approximately $586 million for the same period of 2002, principally due to a continued slowdown in the U.S. non-residential construction market that impacted our Flat Glass business unit’s sales in the United States. Our export sales represented approximately 26% of our consolidated net sales for the year ended December 31, 2003. More than 80% of our consolidated net sales for the year ended December 31, 2003 were either denominated in or sensitive to the value of the U.S. dollar. This is due to the fact that, in addition to exports and foreign subsidiaries’ sales, the prices of a significant portion of our products in Mexico are generally determined with reference to U.S. dollar-based prices.
 
Flat Glass Business Unit
 
Net sales of our Flat Glass business unit were approximately Ps. 13,059 million for the year ended December 31, 2003, almost flat from Ps. 13,061 million for the same period in 2002. Sales of auto glass for the OEM’s decreased as low automobile demand in both the domestic and export markets remained weak. With respect to the construction market, the Flat Glass business unit experienced higher sales volume in Mexico due to the higher demand by certain of its major distributors and the commencement of operations of Vitro AFG, our joint venture with AFG Industries. During 2003, Cristalglass, our Spanish subsidiary, increased its market penetration in Portugal, and showed a growth in net sales of 14% when compared to the year ended December 31, 2002. During 2003, Cristalglass was also awarded significant supply contracts which provided access to new markets, such as contracts to supply architectonic glass to the Spanish monumental construction market. Sluggish demand in the United States’ non-residential construction market was largely responsible for the decline in the net sales of Vitro America.  
 
Export sales of the Flat Glass business unit were approximately $254 million in the year ended December 31, 2003, a decrease of 6.6% when compared to approximately $272 million for the same period in 2002, principally due to lower sales to the automotive markets, particularly by Vitro Flex, which sells almost exclusively to Ford Motor Co. in the United States.
 
Glass Containers Business Unit
 
Net sales of our Glass Containers business unit decreased 5.5% to approximately Ps. 10,451 million for the year ended December 31, 2003 from approximately Ps. 11,058 million for the same period in 2002. The decrease was principally attributable to a decrease in the sales volume of, and a shift in product mix in, the beverages segment in Mexico, mainly in the beer segment. Sales volume in that segment fell 55% in 2003 when compared to the sales volume in 2002, primarily due to the increase of the glass container production capacity of Grupo Modelo S.A. de C.V., a Mexican brewer, which also produces some of its own bottles. In addition, the business unit’s product mix in the beer segment shifted towards less-expensive products. The decrease in net sales was partially offset by a 22.6% increase in sales volume of the non-returnable beverages segment and increased sales volume to value-added markets. Although prices remained stable in 2003 relative to 2002, except in the beer business segment, the product mix generally shifted slightly towards higher-priced goods. The divestiture of ASA during 2002, which had net sales of approximately Ps. 93 million in the period beginning on January 1, 2002 and ending on April 15, 2002, also contributed to the decrease in the business unit’s net sales.
 
For the year ended December 31, 2003, export sales of the Glass Containers business unit amounted to approximately $248 million, an increase of 5.1% from approximately $236 million for the same period in 2002. This was mainly the result of the business unit’s higher sales volume, mainly in the beverages segments, and its focus on value-added niche products.
 
Glassware Business Unit
 
Consolidated net sales of our Glassware business unit amounted to approximately Ps. 2,755 million for the year ended December 31, 2003, a decrease of 4.3% from approximately Ps. 2,878 million for the same period in 2002.
 

46


The decrease was primarily due to (i) lower sales volume in Mexico due to lower than expected demand in certain segments and increased competition from Chinese imports and (ii) the divestiture of ECSA on September 10, 2003, which had net sales of approximately Ps. 193 million for the year ended December 31, 2002 and approximately Ps. 147 million in the period beginning on January 1, 2003 and ending on September 10, 2003. Higher sales volume to Latin America and Europe partially offset the decline in the business unit’s consolidated net sales.
 
Export sales of the Glassware business unit decreased 1.0% from approximately $79 million for the year ended December 31, 2002 to approximately $78 million for the same period in 2003.
 
Operating Income
 
Our consolidated operating income decreased 13.7% from approximately Ps. 2,272 million for the year ended December 31, 2002 to approximately Ps. 1,960 million for the same period in 2003. The decrease was mainly due to the decrease in our consolidated net sales. This decrease in our consolidated operating income was partially offset by a 3.2% decrease in our general, administrative and selling expenses from approximately Ps. 5,479 million for the year ended December 31, 2002 to approximately Ps. 5,309 million for the same period in 2003 as a result of our efforts to reduce expenses and our divestitures.
 
Flat Glass Business Unit
 
Operating income of the Flat Glass business unit amounted to Ps. 1,101 million for the year ended December 31, 2003, an increase of 8.7% from Ps. 1,013 million for the same period in 2002, primarily due to a reduction in cost of sales and operating expenses, than in net sales in 2003. During 2003, as a result of our commitment to reduce costs and realign our product mix, the Flat Glass business unit focused on increasing efficiencies at its facilities by automating certain processes and by reducing expenses especially within the sales and distribution departments. Variable costs in the Flat Glass business unit were lower in 2003 than 2002, as it had a scheduled cold repair in 2003 which shut down one of its furnaces for three months. These effects were partially offset by higher fuel and energy prices, and by the need for higher purchases from third parties to fulfill its clients orders while one of its furnaces was shut down for such scheduled cold repair. As a percentage of sales, its costs did not vary significantly from the period ended December 31, 2002 compared to the same period in 2003.
 
Glass Containers Business Unit
 
The operating income of our Glass Containers business unit decreased 37.8% from approximately Ps. 1,308 million for the year ended December 31, 2002 to approximately Ps. 814 million for the same period in 2003. This decrease in operating income for the year was mainly due to the decrease in its net sales and the failure of its cost of sales and general, administrative and selling expenses to decline proportionately to its net sales. Also, the divestiture of ASA, which contributed approximately Ps. 11 million of operating income for the period beginning on January 1, 2002 and ending on April 15, 2002, contributed to the decline.
 
Glassware Business Unit
 
For the year ended December 31, 2003, operating income of our Glassware business unit was approximately Ps. 196 million, a decrease of 31.7% from approximately Ps. 287 million for the same period of 2002. The decrease in the business unit’s operating income resulted primarily from the decrease in its net sales and increased energy costs due to the increase in the price of natural gas.
 
Total Financing Cost
 
Our total financing cost decreased by approximately Ps. 378 million from approximately Ps. 2,483 million for the year ended December 31, 2002 to approximately Ps. 2,105 million for the same period of 2003. This decrease in total financing cost was primarily due to a lower exchange loss of approximately Ps. 822 million in 2003 compared to an approximately Ps. 1,687 million exchange loss for 2002. The lower exchange loss was due primarily to the 7.6% devaluation of the Mexican peso against the U.S. dollar during 2003 compared to the 13.8% devaluation of the Mexican peso against the U.S. dollar during 2002. The exchange loss, which is a non-cash item, was partially offset by a lower gain from monetary position of approximately Ps. 252 million due the lower inflation during 2003 and an increase of Ps.96 million in our interest income when compared to the year 2002. The net decrease in financing cost was also partially offset by the increase of Ps.207 million in our interest expense resulting from an increase in our total debt and a change in our Indebtedness mix that saw an increase in our peso denominated debt.
 

47


Taxes and Workers’ Profit Sharing
 
For the year ended December 31, 2003, we recorded an expense of Ps. 94 million from income tax, tax on assets and workers’ profit sharing, as compared to a net benefit of Ps. 452 million for the same period in 2002 due principally to an increase in deferred income taxes. The recording during 2002 of the gradual decrease in income tax rates from 35% in 2002 to 32% in 2005 and the effect of a higher devaluation of the Mexican peso during 2002, when compared to 2003, resulted in higher taxes in 2003.

Other expenses, net

Other expenses, net, decreased approximately Ps. 298 million from Ps. 454 million for the year ended December 31, 2002 to Ps. 156 million for the same period in 2003. The decrease was due mainly to a decrease of Ps. 318 million in write-off and loss from sale of assets to Ps. 129 million for the period in 2003, from Ps. 447 million for the year ended  December 31, 2002 which resulted from the write-off made in 2002 of equipment and machinery at the Mexicali plant that was contributed to Vitro AFG, our joint venture with AFG Industries.
 
Net Income (loss)
 
Our net income decreased approximately Ps. 560 million from approximately Ps. 165 million for the year ended December 31, 2002 to a loss of approximately Ps. 395 million for the same period in 2003. This decrease resulted from the aforementioned reasons and because our results of operations for the year ended December 31, 2002 included an approximately Ps. 506 million gain from the sale of our 51% interest in Vitromatic to Whirlpool, which was partially offset by a net loss by Vitromatic of approximately Ps. 128 million for the six months ended June 30, 2002.
 


48


LIQUIDITY AND CAPITAL RESOURCES
 
As of May 31, 2005, we had cash and cash equivalents totalling approximately Ps. 1,938 million ($178 million). Our policy is to invest available cash in short-term instruments issued by Mexican and international banks and securities issued by the governments of Mexico and the United States.
 
Under Mexican GAAP, our consolidated statement of changes in financial position identifies the generation and application of resources representing differences between beginning and ending financial statement balances in constant pesos. Thus, the changes shown in the statements of changes in financial position included in our consolidated financial statements do not necessarily represent cash flow activities. Accordingly, the discussion of cash flows presented in the following paragraph and under “—Changes in Working Capital” are based on the reconciliation to U.S. GAAP included in note 22 to our audited consolidated financial statements.
 
Net cash generated from continuing operations for the year ended December 31, 2004 was approximately Ps. 1,069 million ($96 million), an decrease of 15% from approximately Ps. 1,262 million of net cash generated from continuing operations for the year ended December 31, 2003.
 
Changes in Working Capital
 
Our working capital increased Ps.486 million during 2004.  This increase was principally due to an increase in our trade receivables, inventories and payments to funding the pension plan of the Company.
 
The accounts receivable increase during 2004 due to the advance payment of approximately Ps.100 million of several of our clientes of our Glass Container business unit at the end of the year 2003, which was extinguished during 2004 and for the increase in our sales of our beer, wine, liquor and cosmetis business lines during 2004.
 
Our inventories increased Ps 275 million due to (i) the build-up of finished inventory in our Glass Container business in anticipation of sales expectations for the first quarter of 2005, and (ii) to give better and quicker service to our most important clientes in our wine, food, cosmetics and beverages business line, and (iii) the build-up of finished inventory of flat glass and glassware in anticipation of the refurbishment of these furnaces during 2005.
 
Capital Expenditures
 
We operate in capital-intensive industries and require ongoing investments to update our assets and technology. Over the past years, funds for those investments and for working capital needs, joint venture transactions, acquisitions and dividends have been provided by a combination of cash generated from operations, short- and long-term debt and, to a lesser extent, divestitures.
 
Our capital expenditures program is focused on new investments in, technological upgrades to and maintenance of, our manufacturing facilities, as well as expansion of our production capacity. Our capital expenditures program also contemplates the purchase and maintenance of environmental protection equipment required to meet applicable environmental laws and regulations, as such may be in effect from time to time.
 
During 2005, we expect to make capital expenditures in excess of $100 million as follows:
 
·  
purchase of molds and racks required for introduction of new automotive glass products. We estimate capital expenditures of approximately $19 million;
 
·