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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form F-1
Braskem S.A.
N/A
| Federative Republic of Brazil | 2860 | N/A | ||
|
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(IRS Employer Identification Number) |
Avenida das Nações Unidas, 4777
CT Corporation System
Copies to:
|
Donald E. Baker, Esq. White & Case LLP Alameda Santos, 1940 — 3° andar 01418-200 São Paulo — SP, Brazil 55-11-3147-5600 |
Glenn M. Reiter, Esq. Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 212-455-2000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION OF REGISTRATION FEE
| Proposed Maximum | Amount of | |||
| Title of Each Class of | Aggregate Offering | Registration | ||
| Securities to be Registered | Price(3) | Fee | ||
|
Class A Preferred Shares, without par
value(1)(2)
|
US$250,000,000 | US$31,675.00 | ||
| (1) | Includes class A preferred shares to be offered and sold in the United States and other countries outside Brazil, class A preferred shares subject to the international underwriters’ over-allotment option and class A preferred shares which are being offered in Brazil, but which may be resold in the United States in transactions requiring registration under the Securities Act. Offers and sales of class A preferred shares in Brazil are being made pursuant to Registration S under the Securities Act and are not covered by this registration statement. A portion of the class A preferred shares will be represented by American Depositary Shares (“ADSs”). Each ADS represents 1,000 class A preferred shares. |
| (2) | A separate Registration Statement on Form F-6 (File No 333-108660) was filed on September 10, 2003 and declared effective on September 17, 2003. This Registration Statement on Form F-6 relates to the registration of ADSs evidenced by the American Depositary Receipts issuable upon deposit of the class A preferred shares registered hereby. |
| (3) | Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(c) under the Securities Act based on the average of the high and low prices of ADSs representing class A preferred shares on The New York Stock Exchange on April 2, 2004. |
| The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. |
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| The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the United States Securities Exchange Commission becomes effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. |
SUBJECT TO COMPLETION, DATED , 2004
BRASKEM S.A.
In the form of American Depositary Shares
We are selling class A preferred shares in the form of American Depositary Shares, or ADSs. Each ADS represents 1,000 class A preferred shares.
We are selling ADSs in the United States and other countries outside Brazil through international underwriters named in this prospectus. In addition, we are concurrently offering class A preferred shares in Brazil under a Portuguese language prospectus.
The ADSs are listed on The New York Stock Exchange under the symbol “BAK.” The last reported sale price of the ADSs on The New York Stock Exchange on April 2, 2004 was US$24.13 per ADS. Our class A preferred shares are listed on the São Paulo Stock Exchange in lots of 1,000 shares under the symbol “BRKM5.” The closing price of our class A preferred shares on the São Paulo Stock Exchange on April 2, 2004 was R$69.70 per 1,000 class A preferred shares, which is equivalent to approximately US$24.09 per 1,000 class A preferred shares, based upon an exchange rate of R$2.893 to US$1.00.
The international underwriters have an option to purchase a maximum of additional ADSs to cover over-allotments of ADSs. The Brazilian underwriters also have an option to purchase a maximum of additional class A preferred shares to cover over-allotments of class A preferred shares in the concurrent Brazilian offering.
Investing in the ADSs involves risks. See “Risk Factors” beginning on page 12.
| Underwriting | ||||||||||||
| Discounts and | Proceeds to | |||||||||||
| Price to Public | Commissions | Braskem S.A. | ||||||||||
|
Per ADS
|
US$ | US$ | US$ | |||||||||
|
Total
|
US$ | US$ | US$ | |||||||||
The ADSs are expected to be delivered on or about , 2004.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Global Coordinator and Sole Bookrunner
Joint Lead Managers
| Credit Suisse First Boston | Unibanco |
UBS Investment Bank
The date of this prospectus is , 2004.
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[PHOTOGRAPHS OF FACILITIES TO COME]
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. This prospectus may only be used where it is legal to sell our class A preferred shares or the ADSs. The information in this prospectus may only be accurate on the date of this document.
This prospectus is being used in connection with the offering of class A preferred shares in the form of ADSs in the United States and other countries outside Brazil.
Dealer Prospectus Delivery Obligation
Until , 2004 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars.
On April 2, 2004, the exchange rate for reais into U.S. dollars was R$2.893 to US$1.00, based on the commercial selling rate as reported by the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank. The commercial selling rate was R$2.889 to US$1.00 at December 31, 2003 and R$3.533 to US$1.00 at December 31, 2002. The real/dollar exchange rate fluctuates widely, and the commercial selling rate at April 2, 2004 may not be indicative of future exchange rates. See “Exchange Rates” for information regarding exchange rates for the Brazilian currency since January 1, 1999.
Solely for the convenience of the reader, we have translated some amounts included in “Prospectus Summary — Summary Financial and Other Information,” “Capitalization,” “Selected Financial and Other Information” and elsewhere in this prospectus from reais into U.S. dollars for convenience only using the commercial selling rate as reported by the Central Bank at December 31, 2003 of R$2.889 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Such translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date.
Financial Statements
We maintain our books and records in reais.
Our consolidated and combined financial statements at December 31, 2003 and 2002 and for each of the years ended December 31, 2003, 2002 and 2001 have been audited by PricewaterhouseCoopers Auditores Independentes, as stated in their report appearing herein, and are included in this prospectus.
We prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which are based on:
| • | Brazilian Law No. 6,404/76, as amended by Brazilian Law No. 9,457/97 and Brazilian Law No. 10,303/01, which we refer to collectively as the Brazilian Corporation Law; | |
| • | the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários); and | |
| • | the accounting standards issued by the Brazilian Institute of Independent Accountants (Instituto dos Auditores Independentes do Brasil). |
Brazilian GAAP differs in significant respects from accounting principles generally accepted in the United States, or U.S. GAAP. For more information about the differences between Brazilian GAAP and U.S. GAAP and a reconciliation of our net income (loss) and shareholders’ equity from Brazilian GAAP to U.S. GAAP, see note 29 to our consolidated and combined financial statements.
Consistent with Brazilian GAAP, our consolidated and combined financial statements under Brazilian GAAP proportionally consolidate the results of operations and financial condition of jointly controlled companies which are not our subsidiaries, but which we jointly control with one or more other shareholders. The U.S. GAAP reconciliation eliminates the effects of proportional consolidation for those companies which are not jointly controlled by all voting shareholders.
Share Split
On October 20, 2003, we authorized the split of all of our issued common shares, class A preferred shares and class B preferred shares into 20 shares for each issued share. This share split was effective on October 21, 2003. As a result of this share split, the ratio of our class A preferred shares to ADSs changed from 50 class A preferred shares per ADS to 1,000 class A preferred shares per ADS. All references to numbers of shares and dividend amounts in this prospectus have been adjusted to give effect to this 20-for-one share split.
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Market Share and Other Information
We make statements in this prospectus about our market share in the petrochemical industry in Brazil and our production capacity relative to that of other petrochemical producers in Brazil and Latin America. We have made these statements on the basis of information obtained from third party sources that we believe are reliable. We have calculated our Brazilian market shares with respect to specific products by dividing our domestic net sales volumes of these products by the total Brazilian domestic consumption of these products estimated by the Brazilian Association of Chemical Industry and Derivative Products (Associação Brasileira de Indústrias Químicas e de Produtos Derivados). We derive information regarding (1) the production capacity of other companies in the Brazilian petrochemical industry and the estimated total Brazilian domestic consumption of petrochemical products principally from reports published by the Brazilian Association of Chemical Industry and Derivative Products and (2) the production capacity of other companies in the Latin American petrochemical industry principally from reports published by Chem Systems, Inc. and Chemical Market Associates Inc. Although we have no reason to believe that any of this information is inaccurate in any material respect, neither we nor the underwriters have independently verified the production capacity, market share, market size or similar data provided by third parties or derived from industry or general publications.
Technical and Other Terms
As used in this prospectus, the following terms have these meanings:
| “EDC” | ethylene dichloride, a product of our Vinyls Unit. | |
| “first generation producer” | a petrochemical cracker that transforms or “cracks” naphtha and other inputs into basic petrochemicals, such as ethylene and propylene. | |
| “HDPE” | high density polyethylene, a product of our Polyolefins Unit. | |
| “LDPE” | low density polyethylene, a product of our Polyolefins Unit. | |
| “LLDPE” | linear low density polyethylene, a product of our Polyolefins Unit. | |
| “PET” | polyethylene terephthalate, a product of our Business Development Unit. | |
| “production capacity” | the annual projected capacity for a particular facility, calculated based upon operations 24 hours for each day of a year and deducting scheduled downtime for regular maintenance. | |
| “PVC” | polyvinylchloride, a product of our Vinyls Unit. | |
| “second generation producer” | a producer of resins and other intermediate petrochemical products. | |
| “third generation producer” | a producer that transforms resins and other intermediate petrochemical products into end-products, such as film, piping and containers. | |
| “ton” | a metric ton, which is equal to 1,000 kilograms or 2,204.62 pounds. |
Rounding
We have made rounding adjustments to reach some of the figures included in this prospectus. As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Some of the matters discussed concerning our business operations and financial performance include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” and similar expressions are forward-looking statements. Although we believe that these forward-looking statements are based upon reasonable assumptions, these statements are subject to several risks and uncertainties and are made in light of information currently available to us.
Our forward-looking statements may be influenced by factors, including the following:
| • | general economic, political and business conditions in our company’s markets, both in Brazil and abroad, including demand and prices for petrochemical products; | |
| • | interest rate fluctuations, inflation and exchange rate movements of the real in relation to the U.S. dollar; | |
| • | the cyclical nature of the Brazilian and global petrochemical industries; | |
| • | the level of our indebtedness and related debt service requirements; | |
| • | our ability to obtain financing on satisfactory terms; | |
| • | competition; | |
| • | actions taken by our major shareholders and other shareholders with options or convertible securities entitling them to acquire significant numbers of our shares; | |
| • | prices of naphtha and other raw materials; | |
| • | decisions rendered in pending major tax, labor and other legal proceedings; | |
| • | final decisions by Brazilian antitrust authorities of the transactions providing for the formation of our company as it exists today; and | |
| • | other factors identified or discussed under “Risk Factors.” |
Our forward-looking statements are not guarantees of future performance, and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections. Because of these uncertainties, you should not rely on these forward-looking statements.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
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PROSPECTUS SUMMARY
This summary highlights information presented in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in the ADSs. You should carefully read this entire prospectus before investing, including “Risk Factors” and our consolidated and combined financial statements.
Braskem
We are the leading petrochemical company in Latin America and one of the five largest private sector industrial companies in Brazil, based on net sales revenue for 2003. We recorded net income of R$215.1 million in 2003 on net sales revenue of R$10,135.8 million, in each case under Brazilian GAAP. We produce a diversified portfolio of petrochemical products and have a strategic focus on polyethylene, polypropylene and PVC. We are the only Brazilian company with integrated first and second generation petrochemical production facilities, and we have 13 plants in Brazil.
We have grown over the past three years primarily as the result of the integration of the operations of six Brazilian petrochemical companies: our company, which was formerly named Copene Petroquímica do Nordeste S.A.; OPP Química S.A., or OPP Química; Polialden Petroquímica S.A., or Polialden; Trikem S.A., or Trikem; Proppet S.A., or Proppet; and Nitrocarbono S.A., or Nitrocarbono. We have merged with these companies, other than Polialden. Our business operations are organized into four business units, which correspond to our principal production processes and products:
| • | Basic Petrochemicals, which accounted for R$4,765.3 million, or 47.8%, of the net sales revenue of all segments, including net sales to our other business units, and had an operating margin of 10.5% in 2003; | |
| • | Polyolefins, which accounted for R$3,386.8 million, or 33.9%, of the net sales revenue of all segments and had an operating margin of 15.6% in 2003; | |
| • | Vinyls, which accounted for R$1,371.8 million, or 13.7%, of the net sales revenue of all segments and had an operating margin of 22.9% in 2003; and | |
| • | Business Development, which accounted for R$455.3 million, or 4.6%, of the net sales revenue of all segments and had an operating margin of 6.3% in 2003. |
We believe the integration of the operations of the companies that formed our company has produced, and will continue to provide, significant synergies and cost savings from reduced taxes, procurement and logistics expenses, general and administrative expenses and other operating expenses.
Basic Petrochemicals Unit
We are the leading producer of ethylene and propylene in Brazil based on sales volumes in 2003. At December 31, 2003, our Basic Petrochemicals facilities had the largest production capacity of all first generation producers in Latin America. Our Basic Petrochemicals Unit produces a broad range of basic petrochemicals, including:
| • | olefins, such as ethylene, polymer and chemical grade propylene, butadiene, isoprene and butenel; and | |
| • | aromatics, such as benzene, toluene, para-xylene and ortho-xylene. |
The products of our Basic Petrochemicals Unit are used primarily in the manufacture of intermediate petrochemical products, including those manufactured by our other business units. The operations of our Basic Petrochemicals Unit are conducted at facilities located in the petrochemical complex located in Camaçari in the State of Bahia, which we refer to as the Northeastern Complex.
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Polyolefins Unit
We are the leading producer of polyolefins in Brazil based on sales volumes in 2003. At December 31, 2003, our polyolefins production facilities had the largest production capacity of all second generation producers of polyolefins products in Latin America. Our Polyolefins Unit produces:
| • | polyethylene, including LDPE, LLDPE, HDPE and ultra high molecular weight polyethylene; and | |
| • | polypropylene. |
Approximately two-thirds of our Polyolefins Unit’s sales volumes in 2003 was derived from the sale of polyethylene products, and the remainder was derived from the sale of polypropylene products.
In 2003, we had an approximate 30% share of the Brazilian polyethylene market and an approximate 40% share of the Brazilian polypropylene market, based on sales volumes. We hold the leading market shares in Brazil in three of our four polyethylene product lines.
We manufacture a broad range of polyolefins products for use in consumer and industrial applications, including plastic films for food and industrial packaging; bottles, shopping bags and other consumer goods containers; automotive parts; and household appliances.
Our polyolefins products are manufactured in facilities located in the Northeastern Complex and in the petrochemical complex located in Triunfo in the State of Rio Grande do Sul, which we refer to as the Southern Complex.
Vinyls Unit
We are the leading producer of PVC in Brazil, based on sales volumes in 2003. At December 31, 2003, our PVC production facilities had the largest production capacity of all second generation producers of PVC in Latin America.
Our Vinyls Unit is the only vertically integrated producer of PVC in Brazil. Our PVC production is integrated through our production of chlorine and other raw materials. Our Vinyls Unit also manufactures caustic soda, which is used by producers of aluminum and paper; EDC; and chlorine, which is used internally to manufacture EDC. Approximately two-thirds of our Vinyls Unit’s net sales revenue in 2003 was derived from the sale of PVC products.
In 2003, we had an approximate 57% share of the Brazilian PVC market based on sales volumes. PVC is a versatile polymer. We manufacture a broad range of PVC resins used in the manufacture of industrial products used in the construction industry, including pipes, sheeting, flooring, fittings and wire and cable coverings; and household and other products, including plastic films and laminated sheets, packaging materials, synthetic leather, window frames and bottles.
Our vinyls products are manufactured in facilities located in the States of Bahia, Alagoas and São Paulo.
Business Development Unit
The principal products of our Business Development Unit are PET and caprolactam. PET is used in manufacturing packaging for soft drinks, medications, cleaning products, mineral water and food products, while caprolactam is used in manufacturing Nylon-6 textile thread. Our Business Development Unit also manages certain of our equity investments.
In 2003, 56.1% of our Business Development Unit’s net sales revenue was derived from the sale of PET, and 30.3% was derived from the sale of caprolactam. Our Business Development Unit conducts its manufacturing operations in two plants located in the Northeastern Complex.
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Jointly Controlled Companies
We own 29.5% of the voting and total share capital of Copesul — Companhia Petroquímica do Sul, or Copesul, the first generation producer based in the Southern Complex. Copesul is the second largest first generation producer in Brazil, with an annual ethylene production capacity of 1,135,000 tons and an annual propylene production capacity of 581,000 tons. In 2003, Copesul’s net income on a consolidated basis was R$149.9 million on net sales revenue of R$4,177.9 million, in each case as adjusted to conform to our accounting policies. We are required, under Brazilian GAAP, to account for our interests in Copesul in our financial statements using the proportional consolidation method.
We also own 33.9% of the total share capital of Politeno Indústria e Comércio S.A., or Politeno, including 35.0% of its voting share capital. Politeno is a second generation petrochemical producer operating in the Northeastern Complex. Politeno has an annual production capacity of 145,000 tons of LDPE, and an annual production capacity of 195,000 tons of LLDPE and HDPE. In 2003, Politeno’s net income was R$67.2 million on net sales revenue of R$943.9 million. We are required, under Brazilian GAAP, to account for our interests in Politeno in our financial statements using the proportional consolidation method.
Strategy
Our vision is to strengthen our position as a world-class petrochemical company. We seek to reinforce our leading position in the Latin American petrochemical market, with a strategic focus on polyethylene, polypropylene and PVC and integration with our production of ethylene and propylene. Our business model focuses on enhancing shareholder value, with strategic drivers consisting of market leadership, cost competitiveness and technological autonomy.
We are the first Brazilian company to integrate first and second generation petrochemical production facilities. Our competitive advantages are derived from our leadership position in the Lain American market and our favorable cost structure, resulting from our production scale and synergies realized from the integration process that formed our company.
The key elements of our strategy include:
| • | Focus on Customer Relationships — we seek to establish close, long-term relationships with our customers, which foster customer loyalty during periods of lower demand. | |
| • | Pursuit of Selected Business Opportunities — we are pursuing business opportunities by developing new and specialized products. | |
| • | Expansion of Our Production Capacity — we plan to expand our production capacity, primarily through efficiency enhancements and by modernizing our production technology. | |
| • | Continued Reductions in Operating Costs and Increases in Operating Efficiencies — we have an ongoing program to increase operating efficiencies and to reduce operating costs. | |
| • | Commitment to Our Employees and Our Communities — we are focused on our human resources, which are vital to our competitiveness and growth, and we are also committed to improving the quality of life in the communities in which our facilities are located. |
Principal Shareholders
Our controlling shareholder is the Odebrecht Group, which is one of the 10 largest Brazilian private sector conglomerates based upon net sales revenue for 2003. The Odebrecht Group also controls Construtora Norberto Odebrecht S.A., one of the largest heavy construction and engineering companies in Latin America. The Odebrecht Group, through Odebrecht S.A., or Odebrecht, and its wholly-owned subsidiary, ODBPAR Investimentos S.A., or ODBPAR Investments, directly owns 38.5% of our total share capital, including 42.9% of our voting share capital. In addition, the Odebrecht Group owns 50.1% of
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Petrobras Química S.A., or Petroquisa, a subsidiary of Petróleo Brasileiro S.A. — Petrobras, or Petrobras, which is Brazil’s national oil company has an option exercisable through April 2005 to acquire from us, and in certain circumstances from the Odebrecht Group, a number of our common and preferred shares that would provide it with the same equity participation in our voting and total shares as the participation owned collectively by (1) the Odebrecht Group, (2) Petroquímica da Bahia S.A., or Petroquímica da Bahia, which together with its affiliates form a group of companies controlled by the Mariani family, or the Mariani Group, and (3) Norquisa. Accordingly, Petroquisa may become one of the principal shareholders in our company through exercise of this option. We cannot predict whether or not Petroquisa will exercise this option.
The Odebrecht Group has entered into memoranda of understanding with (1) Petroquisa, (2) the pension fund of Banco do Brasil (Caixa de Previdência dos Funcionários do Banco do Brasil), or Previ, and the pension fund of Petrobras (Fundação Petrobras de Seguridade Social Petros), or Petros, and (3) Petroquímica da Bahia, a member of the Mariani Group and the controlling shareholder of Pronor Petroquímica S.A., or Pronor, with respect to, among other things, the voting and transfer of our shares.
The following chart presents our current ownership structure. The percentages in bold italics represent the percentage of the voting share capital owned directly by each shareholder, and the percentages not in bold italics represent the percentage of the total share capital owned by each shareholder.
| (1) | Includes, in addition to direct shareholdings, 969,303 ADSs outstanding, representing 969,303,000 class A preferred shares, or 1.3% of our total share capital. |
| (2) | Pronor is controlled by Petroquímica da Bahia. |
| (3) | Our subsidiary Copene Participações S.A. owns 0.3% of our total share capital, including 0.6% of our voting share capital. |
Our registered office is at Rua Eteno, 1561, CEP 42810-000, Camaçari, Bahia, Brazil, and our telephone number at this address is 55-71-632-5102. Our principal executive office is at Avenida das Nações Unidas, 4777, São Paulo, SP, CEP 05477-000, Brazil, and our telephone number at this address is 55-11-3443-9999.
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The Offering
| Issuer | Braskem S.A. | |
| Global offering | The global offering consists of the international offering and the Brazilian offering. | |
| International offering | ADSs, representing class A preferred shares, are being offered through the international underwriters in the United States and other countries outside Brazil. | |
| Brazilian offering | Concurrently with the international offering, class A preferred shares are being offered by the Brazilian underwriters in Brazil. | |
| ADSs | Each ADS represents 1,000 class A preferred shares. ADSs will be evidenced by American depositary receipts, or ADRs. | |
| Offering price | The initial public offering price for the international offering is set forth on the cover page of this prospectus. The offering price for the Brazilian offering is R$ per 1,000 class A preferred shares, which is the approximate real equivalent of the offering price per ADS in the international offering, based upon an exchange rate of R$ to US$1.00. | |
| Over-allotment options | We have granted the international underwriters an option to purchase an additional ADSs, representing class A preferred shares, within 30 days from the date of this prospectus, solely to cover over-allotments, if any. We have also granted the Brazilian underwriters an option to purchase a maximum of class A preferred shares to cover over-allotments of class A preferred shares, if any. | |
| Use of proceeds | We estimate that our net proceeds from the global offering will be approximately US$ . We intend to use the net proceeds from the global offering for general corporate purposes, including, among others, working capital and repayment of short-term indebtedness. | |
| Share capital before and after global offering | Our share capital is divided into common shares and preferred shares. Our preferred shares are, in turn, divided into class A preferred shares and class B preferred shares. Each share of our share capital represents the same economic interest, except that the preferred shares are entitled to the preferences described under “Description of Share Capital — Liquidation” and “Dividends and Dividend Policy — Amounts Available for Distribution.” | |
| Our outstanding share capital immediately before the global offering will consist of 76,568,187,272 shares, comprised of the following: | ||
| • 25,730,061,841 common shares; | ||
| • 50,608,970,631 class A preferred shares (excluding 621,887,272 shares held in treasury); and | ||
| • 229,154,800 class B preferred shares. |
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| Immediately after the global offering and the conversion of shares, we will have class A preferred shares outstanding and total shares outstanding, assuming no exercise of the underwriters’ over-allotment options. | ||
| Voting rights | Holders of our class A preferred shares and, consequently, holders of the ADSs do not have voting rights, except in very limited circumstances. | |
| Dividends | Under the Brazilian Corporation Law and our by-laws, we are required to distribute as dividends not less than 25% of our annual net income, subject to adjustments and exceptions. We may also pay dividends in the form of interest attributable to shareholders’ equity in lieu of dividends. Under the terms of a shareholders agreement, we are required, subject to certain limitations, to distribute at least 50% of our adjusted net income in each fiscal year. Under the terms of certain of our debt obligations, we cannot distribute more than 50% of our adjusted net income in any fiscal year. | |
| We have not paid dividends since May 20, 2002 because of our accumulated deficit arising from net losses in 2002. We expect to resume paying dividends, which may be in the form of interest attributable to shareholders’ equity, when we have retained earnings. | ||
| The holders of ADSs will be entitled to receive dividends to the same extent as the owners of our class A preferred shares, subject to deduction of any fees and charges of the depositary for the ADSs. | ||
| Taxation | Dividend distributions with respect to our class A preferred shares or ADSs are not currently subject to withholding of Brazilian income tax. However, payment of interest attributable to shareholders’ equity (in lieu of dividends) currently is subject to withholding of Brazilian income tax. Gains from the sale or other disposition of ADSs or class A preferred shares outside of Brazil by shareholders not domiciled in Brazil could be subject to Brazilian income tax. For certain Brazilian and U.S. tax consequences with respect to U.S. holders of our class A preferred shares or ADSs, see “Taxation.” | |
| Lock-up agreements | We have agreed with the underwriters, subject to certain exceptions, not to offer, sell, contract to sell, grant an option to sell or otherwise dispose of, directly or indirectly, or file a registration statement with the U.S. Securities and Exchange Commission, or SEC, or the Brazilian Securities Commission relating to, any shares of our share capital or ADSs or securities convertible into or exchangeable or exercisable for any shares of our share capital or ADSs or warrants or other rights to purchase any shares of our share capital or ADSs, or publicly disclose the intention to make any such offer, sale, disposition or filing, during the 120-day period following the date of this prospectus without the prior written consent of Credit Suisse First Boston LLC, on behalf of the international underwriters. The Odebrecht Group and our directors and executive officers have agreed to |
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| substantially similar lock-up provisions, subject to some exceptions. | ||
| Listings | The ADSs are listed on The New York Stock Exchange under the symbol “BAK.” Our class A preferred shares are listed on the São Paulo Stock Exchange under the symbol “BRKM5” and on the LATIBEX section of the Madrid Stock Exchange under the symbol “XBRK.” | |
| ADR depositary | The Bank of New York. | |
| Risk factors | See “Risk Factors” and the other information in this prospectus before investing in the ADSs or class A preferred shares. |
Expected timetable for the global offering (subject to change):
|
Commencement of marketing of the global offering
|
, 2004 | |||
|
Announcement of offer price
|
, 2004 | |||
|
Allocation of ADSs and class A preferred
shares
|
, 2004 | |||
|
Settlement and delivery of ADSs and class A
preferred shares
|
, 2004 |
Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the international and Brazilian underwriters’ options to purchase a maximum of additional ADSs and additional class A preferred shares, respectively, to cover over-allotments, if any.
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Summary Financial and Other Information
The summary financial information set forth below has been derived from our consolidated and combined financial statements prepared in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP.
For a discussion of the significant differences relating to these financial statements and a reconciliation of net income (loss) and shareholders’ equity from Brazilian GAAP to U.S. GAAP, see note 29 to our consolidated and combined financial statements included in this prospectus. The summary financial data at December 31, 2003 and 2002 and for the three years ended December 31, 2003 have been derived from our consolidated and combined financial statements included in this prospectus. The summary financial data at December 31, 2001 has been derived from our audited combined financial statements that are not included in this prospectus. The summary financial data at December 31, 2000 and 1999 and for the two years ended December 31, 2000 have been derived from audited financial statements of our company that are not included in this prospectus. This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated and combined financial statements in this prospectus.
All per thousand share data presented below for periods before October 21, 2003 have been adjusted to give effect to the 20-for-1 share split that was effective on that date.
| At and for the Year Ended December 31, | ||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | |||||||||||||||||||
| (in millions of | ||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | |||||||||||||||||||||||
| per thousand | operating data) | |||||||||||||||||||||||
| shares and per | ||||||||||||||||||||||||
| ADS amounts) | ||||||||||||||||||||||||
|
Statement of Operations Data
|
||||||||||||||||||||||||
|
Brazilian GAAP:
|
||||||||||||||||||||||||
|
Net sales revenue
|
US$ | 3,508.1 | R$ | 10,135.8 | R$ | 7,576.6 | R$ | 4,459.5 | R$ | 2,897.5 | R$ | 1,874.8 | ||||||||||||
|
Cost of sales and services rendered
|
(2,799.8 | ) | (8,089.3 | ) | (6,175.5 | ) | (3,637.6 | ) | (2,357.1 | ) | (1,344.1 | ) | ||||||||||||
|
Gross profit
|
708.3 | 2,046.5 | 1,401.1 | 821.9 | 540.4 | 530.7 | ||||||||||||||||||
|
Selling and general and administrative expenses
|
(163.3 | ) | (471.9 | ) | (577.7 | ) | (210.3 | ) | (116.2 | ) | (101.7 | ) | ||||||||||||
|
Investment in associated companies, net(3)
|
(54.8 | ) | (158.2 | ) | (251.7 | ) | (214.3 | ) | (3.6 | ) | 4.2 | |||||||||||||
|
Depreciation and amortization
|
(67.0 | ) | (193.5 | ) | (222.4 | ) | (111.3 | ) | (36.5 | ) | (36.1 | ) | ||||||||||||
|
Financial expenses
|
(246.6 | ) | (712.6 | ) | (3,481.5 | ) | (801.2 | ) | (250.0 | ) | (346.6 | ) | ||||||||||||
|
Financial income
|
3.1 | 9.0 | 619.6 | 294.7 | 178.6 | 173.2 | ||||||||||||||||||
|
Zero-rated IPI credit
|
— | — | 1,030.1 | — | — | — | ||||||||||||||||||
|
Other operating income (expenses)
|
17.2 | 49.7 | 102.6 | 103.3 | (12.5 | ) | 5.5 | |||||||||||||||||
|
Operating income (loss)
|
196.9 | 569.0 | (1,379.9 | ) | (117.2 | ) | 300.2 | 229.2 | ||||||||||||||||
|
Non-operating expenses, net
|
(1.7 | ) | (4.8 | ) | (98.0 | ) | (120.8 | ) | (0.6 | ) | (9.1 | ) | ||||||||||||
|
Income (loss) before income tax and social
contribution (current and deferred) and minority interest
|
195.2 | 564.2 | (1,477.9 | ) | (238.0 | ) | 299.6 | 220.1 | ||||||||||||||||
|
Income tax and social contribution (current and
deferred)
|
(42.5 | ) | (122.9 | ) | (89.8 | ) | (77.6 | ) | (73.3 | ) | (54.4 | ) | ||||||||||||
|
Income (loss) before minority interest
|
152.7 | 441.3 | (1,567.7 | ) | (315.6 | ) | 226.3 | 165.7 | ||||||||||||||||
|
Minority interest
|
(78.3 | ) | (226.2 | ) | 189.0 | (108.9 | ) | 1.3 | 0.2 | |||||||||||||||
|
Net income (loss) for the year
|
US$ | 74.4 | R$ | 215.1 | R$ | (1,378.7 | ) | R$ | (424.5 | ) | R$ | 227.6 | R$ | 165.9 | ||||||||||
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| At and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions of | |||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | ||||||||||||||||||||||||
| per thousand | operating data) | ||||||||||||||||||||||||
| shares and per | |||||||||||||||||||||||||
| ADS amounts) | |||||||||||||||||||||||||
|
Number of shares outstanding at year end,
excluding treasury shares (in thousands):
|
|||||||||||||||||||||||||
|
Common shares
|
— | 25,608,114 | 24,521,820 | 12,933,860 | 12,933,860 | 12,933,860 | |||||||||||||||||||
|
Class A preferred shares
|
— | 42,594,754 | 42,122,880 | 21,592,900 | 21,592,900 | 21,574,900 | |||||||||||||||||||
|
Class B preferred shares
|
— | 229,154 | 229,160 | 229,160 | 229,160 | 229,160 | |||||||||||||||||||
|
Net income (loss) per thousand shares at year end
|
US$ | 1.09 | R$ | 3.15 | R$ | (20.62 | ) | R$ | (12.21 | ) | R$ | 6.55 | R$ | 4.78 | |||||||||||
|
Net income (loss) per ADS(4) at year end
|
1.09 | 3.15 | (20.62 | ) | (12.21 | ) | 6.55 | 4.78 | |||||||||||||||||
|
Dividends declared per thousand shares:
|
|||||||||||||||||||||||||
|
Common shares
|
— | — | — | 1.73 | 3.44 | 2.42 | |||||||||||||||||||
|
Class A preferred shares
|
— | — | 0.52 | 2.08 | 3.44 | 2.42 | |||||||||||||||||||
|
Class B preferred shares
|
— | — | 0.52 | 2.08 | 2.08 | 2.08 | |||||||||||||||||||
|
Dividends declared per ADS(4)
|
— | — | 0.52 | 2.08 | 3.44 | 2.42 | |||||||||||||||||||
|
U.S. GAAP:
|
|||||||||||||||||||||||||
|
Net income (loss) for the year
|
US$ | 131.1 | R$ | 378.7 | R$ | (698.7 | ) | R$ | (470.0 | ) | |||||||||||||||
|
Basic earnings (loss) per thousand shares
(weighted average):
|
|||||||||||||||||||||||||
|
Common shares
|
1.95 | 5.64 | (29.14 | ) | (26.66 | ) | |||||||||||||||||||
|
Class A preferred shares
|
1.90 | 5.49 | — | — | |||||||||||||||||||||
|
Class B preferred shares
|
0.57 | 1.64 | — | — | |||||||||||||||||||||
|
Basic earnings (loss) per ADS (weighted
average)(4)
|
1.90 | 5.49 | — | — | |||||||||||||||||||||
|
Diluted earnings (loss) per thousand shares
(weighted average):
|
|||||||||||||||||||||||||
|
Common shares
|
US$ | 1.93 | R$ | 5.59 | R$ | (29.14 | ) | R$ | (26.66 | ) | |||||||||||||||
|
Class A preferred shares
|
1.89 | 5.47 | — | — | |||||||||||||||||||||
|
Class B preferred shares
|
0.57 | 1.64 | — | — | |||||||||||||||||||||
|
Diluted earnings (loss) per ADS (weighted
average)(4)
|
1.89 | 5.47 | — | — | |||||||||||||||||||||
|
Balance Sheet Data
|
|||||||||||||||||||||||||
|
Brazilian GAAP:
|
|||||||||||||||||||||||||
|
Cash, cash equivalents and marketable securities
|
US$ | 409.9 | R$ | 1,184.3 | R$ | 821.0 | R$ | 513.2 | R$ | 708.9 | R$ | 561.4 | |||||||||||||
|
Trade accounts receivable
|
420.9 | 1,216.2 | 959.0 | 484.1 | 231.6 | 188.6 | |||||||||||||||||||
|
Inventories
|
370.9 | 1,071.6 | 889.1 | 667.8 | 163.4 | 119.9 | |||||||||||||||||||
|
Property, plant and equipment, net
|
1,741.7 | 5,032.0 | 5,296.7 | 4,429.7 | 1,969.0 | 1,977.2 | |||||||||||||||||||
|
Total assets
|
4,805.1 | 13,883.0 | 13,898.2 | 9,555.3 | 3,748.7 | 3,544.3 | |||||||||||||||||||
|
Short-term loans and financing (including current
portion of long-term debt)
|
943.7 | 2,726.5 | 2,746.1 | 1,966.4 | 331.5 | 257.4 | |||||||||||||||||||
|
Short-term debentures
|
6.6 | 349.0 | 32.1 | 26.2 | — | — | |||||||||||||||||||
|
Short-term related company debt
|
0.1 | 0.2 | 8.2 | 88.7 | — | — | |||||||||||||||||||
|
Long-term loans and financing
|
1,251.3 | 3,615.3 | 3,891.6 | 3,101.7 | 861.8 | 915.6 | |||||||||||||||||||
|
Long-term debentures
|
509.8 | 1,143.0 | 1,190.2 | 473.6 | — | — | |||||||||||||||||||
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| At and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions of | |||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | ||||||||||||||||||||||||
| per thousand | operating data) | ||||||||||||||||||||||||
| shares and per | |||||||||||||||||||||||||
| ADS amounts) | |||||||||||||||||||||||||
|
Long-term related company debt
|
61.5 | 177.6 | 189.3 | 626.7 | 0.9 | 1.1 | |||||||||||||||||||
|
Minority interest
|
191.9 | 554.4 | 433.1 | 738.0 | 27.4 | 30.1 | |||||||||||||||||||
|
Share capital
|
653.3 | 1,887.4 | 1,845.4 | 1,201.6 | 1,201.6 | 1,203.9 | |||||||||||||||||||
|
Shareholders’ equity
|
731.2 | 2,112.6 | 1,821.8 | 1,729.0 | 2,267.8 | 2,085.3 | |||||||||||||||||||
|
U.S. GAAP:
|
|||||||||||||||||||||||||
|
Total assets
|
US$ | 3,792.2 | R$ | 10,956.4 | R$ | 10,377.0 | R$ | 6,964.3 | |||||||||||||||||
|
Shareholders’ equity
|
2.5 | 7.1 | (416.5 | ) | 289.8 | ||||||||||||||||||||
|
Other Financial Information
|
|||||||||||||||||||||||||
|
Brazilian GAAP:
|
|||||||||||||||||||||||||
|
Net cash provided by (used in):
|
|||||||||||||||||||||||||
|
Operating activities
|
US$ | 200.9 | R$ | 580.5 | R$ | 790.0 | R$ | 1,453.9 | R$ | 550.3 | R$ | 613.6 | |||||||||||||
|
Investing activities
|
(159.4 | ) | (460.4 | ) | (646.7 | ) | (862.2 | ) | (115.6 | ) | (34.6 | ) | |||||||||||||
|
Financing activities
|
127.3 | 367.8 | (237.2 | ) | (404.9 | ) | (287.2 | ) | (210.7 | ) | |||||||||||||||
|
Capital expenditures:
|
|||||||||||||||||||||||||
|
Property, plant and equipment
|
74.3 | 214.7 | 419.9 | 318.0 | 18.4 | 48.0 | |||||||||||||||||||
|
Interest in other companies
|
24.8 | 71.7 | 13.1 | 1,172.3 | 82.6 | 26.6 | |||||||||||||||||||
|
EBITDA(5)
|
625.9 | 1,808.4 | 2,043.7 | 708.7 | 548.0 | 568.9 | |||||||||||||||||||
| At and for the Year Ended December 31, | |||||||||||||||||||||
| 2003 | 2002 | 2001(2) | 2000 | 1999 | |||||||||||||||||
| (in millions of reais, except per thousand shares, per ADS | |||||||||||||||||||||
| amounts and operating data) | |||||||||||||||||||||
|
Operating Data(6):
|
|||||||||||||||||||||
|
Ethylene:
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
1,047.3 | 994.8 | 1,064.8 | 1,103.8 | 1,121.1 | ||||||||||||||||
|
Average domestic price per ton (in R$)
|
1,634 | 1,292 | 1,135 | 1,046 | 633 | ||||||||||||||||
|
Propylene:
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
403.4 | 415.2 | 421.1 | 487.7 | 494.3 | ||||||||||||||||
|
Average domestic price per ton (in R$)
|
1,495 | 1,106 | 825 | 875 | 444 | ||||||||||||||||
|
Polyethylene(7):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
445.4 | 491.8 | 495.0 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,567 | 2,007 | 1,920 | ||||||||||||||||||
|
Polypropylene(7):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
374.9 | 395.1 | 338.5 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,689 | 1,931 | 1,623 | ||||||||||||||||||
|
PVC(8):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
342.4 | 350.1 | 327.6 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,358 | 1,969 | 1,623 | ||||||||||||||||||
|
Number of employees (at period end)
|
2,868 | 2,817 | 1,424 | 1,161 | 1,104 | ||||||||||||||||
| (1) | Translated for convenience only using the commercial selling rate as reported by the Central Bank at December 31, 2003 for reais into U.S. dollars of R$2.889=US$1.00. |
| (2) | The financial information for 2001 is not comparable with the financial information for 2000 and 1999 as a result of our merger with OPP Produtos, which we accounted for as if it had occurred on July 25, 2001 as a result of the common control exercised by the Odebrecht Group over our company and OPP Produtos. |
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Table of Contents
| (3) | Investment in associated companies, net comprises equity in the results, amortization of goodwill, net, foreign exchange variation and tax incentives and other. |
| (4) | Net income (loss) per 1,000 shares or ADS under Brazilian GAAP is based on shares outstanding at the end of each year. Earnings (loss) per 1,000 shares or ADS under U.S. GAAP is based on the weighted average number of class A preferred shares outstanding during each period. |
| (5) | EBITDA is the sum of the following income statement lines, without giving effect to the proportional consolidation of our jointly controlled companies: Net income (loss) for the year; minority interest; income tax and social contribution (current and deferred); non-operating expenses, net; financial expenses, net; investment in associated companies; and depreciation and amortization, including depreciation and amortization within cost of sales. EBITDA is not a measurement under Brazilian GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance, cash flow from operating activities or other measures of liquidity determined in accordance with Brazilian GAAP. However, we believe that EBITDA serves as a financial analysis tool for measuring our company’s performance in several areas, including liquidity, operating performance and leverage. In addition, EBITDA is commonly used by financial analysts in evaluating our company and its financial performance. EBITDA may not be comparable to similarly titled measures of other companies. EBITDA is calculated as follows: |
| For the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions | |||||||||||||||||||||||||
| of US$) | (in millions of reais) | ||||||||||||||||||||||||
|
Net income (loss) for the year
|
74.4 | 215.1 | (1,378.7 | ) | (424.5 | ) | 227.6 | 165.9 | |||||||||||||||||
|
Add:
|
|||||||||||||||||||||||||
|
Minority interest
|
77.7 | 224.4 | (199.1 | ) | 112.2 | 1.3 | 0.2 | ||||||||||||||||||
|
Income tax and social contribution (current and
deferred)
|
31.8 | 91.8 | 57.7 | 56.0 | 73.8 | 56.3 | |||||||||||||||||||
|
Non-operating expenses, net
|
1.6 | 4.6 | 74.2 | 116.1 | 0.7 | 9.0 | |||||||||||||||||||
|
Financial expenses, net
|
226.9 | 655.5 | 2,788.5 | 468.1 | 71.4 | 173.5 | |||||||||||||||||||
|
Investment in associated companies, net
|
41.3 | 119.4 | 313.7 | 232.8 | 3.6 | (4.2 | ) | ||||||||||||||||||
|
Depreciation and amortization, including
depreciation and amortization within cost of sales
|
172.2 | 497.6 | 387.4 | 148.0 | 169.6 | 165.2 | |||||||||||||||||||
|
EBITDA
|
625.9 | 1,808.4 | 2,043.7 | 708.7 | 548.0 | 568.9 | |||||||||||||||||||
| (6) | Excluding intra-company sales within Braskem. |
| (7) | Represents the sum of the sales volumes of Polialden and OPP Química for 2001. |
| (8) | Represents the sales volume of Trikem for 2001. |
11
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RISK FACTORS
Prospective purchasers of ADSs should carefully consider the risks described below, as well as the other information in this prospectus, before deciding to purchase any ADSs. Our business, results of operations, financial condition or prospects could be negatively affected if any of these risks occurs, and as a result, the trading price of our class A preferred shares or the ADSs could decline and you could lose all or part of your investment.
Risks Relating to Brazil
The Brazilian government’s influence over the Brazilian economy and Brazilian political and economic conditions may affect our company and our financial performance and, consequently, the market price of the ADSs.
The Brazilian economy has been characterized by frequent and occasionally extensive intervention by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls, blocking access to bank accounts, imposing capital controls and limiting imports into Brazil. We have no control over, and cannot predict, what measures or policies the Brazilian government may take in the future.
Our results of operations and financial condition and, consequently, the market price of the ADSs may be adversely affected by factors such as:
| • | fluctuations in exchange rates; | |
| • | exchange control policies; | |
| • | interest rates; | |
| • | inflation; | |
| • | tax policies; | |
| • | expansion or contraction of the Brazilian economy, as measured by rates of growth in gross domestic product, or GDP; | |
| • | social instability; | |
| • | liquidity of domestic capital and lending markets; and | |
| • | other political, diplomatic, social and economic developments in or affecting Brazil. |
Luiz Inácio Lula da Silva of the Workers’ Party took office as President of Brazil on January 1, 2003. In the period leading up to and following the October 2002 presidential election, there was substantial uncertainty regarding the policies that the new government would pursue. This uncertainty resulted in a loss of confidence in the Brazilian capital markets and a 34.3% devaluation of the real against the U.S. dollar between January 1, 2002 and December 31, 2002. While the Brazilian government has adopted economic measures that are more conservative than initially expected by some observers, we cannot assure you that these policies will continue or that the Brazilian government will continue to pursue economic stabilization and liberalization policies. We cannot predict what future fiscal, monetary, social security and other policies will be adopted by the Brazilian government and whether these policies will result in adverse consequences to the economy and to our business, results of operations, financial condition or prospects.
The Brazilian government’s actions to combat inflation may contribute significantly to economic uncertainty in Brazil and adversely affect the market price of the ADSs.
Historically, Brazil has experienced high rates of inflation. Inflation, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy, particularly prior to 1995. The
12
Table of Contents
Brazil may experience high levels of inflation in future periods. Increasing prices for petroleum, the depreciation of the real and future governmental measures seeking to maintain the value of the real in relation to the U.S. dollar, may trigger increases in inflation in Brazil. Periods of higher inflation may have a material adverse effect on the Brazilian economy, the Brazilian financial markets and the market price of the ADSs. High inflation also may have a material adverse effect on our business, financial condition and results of operations, including the possibility of reduced demand for our products in Brazil.
Fluctuations in the real/ U.S. dollar exchange rate could adversely affect the Brazilian economy and our ability to service our foreign currency-denominated debt, and could lead to a decline in the market price of the ADSs.
The exchange rate between the real and the U.S. dollar and the relative rates of depreciation and appreciation of the real have affected our results of operations and may continue to do so.
The Brazilian currency has devalued often during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. For example, the real depreciated in value against the U.S. dollar by 15.7% in 2001 and 34.3% in 2002 as compared with appreciation of 22.3% in 2003.
Devaluation of the real relative to the U.S. dollar also could result in additional inflationary pressures in Brazil by generally increasing the price of imported products and services and requiring recessionary government policies to curb demand. In addition, a devaluation of the real could weaken investor confidence in Brazil and reduce the market price of the ADSs. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments and may dampen export-driven growth.
We had total foreign currency-denominated debt obligations in an aggregate amount of R$5,220.0 million (US$1,806.7 million) at December 31, 2003, representing 66.6% of our indebtedness on a consolidated basis. Although we manage a portion of our exchange rate risk through foreign currency derivative instruments, our foreign currency debt obligations are not completely hedged. A significant devaluation of the real in relation to the U.S. dollar or other currencies could adversely affect our ability to meet debt service requirements of our foreign currency-denominated obligations, particularly as our net sales revenue is primarily denominated in reais.
In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. For example, the 34.3% devaluation of the real in 2002 substantially increased our financial expenses and was a significant factor in our net loss for that year.
The prices of naphtha, our most important raw material, and of some of our other raw materials are denominated in or linked to the U.S. dollar. In 2003, 65.2% of our direct and indirect cost of sales and services represented the cost of naphtha. When the real depreciates against the U.S. dollar, the cost in reais of our U.S. dollar-linked raw materials increases, and our operating income in reais decreases.
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Brazilian government exchange control policies could adversely affect our ability to service our foreign currency-denominated debt and affect our liquidity.
The purchase and sale of foreign currency in Brazil is subject to governmental control. In the past, the Central Bank has centralized certain payments of principal on external obligations. Many factors could cause the Brazilian government to institute more restrictive exchange control policies, including the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy towards the International Monetary Fund and political constraints to which Brazil may be subject. A more restrictive policy could affect our ability to make payments outside Brazil to meet our obligations under foreign currency-denominated debt obligations and other liabilities. At December 31, 2003, 66.6% of our indebtedness on a consolidated basis was denominated in foreign currencies. If we fail to make payments under any of these obligations, we will be in default under those obligations, which could have an immediate adverse effect on our liquidity as well as on the market price of the ADSs.
Events in other emerging markets and the Brazilian government’s monetary policies may negatively affect our net sales revenue and the availability of credit.
External events have often resulted in considerable outflows of funds and declines in the amount of foreign investment in Brazil. These events include the Asian economic crisis of 1997, the Russian currency crisis of 1998, the currency instability that Brazil encountered in 1999, and the recent economic crisis in Argentina. To defend the value of the real during events like these and to control inflation, the Brazilian government has maintained a tight monetary policy with high interest rates and has restricted the growth of credit and the economy. These disruptions in the Brazilian economy could adversely affect the demand for our products and our ability to obtain financing in Brazil and satisfy our liquidity and capital resources requirements.
Energy shortages in Brazil could adversely affect operations of our facilities as well as our financial performance.
The Northeast and certain other regions of Brazil faced an energy shortage during the second half of 2001. In response, the Brazilian government instituted an electric power rationing program from June 2001 to February 2002 that aimed to reduce electricity consumption by 20%. As a result of this program, we experienced a temporary reduction in our PVC production in our plants located in the state of Alagoas, and many of our customers curtailed their demand for our products. We utilize electricity supplied by Companhia Hidro Elétrica do São Francisco — Chesf, or CHESF, for approximately 30% of our power needs at the Northeastern Complex, and most of our power needs in Alagoas. A severe drought in Brazil’s northeastern region in 2003 reduced hydroelectric generation in the region. In addition, there are inadequate transmission lines to connect the power grids in northeastern and southeastern Brazil, so that any excess power in the Southeast, as was available in 2003, may not be transmitted to meet energy needs in the Northeast. As a result, electric power to the Northeastern Complex supplied by CHESF was interrupted in November 2003, and we had to shutdown our operations there for three days. Continued energy shortages in the Northeast and a lack of adequate transmission infrastructure may result in further unexpected shutdowns of our operations at the Northeastern Complex in the future, which could adversely affect our financial condition and results of operations.
Changes in tax laws may adversely affect our results of operations.
The Brazilian government regularly implements changes to tax regimes that affect us and our customers. These changes include changes in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In April 2003, the Brazilian government presented a tax reform proposal, which was mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposal provided for changes in the rules governing the federal Social Integration Program (Programa de Integração Social), or PIS, the federal Contribution for Social
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In December 2003, the Brazilian Federal Senate approved part of this tax reform proposal following its approval by the Brazilian Federal House of Representatives. Other parts of the tax reform proposal were amended by the Senate and returned to the House of Representatives for further examination. If approved, these tax reform measures will be gradually adopted in 2005 and 2007.
Some of these measures may result in increases in our tax payments. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. However, the proposed tax reforms, if enacted, could have an adverse effect upon our results of operations.
Risks Relating to Our Company and the Petrochemical Industry
The cyclical nature of the petrochemical industry may adversely affect our results of operations.
The Brazilian petrochemical industry, including the markets in which we compete, is cyclical and sensitive to changes in supply and demand that are, in turn, affected by political and economic conditions in Brazil and elsewhere. This cyclicality may adversely affect our financial performance. In particular:
| • | downturns in general business and economic activity may cause demand for our products to decline; | |
| • | when demand falls, we may be under competitive pressure to lower our prices; and | |
| • | if we decide to expand our plants or construct new plants, we may do so based on an estimate of future demand that never materializes or materializes at levels lower than we predicted. |
The global petrochemical industry is also cyclical. Historically, the international petrochemical markets have experienced alternating periods of limited supply, which have caused prices and profit margins to increase, followed by expansion of production capacity, which has resulted in oversupply and reduced prices and profit margins. The Brazilian petrochemical industry has become increasingly integrated with the global petrochemical industry for a number of reasons, including increased demand for, and consumption of, petrochemical products in Brazil and the ongoing integration of regional and world markets for commodity products. Prices for our products sold in Brazil are established with reference to international market prices. Our results of operations are therefore increasingly linked to global industry conditions that we cannot control.
We face competition from producers of polyolefins, vinyls and other petrochemical products.
We face competition in Brazil from Brazilian and international producers of polyethylene, polypropylene, vinyls and other petrochemical products. In addition, our prices for our second generation products are generally set with reference to the prices charged for these products by foreign producers in international markets. We anticipate that we may experience increasingly intense competition from international producers of polyolefins and vinyls products, both in Brazil and in selected foreign markets in which we sell these products. Many of our foreign competitors are substantially larger and have substantially greater financial, manufacturing, technological and marketing resources than our company.
We face significant competition in the polyethylene market. In 2001, The Dow Chemical Company, or Dow Chemical, commenced operation of a polyethylene facility in Argentina with an annual capacity of 700,000 tons. In addition, Rio Polímeros S.A., or Rio Polímeros, a Brazilian petrochemical company, is currently constructing a large petrochemical plant in Brazil that has announced plans to commence operations in December 2004. The announced annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene (representing an increase of approximately 35% of the current total Brazilian production capacity of polyethylene). Actions by our competitors, including
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We may be adversely affected by high naphtha costs.
Naphtha is the principal raw material of our Basic Petrochemicals Unit. In 2003, naphtha accounted, directly and indirectly, for approximately two-thirds of our consolidated cost of sales and services rendered. The price of naphtha supplied by Petrobras is linked to the Amsterdam-Rotterdam-Antwerp market price of naphtha and to the U.S. dollar/real exchange rate. The price of naphtha that we purchase from other suppliers is also linked to the Amsterdam-Rotterdam-Antwerp market price.
During 2003, the price of naphtha in U.S. dollars increased by 5.6%, from US$287.00 per ton in December 2002 to US$313.00 per ton in December 2003. The U.S. dollar price of naphtha was volatile during 2003, increasing substantially between January and February prior to the commencement of the war in Iraq, declining sharply through May before rebounding in June and increasing steadily through the end of the year. The price of naphtha may increase significantly or the real may devalue significantly in the future.
Although the majority of our net sales revenue is in reais, we do not currently hedge our exposure to changes in naphtha prices. In periods of high volatility in the U.S. dollar/real exchange rate, there is usually a lag between the time that the U.S. dollar appreciates and the time that we may effectively pass on those increased costs in reais to our customers in Brazil. As a result, if the real depreciates precipitously against the U.S. dollar in the future, we may not immediately be able to pass on all of the corresponding increases in our naphtha costs to our customers in Brazil, which could materially adversely affect our results of operations and financial condition.
We depend on Petrobras to supply us with the substantial portion of our naphtha requirements.
Currently, Petrobras is the only Brazilian supplier of naphtha and supplied 68.8% of the naphtha consumed by our company in 2003. Petrobras produces some of the naphtha it sells to us and imports the balance. Significant damage to Petrobras’ refineries or to the port facilities through which Petrobras imports naphtha, or to any of the pipelines connecting us to Petrobras facilities, whether as a consequence of an accident, natural disaster, fire or otherwise, could adversely affect our operations. In addition, although regulatory changes have ended Petrobras’ monopoly in the Brazilian naphtha market and have allowed us to import naphtha, any reversal in the continuing deregulation of the oil and gas industry in Brazil could adversely affect our production costs.
Our indebtedness will require that a significant portion of our cash flow be used to meet debt-service obligations on that indebtedness.
We had R$7,833.8 million of total indebtedness on a consolidated basis at December 31, 2003, including R$490.7 million of indebtedness of our jointly controlled companies, including Copesul, Politeno and Cetrel S.A. — Empresa de Proteção Ambiental, or Cetrel, which we consolidate on a proportional basis as required by Brazilian GAAP, and excluding R$177.8 million of related party debt and R$113.4 million of advances for purchase of credit rights, a form of long-term obligation. We had consolidated negative working capital of R$726.8 million at December 31, 2003, principally as a result of the level of our short-term indebtedness, including the current portion of our long-term debt.
The level of our indebtedness could have important consequences, including the following:
| • | our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt-service requirements or other purposes could be limited; | |
| • | a substantial portion of our cash flow from operations must be dedicated to pay principal and interest on our indebtedness and may not be available for other purposes, such as the payment of dividends; |
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| • | our level of indebtedness could limit our flexibility in planning for, or reacting to changes in, our business; and | |
| • | our level of indebtedness could make us more vulnerable in the event of a downturn in our business. |
Some of our shareholders may have the ability to influence the outcome of corporate actions or decisions, which could affect the holders of the ADSs.
The Odebrecht Group directly holds 42.9% of our voting common shares, and its designees currently constitute a majority of the members of our board of directors. In addition, the Odebrecht Group owns 50.1% of the voting share capital of Norquisa, which owns 29.4% of our voting share capital and 10.7% of our total share capital. Some of our other shareholders, consisting of Petroquisa, a subsidiary of Petrobras, and two Brazilian pension funds, have veto and other rights under shareholders agreements as described under “Principal Shareholders and Related Party Transactions — Principal Shareholders — Shareholders Agreements.” As discussed below, Petroquisa also has an option to purchase a significant number of common and preferred shares in our company that would give Petroquisa substantial voting and other rights in respect of our company. As a result, the Odebrecht Group, Petroquisa and these other shareholders may have the ability to influence the outcome of major corporate actions or decisions requiring the approval of our shareholders or our board of directors, which could affect the holders of the ADSs.
We may be required to issue over the next twelve months a substantial number of new common and preferred shares to Petroquisa, a subsidiary of Petrobras, which would result in a change in the composition of our board of directors and could influence changes in our strategy and otherwise influence the outcome of major corporate actions and decisions, and also could have a dilutive effect on our net income per 1,000 shares.
Under a memorandum of understanding between Petroquisa, on the one hand, and Odebrecht and other key shareholders, on the other, Petroquisa has an option exercisable through April 30, 2005 to acquire from us, and in certain circumstances from the Odebrecht Group, a number of our common and preferred shares that would provide it with the same equity participation in our voting and total share capital as the participation owned collectively by the Odebrecht Group, Petroquímica da Bahia, and Norquisa. Under this memorandum of understanding, the consideration for the shares issued by our company upon Petroquisa’s exercise of the option will consist of shares of Copesul, and the exchange ratio of such consideration for our common and preferred shares will be based upon independent enterprise valuations calculated from discounted cash flows of our company and Copesul. If Petroquisa exercises the option, Petroquisa will be entitled to representation on our board of directors equal to that of the Odebrecht Group, the Mariani Group and Norquisa, jointly. In addition, Petroquisa and the other shareholders party to the memorandum of understanding will be obligated to coordinate their votes and vote as a bloc at meetings of our board of directors and shareholders.
We are unable to predict whether Petroquisa will exercise the option or, because the independent enterprise valuations have not been conducted, the number of new common and preferred shares to be issued by our company if Petroquisa exercises the option. We cannot determine whether the option, if exercised, will have a dilutive effect on our net income per 1,000 shares, which could, in turn, affect the market prices of our class A preferred shares and the ADSs. If it exercises the option, Petroquisa and its controlling shareholder, Petrobras, are required under the terms of the Petroquisa memorandum of understanding to negotiate and enter into a new shareholders agreement with Odebrecht and other shareholders, which may include new or different terms than the Petroquisa memorandum of understanding and as a result, could influence changes in our strategy and otherwise influence the outcome of major corporate actions and decisions.
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We may face conflicts of interest in transactions with related parties.
We maintain trade accounts receivable and current and long-term payables with some of our affiliates and other related parties, including Petrobras (which is our sole domestic supplier of naphtha), Copesul in the Southern Complex (which supplies us with ethylene and propylene), and Politeno (which purchases ethylene from our company). Through Petroquisa, Petrobras is the indirect holder of 7.8% of our common shares and 11.1% of our total share capital. These accounts receivable and accounts payable balances result mainly from purchases and sales of goods, which are at prices and on terms equivalent to the average terms and prices of transactions that we enter into with third parties. We also engage in financial and other transactions with some of our shareholders, such as the grant of the Petroquisa option discussed above. These and other commercial and financial transactions between us and our affiliates could result in conflicting interests.
Future adjustments in tariffs on imports that compete with our products could cause us to lower our prices.
We take into account, when setting the domestic prices for our products, tariff rates imposed by the Brazilian government on imports of similar products and the products of our customers. We currently benefit from tariffs that allow us to charge lower prices for our polyolefins and vinyls products than imports of those products. Our margins from sales in the Brazilian market are therefore significantly higher than our margins from exports. However, the Brazilian government has in the past used import and export tariffs to effect economic policies, with the consequence that tariffs can vary considerably, especially tariffs on petrochemical products. Future adjustments of tariffs could result in our lowering our domestic prices and could have a material adverse effect on our results of operations.
Our business is subject to stringent environmental regulations and further tightening of those regulations could adversely affect our company.
Our company, like other Brazilian petrochemical producers, is subject to stringent Brazilian federal, state and local environmental laws and regulations concerning human health, the handling and disposal of solid and hazardous wastes and discharges of pollutants into the air and water. Petrochemical producers are sometimes subject to unfavorable market perceptions as a result of the environmental impact of their business, which can have an adverse effect on their results of operations. As environmental laws become more stringent in Brazil and worldwide, the amount and timing of future expenditures required to remain compliant could increase substantially and could adversely affect the availability of funds for other capital expenditures and other purposes.
We manufacture products that are subject to the risk of fire, explosions and other hazards.
Our operations are subject to hazards, such as fires, explosions and other accidents, associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and petrochemical products. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A sufficiently large accident at one of our plants or storage facilities could force us to suspend our operations temporarily and result in significant remediation costs and lost net sales revenue. Although we maintain insurance coverage for losses due to fire damage and for losses of income resulting from stoppages due to fire, explosion or electrical damage, those insurance proceeds may not be available on a timely basis and may be insufficient to cover all losses.
We may be adversely affected by any future adverse decision of the Brazilian antitrust authorities concerning the formation of our company.
As part of our corporate reorganization process that began in 2001, we merged with each of OPP Química, Trikem, Proppet and Nitrocarbono and we acquired Polialden. We closed these transactions, as permitted by Brazilian law, subject to the final approval of the Brazilian antitrust authorities. We have submitted the terms and conditions of these transactions to the Brazilian antitrust authorities. These antitrust authorities will determine whether these transactions negatively impact competitive conditions in
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We may be adversely affected by the unfavorable outcome of pending litigation.
We are involved in numerous tax, civil and labor disputes involving significant monetary claims. If unfavorable decisions are rendered in one or more of these lawsuits, we could be required to pay substantial amounts, which could materially adversely affect our financial condition and results of operations. For some of these lawsuits, we have not established any provision on our balance sheet or have established provisions only for part of the amounts in question, based on our judgments about the likelihood of winning these lawsuits in view of the advice of our external legal advisors.
The lawsuits for which we have not established provisions or have established only partial provisions include the following:
| • | Social Contribution on Net Income. We and some of our subsidiaries have challenged the constitutionality of the Brazilian federal Social Contribution on Net Income (Contribuição Social sobre o Lucro Líquido). A Brazilian Federal Supreme Court (Supremo Tribunal Federal) decision in our favor was overruled in a subsequent rescission action filed by the Brazilian tax authorities, and our appeal of that suit is pending. Our total estimated exposure, including interest, was R$416.8 million at December 31, 2003. This amount does not include R$226.1 million in penalties and interest on penalties at December 31, 2003 that we believe are not payable because we relied upon a judicial decision in not paying Social Contribution on Net Income. We have not established a provision for these lawsuits. | |
| • | Cost of Living Adjustments on Workers’ Wages. The unions that represent employers and workers in the Northeastern Complex are involved in a lawsuit over the indices we and other companies have used for cost of living adjustments on workers’ wages since early 1990. Although the Brazilian Federal Supreme Court has held in favor of the employers’ union, the workers’ union has requested reconsideration of the decision, and the decision of the Brazilian Federal Supreme Court is not yet final. If the workers’ union prevails in this lawsuit, we may be required to pay cost of living adjustments retroactively from April 1990 to the present. We have not established a provision for these lawsuits. Because the amount of our total exposure is subject to several variables, including the number of our employees and their salaries over more than a decade, we do not have a specific estimate of our total exposure in these lawsuits. | |
| • | Preferred Shareholder Litigation. Certain owners of our class B preferred shares and of Polialden’s preferred shares have filed several lawsuits seeking, among other rights, the right to receive dividend distributions equal to those paid to owners of our and Polialden’s common shares and, in our case, class A preferred shares. If we or Polialden loses any of these suits, we or Polialden could be required to pay the difference between the dividends claimed and the dividends we or Polialden paid. Because some of these shareholders have not claimed a specific amount of dividends and the calculation of our total exposure depends on several variables, we do not have a specific estimate of our total exposure in these lawsuits. |
In addition, we and some of our subsidiaries believe that our chances of success are remote in a series of lawsuits in which we challenged the constitutionality of an increase in the COFINS tax rate. We had established total provisions of R$284.9 million at December 31, 2003 for all our lawsuits relating to PIS and COFINS, including separate lawsuits challenging the basis of calculation of PIS and COFINS. Because we have deposited only R$94.0 million of this amount with the courts, we would be required, in
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We are also parties to a number of lawsuits seeking tax credits that we believe the Brazilian tax authorities have disallowed or limited in violation of the Brazilian Constitution and/or applicable law. In some cases where we have received favorable lower court decisions, we have used these credits to offset other tax obligations and have established provisions in an equivalent amount until a final decision is rendered (adjusting these provisions based on the SELIC (Sistema Especial de Liquidação e de Custódia — SELIC), or SELIC interest rate). These provisions totaled R$752.0 million at December 31, 2003. If we ultimately lose any of these lawsuits, we would be required to pay the tax obligations we had previously offset with those credits, which could materially adversely affect our financial condition.
Risks Relating to Our Class A Preferred Shares and the ADSs
Our class A preferred shares and the ADSs have limited voting rights.
Under the Brazilian Corporation Law and our by-laws, holders of our class A preferred shares and, consequently, the ADSs are not entitled to vote at meetings of our shareholders, except in very limited circumstances. These limited circumstances directly relate to key rights of the holders of class A preferred shares, such as modifying basic terms of our class A preferred shares or creating a new class of preferred shares with superior rights. In addition, holders of preferred shares without voting rights and non-controlling common shareholders that together hold at least 10% of our voting shares are each entitled to elect one member and his or her respective alternate to the fiscal council. However, until our general shareholders meeting in 2006, any member elected to our board of directors by these preferred shareholders must be selected from a list of three nominees chosen by our controlling shareholder. Holders of our class A preferred shares and the ADSs are not entitled to vote to approve corporate transactions, including mergers or consolidations of our company with other companies.
Holders of ADSs may find it difficult to exercise even their limited voting rights at our shareholders’ meetings.
Holders may exercise the limited voting rights with respect to our class A preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our class A preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the ADR depositary following our notice to the ADR depository requesting the ADR depository to do so. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. This noticed voting process will take longer for ADS holders than for holders of class A preferred shares. If it fails to receive timely voting instructions for your ADSs, the depositary will assume that you are instructing it to give a discretionary proxy to a person designated by us to vote your ADSs, except in limited circumstances.
Exchange controls and restrictions on remittances abroad may adversely affect holders of the ADSs.
The Brazilian custodian for our Class A preferred shares must obtain a certificate of registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of our class A preferred shares and sales proceeds related thereto. If a holder of ADSs decides to exchange ADSs for the underlying class A preferred shares, the holder will be entitled to continue to rely on the depositary’s electronic certificate of registration for five business days from the date of exchange. After that period, the holder may not be able to obtain and remit U.S. dollars abroad upon the sale of our class A preferred shares, or distributions relating to our class A preferred shares, and will generally be subject to less favorable tax treatment on gains with respect to our class A preferred shares or
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If you attempt to obtain your own electronic certificate of registration, you may incur expenses or suffer significant delays in the application process. Obtaining an electronic certificate of registration involves preparing and filing extensive documentation in Brazil. In addition, you will need to (1) appoint at least one representative in Brazil with powers to perform certain actions relating to your foreign investment, including with respect to taxes, (2) engage an expert in Central Bank and Brazilian Securities Commission regulations and (3) obtain a taxpayer identification number from the Brazilian government. These expenses or delays could adversely impact your ability to timely receive dividends or distributions relating to our class A preferred shares or the return of your capital. The ADS depositary’s certificate of registration or any certificate of registration you obtain yourself may be adversely affected by future legislative or other regulatory changes, or additional restrictions applicable to investors, the sale of the underlying preferred shares or the repatriation of the proceeds from sale could be imposed in the future.
Restrictions on the remittances of funds from Brazil may impair your ability to receive dividends, distributions or the proceeds of any sale of our class A preferred shares underlying the ADSs.
The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to non-Brazilian investors of proceeds from their investments in Brazil. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance.
The Brazilian government imposed remittance restrictions for approximately six months in 1989 and early 1990. Any similar restrictions would impair or prevent the conversion of dividends, distributions or the proceeds from any sale of class A preferred shares from reais into U.S. dollars and the remittance of the U.S. dollars abroad. The Brazilian government may take similar measures in the future. In such an event, the Brazilian custodian for our preferred shares will hold the reais that it cannot convert for the account of holders of ADSs who have not been paid. Neither the custodian nor the ADR depositary will be required to invest the reais or be liable for any interest.
Holders of ADSs may face difficulties in protecting their interests as shareholders because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.
Our corporate affairs are governed by our by-laws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. In addition, your rights as holders of our class A preferred shares underlying the ADSs under the Brazilian Corporation Law to protect your interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our class A preferred shares and ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.
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Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are a corporation (sociedade anônima) organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for you to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, you may face greater difficulties in protecting your interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
Actual or anticipated sales of a substantial number of class A preferred shares could decrease the market prices of our class A preferred shares and the ADSs.
Sales of a substantial number of our class A preferred shares after the completion of the global offering, or the anticipation of such sales, could negatively affect the market prices of our class A preferred shares and the ADSs. After the global offering, we will have a total of shares outstanding, including class A preferred shares, or class A preferred shares if the underwriters’ over-allotment options are exercised in full. The Odebrecht Group will hold directly 29,902,332,960 shares, consisting of common shares and class A preferred shares. In addition, the Odebrecht Group controls Norquisa, which will hold directly 8,264,861,540 shares, consisting of common shares and class A preferred shares. Moreover, Petroquisa is entitled to exercise an option over the next 12 months to acquire a substantial number of new common and preferred shares from our company. We and the Odebrecht Group have agreed that, subject to some exceptions, we and the Odebrecht Group will not sell, offer or contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, or, in our case, file a registration statement with the SEC or the Brazilian Securities Commission relating to, any shares of our share capital or the ADSs or securities convertible into or exchangeable or exercisable for any shares of our share capital or the ADSs or warrants or other rights to purchase any shares of our share capital or ADSs for a period of 120 days after the date of this prospectus without the prior written consent of Credit Suisse First Boston LLC, on behalf of the international underwriters. If, in the future, substantial sales of shares are made by the Odebrecht Group, Petroquisa or other existing or future holders of class A preferred shares, the market price of our class A preferred shares and, by extension, the ADSs may decrease significantly. As a result, you may not be able to sell the ADSs at or above the price you paid for them.
Holders of ADSs may be unable to exercise preemptive rights with respect to our class A preferred shares underlying the ADSs.
You may be unable to exercise the preemptive rights relating to our class A preferred shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we may not file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive rights by the depositary, or if they cannot be sold, your preemptive rights will be allowed to lapse.
Holders of ADSs could be subject to Brazilian income tax on capital gains from sales of ADSs.
Historically, any capital gain realized on a sale or other disposition of ADSs or class A preferred shares between non-Brazilian holders outside Brazil was not subject to Brazilian income tax. However, a new Brazilian law provides that, commencing on February 1, 2004, “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquirer is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to
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The relative volatility and liquidity of the Brazilian securities markets may adversely affect the liquidity and market price of the ADSs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The São Paulo Stock Exchange, which is the principal Brazilian stock exchange, had a market capitalization of US$234.2 billion (or R$676.7 billion) at December 31, 2003 and an average daily trading volume of US$271.9 million for 2003. In comparison, The New York Stock Exchange had a market capitalization of US$17.3 trillion at December 31, 2003 and an average daily trading volume of US$38.5 billion for 2003. There is also significantly greater concentration in the Brazilian securities markets. The 10 largest companies in terms of market capitalization represented approximately 48% of the aggregate market capitalization of the São Paulo Stock Exchange at December 31, 2003. The 10 most widely traded stocks in terms of trading volume accounted for approximately 54% of all shares traded on The São Paulo Stock Exchange in 2003. These market characteristics may substantially limit the ability of holders of the ADSs to sell class A preferred shares underlying ADSs at a price and at a time when they wish to do so.
Developments in other emerging markets may adversely affect the market price of the ADSs.
The market price of the ADSs may be adversely affected by declines in the international financial markets and world economic conditions. Although economic conditions are different in each country, investors’ reaction to developments in one country can affect the securities markets and the securities of issuers in other countries, including Brazil. Brazilian securities markets are, to varying degrees, influenced by economic and market conditions in other emerging market countries, especially those in Latin America. Any return to economic turmoil in Argentina or adverse economic developments in other emerging markets may adversely affect investor confidence in securities issued by Brazilian companies, causing their market price and liquidity to suffer. Any such developments could immediately affect our ability to raise capital when needed and the market price of the ADSs.
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USE OF PROCEEDS
We estimate the net proceeds from the sale of class A preferred shares in the global offering, including the ADSs offered by this prospectus, will be approximately US$ million or approximately US$ million if the underwriters’ over-allotment options are exercised in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to use the net proceeds of the global offering for general corporate purposes, including, among others, working capital and repayment of short-term indebtedness.
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MARKET INFORMATION
The principal trading market for our common shares, class A preferred shares and class B preferred shares is the São Paulo Stock Exchange. Our common shares and class A preferred shares began trading on the São Paulo Stock Exchange on November 11, 1980, and our class B preferred shares began trading on the São Paulo Stock Exchange on August 19, 1983.
On December 21, 1998, ADSs representing our class A preferred shares began trading on The New York Stock Exchange. On December 31, 2003, there were 969,303 ADSs outstanding, representing 969,303,000 class A preferred shares, or 2.2% of our outstanding class A preferred shares.
On October 8, 2003, we listed our class A preferred shares on the LATIBEX, a stock market for Latin American issuers that is quoted in euros on the Madrid Stock Exchange, under the symbol “XBRK.” Our class A preferred shares are traded on the LATIBEX in lots of 1,000 shares.
At December 31, 2003, we had approximately 6,400 shareholders, including two U.S. resident holders of our common shares, approximately 98 U.S. resident holders of our class A preferred shares (including The Bank of New York, as depositary) and no U.S. resident holders of our class B preferred shares. At December 31, 2003, there were 212,167,900 common shares, 2,138,323,444 class A preferred shares (including class A preferred shares represented by ADSs), and no class B preferred shares held by U.S. resident holders.
Price History of Our Class A Preferred Shares and the ADSs
The tables below set forth the high and low closing sales prices for our class A preferred shares on the São Paulo Stock Exchange and the high and low closing sales prices for the ADSs on The New York Stock Exchange for the periods indicated.
| New York Stock | ||||||||||||||||
| São Paulo Stock Exchange | Exchange | |||||||||||||||
| Reais per 1,000 | U.S. dollars | |||||||||||||||
| Class A Preferred Shares | per ADS | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
1999
|
R$ | 23.72 | R$ | 3.85 | US$ | 16.19 | US$ | 3.68 | ||||||||
|
2000
|
34.67 | 20.34 | 22.88 | 14.19 | ||||||||||||
|
2001
|
31.00 | 15.43 | 17.88 | 6.14 | ||||||||||||
|
2002
|
29.24 | 9.60 | 12.75 | 2.57 | ||||||||||||
|
2003
|
66.85 | 7.90 | 23.39 | 2.20 | ||||||||||||
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| São Paulo Stock Exchange | New York Stock Exchange | |||||||||||||||
| Reais per 1,000 | U.S. dollars | |||||||||||||||
| Class A Preferred Shares | per ADS | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
2002
|
||||||||||||||||
|
First Quarter
|
R$ | 29.24 | R$ | 23.02 | US$ | 12.75 | US$ | 10.05 | ||||||||
|
Second Quarter
|
27.11 | 18.75 | 11.77 | 6.09 | ||||||||||||
|
Third Quarter
|
20.35 | 11.50 | 7.11 | 3.18 | ||||||||||||
|
Fourth Quarter
|
12.25 | 9.60 | 3.50 | 2.57 | ||||||||||||
|
2003
|
||||||||||||||||
|
First Quarter
|
13.25 | 7.90 | 4.10 | 2.20 | ||||||||||||
|
Second Quarter
|
20.75 | 11.40 | 7.20 | 3.35 | ||||||||||||
|
Third Quarter
|
36.30 | 19.20 | 12.49 | 6.60 | ||||||||||||
|
Fourth Quarter
|
66.85 | 35.80 | 23.39 | 12.40 | ||||||||||||
|
2004
|
||||||||||||||||
|
First Quarter
|
80.51 | 63.00 | 29.25 | 21.50 | ||||||||||||
| São Paulo Stock Exchange | New York Stock Exchange | |||||||||||||||
| Reais per 1,000 | U.S. dollars | |||||||||||||||
| Class A Preferred Shares | per ADS | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
October 2003
|
R$ | 42.45 | R$ | 35.80 | 15.00 | 12.40 | ||||||||||
|
November 2003
|
48.97 | 40.00 | 16.75 | 14.23 | ||||||||||||
|
December 2003
|
66.85 | 48.30 | 23.39 | 16.61 | ||||||||||||
|
January 2004
|
80.51 | 67.10 | 29.25 | 23.25 | ||||||||||||
|
February 2004
|
77.00 | 63.00 | 26.00 | 21.50 | ||||||||||||
|
March 2004
|
77.41 | 72.88 | 26.79 | 23.22 | ||||||||||||
|
April 2004 (through April 2)
|
72.49 | 69.70 | 25.53 | 24.13 | ||||||||||||
Source: Economática Ltda.
On April 2, 2004, the closing sales price of:
| • | our class A preferred shares on the São Paulo Stock Exchange was R$69.70 per 1,000 shares; | |
| • | our class A preferred shares on the LATIBEX was €19.80 per 1,000 shares; and | |
| • | the ADSs on The New York Stock Exchange was US$24.13 per ADS. |
Trading on the São Paulo Stock Exchange
Settlement of transactions conducted on the São Paulo Stock Exchange is effected three business days after the trade date without any adjustment for inflation. Delivery of and payment for shares is made through the facilities of the São Paulo Stock Exchange’s clearinghouse (Companhia Brasileira de Liquidação e Custódia). The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date.
The São Paulo Stock Exchange is significantly less liquid than The New York Stock Exchange and many other of the world’s major stock exchanges. While all of the outstanding shares of a listed company may trade on the São Paulo Stock Exchange, in most cases fewer than half of the listed shares are actually available for trading by the public. The remaining shares are often held by a single or small group of controlling persons or by governmental entities.
Trading on the São Paulo Stock Exchange by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under
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Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the Brazilian Securities Commission, which has authority over stock exchanges and the securities markets generally, by the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Brazilian Law No. 6,385/76, as amended, and by the Brazilian Corporation Law and other Brazilian Securities Commission rulings and regulations.
Under the Brazilian Corporation Law, a company may be either public (companhia aberta), as we are, or closely held (companhia fechada). All public companies are registered with the Brazilian Securities Commission and are subject to periodic reporting requirements. A company registered with the Brazilian Securities Commission may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares of a listed company, like those of our company, also may be traded privately subject to certain limitations.
The Brazilian over-the-counter market consists of direct trades between persons in which a financial institution registered with the Brazilian Securities Commission serves as intermediary. No special application, other than registration with the Brazilian Securities Commission, is necessary for securities of a public company to be traded in this market. The Brazilian Securities Commission must receive notice of all trades carried out in the Brazilian over-the counter market by the respective intermediaries.
Trading of a company’s securities on the São Paulo Stock Exchange may be suspended in anticipation of a material announcement. A company must also suspend trading of its securities on international stock exchanges on which its securities are traded. Trading may also be suspended by a Brazilian stock exchange or the Brazilian Securities Commission, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to an inquiry by the Brazilian Securities Commission or the relevant stock exchange.
Brazilian Law No. 6,385/76, as amended, the Brazilian Corporation Law and regulations issued by the Brazilian Securities Commission provide for, among other things, disclosure obligations, restrictions on insider trading and price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as securities markets in the United States and some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of our class A preferred shares and the ADSs at a disadvantage. Corporate disclosures also may be less complete than for public company in the United States and certain other jurisdictions.
São Paulo Stock Exchange Corporate Governance Standards
On December 11, 2000, the São Paulo Stock Exchange launched three new listing segments:
| • | Corporate Governance Level 1; | |
| • | Corporate Governance Level 2; and | |
| • | The New Market (Novo Mercado) of the São Paulo Stock Exchange. |
27
Table of Contents
These new listing segments have been designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those already required under the Brazilian Corporation Law. The inclusion of a company in any of the new segments requires adherence to a series of corporate governance rules. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations.
On February 13, 2003, we agreed to comply with Level 1. At that time, we announced our intention to adhere to Level 2 by December 31, 2004.
In becoming a Level 1 company, we agreed to:
| • | ensure that shares representing 25% of our total share capital are available for trading; | |
| • | adopt offering procedures that favor widespread ownership of shares whenever making a public offering; | |
| • | comply with minimum quarterly disclosure standards; | |
| • | follow stricter disclosure policies with respect to transactions involving our securities made by our controlling shareholder and our directors and executive officers; | |
| • | disclose any existing shareholders agreements and stock option plans; and | |
| • | make a schedule of corporate events available to our shareholders. |
To become a Level 2 company, a company must agree to the following additional provisions:
| • | confer upon preferred shares the right to vote on at least the following issues: (1) transformation, merger, consolidation or spin-off of the company; (2) approval of transactions between the company and its controlling shareholder and/or related parties, whenever such matter is subject to authorization at a general meeting of shareholders pursuant to law or under the company’s by-laws; (3) appraisal of assets contributed to pay the company’s capital increases; (4) selection of a specialized company in charge of determining the company’s economic value for delisting purposes; and (5) amendment to or revocation of any provisions contained in the company’s by-laws, whenever such acts alter or modify any requirements set forth in the São Paulo Stock Exchange regulations; | |
| • | offer tag-along rights to minority shareholders (meaning that upon the acquisition of a controlling interest, the purchaser must also agree to purchase the shares of the company’s minority shareholders in an amount equivalent to 100% of the price paid for each share in the controlling stake, in the case of holders of common shares, and at least 70% of the price paid for each share in the controlling stake, in the case of holders of preferred shares); | |
| • | conduct a tender offer at fair market value in the event of a delisting of shares; | |
| • | present an annual balance sheet prepared in accordance with, or reconciled to, U.S. GAAP or international financial reporting standards; | |
| • | establish a one-year term for all members of the board of directors; and | |
| • | resolve corporate conflicts with or among the company’s shareholders through arbitration. |
To be a company listed on the New Market, a company must have its share capital composed exclusively of common shares in addition to meeting the Level 1 and the Level 2 requirements. We have no current plans to propose to amend our share capital structure to provide solely for the issuance of common shares.
28
Table of Contents
CAPITALIZATION
The following table sets forth our consolidated capitalization at December 31, 2003:
| • | on an actual historical basis; | |
| • | as adjusted for: |
| (1) the issuance and sale of R$1,200.0 million in aggregate principal amount of our eleventh series of debentures in January and February 2004 and the use of proceeds therefrom; and | |
| (2) the issuance and sale of US$250.0 million (R$710.4 million) in aggregate principal amount of our 11.75% Notes due 2014 in January 2004 and the use of proceeds therefrom; and |
| • | as further adjusted for the sale of class A preferred shares in the global offering, including the ADSs offered hereby, at the initial public offering price, and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us in connection with the global offering, and the use of proceeds therefrom. |
You should read this table in conjunction with our consolidated and combined financial statements included in this prospectus.
| At December 31, 2003 | ||||||||||||||||||||||||||
| Historical | As Adjusted | As Further Adjusted | ||||||||||||||||||||||||
| (in millions | (in millions | (in millions | (in millions | (in millions | (in millions | |||||||||||||||||||||
| of reais) | of US$)(1) | of reais) | of US$)(1) | of reais) | of US$)(1) | |||||||||||||||||||||
|
Cash and cash equivalents and marketable
securities
|
R$ | 1,184.3 | US$ | 409.9 | R$ | 2,571.0 | US$ | 889.8 | R$ | US$ | ||||||||||||||||
|
Short-term debt (including accrued interest
and current portion of long-term debt)
|
||||||||||||||||||||||||||
|
Real-denominated
debt (including debentures)
|
R$ | 891.8 | US$ | 308.7 | R$ | 891.8 | US$ | 308.7 | R$ | US$ | ||||||||||||||||
|
Foreign currency-denominated debt
|
1,966.2 | 680.6 | 1,966.2 | 680.6 | ||||||||||||||||||||||
|
Short-term debt of proportionally consolidated
companies
|
217.5 | 75.3 | 217.5 | 75.3 | ||||||||||||||||||||||
|
Total short-term debt
|
R$ | 3,075.5 | US$ | 1,064.6 | R$ | 3,075.5 | US$ | 1,064.6 | R$ | US$ | ||||||||||||||||
|
Long-term debt
|
||||||||||||||||||||||||||
|
Real-denominated
debt:
|
||||||||||||||||||||||||||
|
Eleventh series of debentures
|
R$ | — | US$ | — | R$ | 1,200.0 | US$ | 415.4 | R$ | 1,200.0 | US$ | 415.4 | ||||||||||||||
|
Tenth series of debentures
|
379.9 | 131.5 | ||||||||||||||||||||||||
|
Subordinated convertible debentures
|
763.1 | 264.1 | 763.1 | 264.1 | 763.1 | 264.1 | ||||||||||||||||||||
|
Other real-denominated debt
|
505.2 | 174.9 | 361.4 | 125.1 | 361.4 | 125.1 | ||||||||||||||||||||
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Table of Contents
| At December 31, 2003 | |||||||||||||||||||||||||||
| Historical | As Adjusted | As Further Adjusted | |||||||||||||||||||||||||
| (in millions | (in millions | (in millions | (in millions | (in millions | (in millions | ||||||||||||||||||||||
| of reais) | of US$)(1) | of reais) | of US$)(1) | of reais) | of US$)(1) | ||||||||||||||||||||||
|
Foreign currency-denominated debt:
|
|||||||||||||||||||||||||||
|
11.75% Notes due 2014
|
— | — | 710.4 | 245.9 | 710.4 | 245.9 | |||||||||||||||||||||
|
9.25% Notes due 2005
|
187.8 | 65.0 | 187.8 | 65.0 | 187.8 | 65.0 | |||||||||||||||||||||
|
12.50% Notes due 2008
|
794.5 | 275.0 | 794.5 | 275.0 | 794.5 | 275.0 | |||||||||||||||||||||
|
9.00% Notes due 2007
|
433.4 | 150.0 | 433.4 | 150.0 | 433.4 | 150.0 | |||||||||||||||||||||
|
Other foreign currency-denominated debt
|
1,421.2 | 491.9 | 1,421.2 | 491.9 | 1,421.2 | 491.9 | |||||||||||||||||||||
|
Long-term debt of proportionally consolidated
companies
|
273.2 | 94.5 | 273.2 | 94.6 | 273.2 | 94.6 | |||||||||||||||||||||
|
Total long-term debt
|
4,758.3 | 1,646.9 | 6,134.8 | 2,123.5 | 6,134.8 | 2,123.5 | |||||||||||||||||||||
|
Related party debt (long-term)
|
|||||||||||||||||||||||||||
|
Real-denominated debt
|
20.2 | 7.0 | 20.2 | 7.0 | 20.2 | 7.0 | |||||||||||||||||||||
|
Foreign currency-denominated debt
|
157.4 | 54.5 | 157.4 | 54.5 | 157.4 | 54.5 | |||||||||||||||||||||
|
Total related party debt
|
177.6 | 61.5 | 177.6 | 61.5 | 177.6 | 61.5 | |||||||||||||||||||||
|
Shareholders’ equity
|
2,112.6 | 731.2 | 2,112.6 | 731.2 | |||||||||||||||||||||||
|
Total capitalization (long-term debt, related
party debt (long-term) plus shareholders’ equity)
|
R$ | 7,048.5 | US$ | 2,439.6 | R$ | 8,425.0 | US$ | 2,916.2 | R$ | US$ | |||||||||||||||||
| (1) | Translated for convenience only using the commercial selling rate as reported by the Central Bank at December 31, 2003 for reais into U.S. dollars of R$2.889=U.S.$1.00. |
At December 31, 2003, R$840.8 million of our real-denominated debt (excluding related party debt) was secured and R$1,699.2 million was unsecured. At December 31, 2003, R$232.8 million of our foreign currency-denominated debt (excluding related party debt) was secured and R$4,570.3 million was unsecured. At December 31, 2003, R$276.2 million of our foreign currency-denominated debt was guaranteed by the Odebrecht Group.
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Table of Contents
DILUTION
Dilution Relating to Global Offering
Purchasers of the ADSs will experience immediate and substantial dilution to the extent of any difference between the initial public offering price per share and the net book value per share upon the completion of the global offering.
Net book value represents the amount of our total assets, less our total liabilities. Net book value per share is determined by dividing our net book value by the number of our outstanding shares.
At December 31, 2003, our net book value was approximately US$10.58 per share, translated at the commercial selling rate as reported by the Central Bank at December 31, 2003 for reais into U.S. dollars of R$2.889 = US$1.00. Based upon an the initial public offering price of US$ per ADS, the immediate dilution to purchasers of the ADSs in the global offering will be US$ per share or %. The following table illustrates this per ADS dilution:
| Per ADS | ||||
|
Initial public offering price
|
US$ | |||
|
Net book value at December 31, 2003
|
||||
|
Dilution to new investors
|
US$ | |||
Future Dilution
Holders of ADSs may, in the future, experience further substantial dilution upon the exercise of the Petroquisa option to acquire new common shares and preferred shares from our company or upon conversion by ODBPAR Investments of R$636.6 million principal amount of convertible subordinated debentures. See “Principal Shareholders and Related Party Transactions — Principal Shareholders — Shareholders Agreements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Indebtedness and Financing Strategy.”
31
Table of Contents
EXCHANGE RATES
There are two principal legal foreign exchange markets in Brazil:
| • | the commercial rate exchange market; and | |
| • | the floating rate exchange market. |
Each of these markets is separately regulated. Most trade and financial foreign-exchange transactions are carried out on the commercial rate exchange market. These transactions include the purchase and sale of ordinary and preferred shares and the payment of dividends or other distributions with respect to them.
Foreign currencies may be purchased only through a Brazilian bank authorized to operate in these markets. The Brazilian government unified the operating limits imposed on Brazilian banks with respect to both markets, which reduced the difference between their rates. In both markets, rates are still freely negotiated but may be strongly influenced by Central Bank intervention.
From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real/ U.S. dollar exchange rate to float freely. Since then, the real/ U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably. From December 31, 1998 through December 31, 2003, the real devalued by 58.2% against the U.S. dollar, and at April 2, 2004, the commercial selling rate for U.S. dollars was R$2.893 per US$1.00. The Central Bank has intervened occasionally to control unstable movements in the foreign exchange rate. However, the exchange market may continue to be volatile, and the real may depreciate or appreciate substantially in value in relation to the U.S. dollar in the future.
The following table shows the commercial selling rate for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the exchange rates on the last day of each month during the years presented.
| Reais per U.S. Dollar | ||||||||||||||||
| Year | High | Low | Average | Period End | ||||||||||||
|
1999
|
R$ | 2.165 | R$ | 1.210 | R$ | 1.851 | R$ | 1.789 | ||||||||
|
2000
|
1.985 | 1.723 | 1.835 | 1.956 | ||||||||||||
|
2001
|
2.801 | 1.936 | 2.353 | 2.320 | ||||||||||||
|
2002
|
3.955 | 2.271 | 2.998 | 3.533 | ||||||||||||
|
2003
|
3.662 | 2.822 | 3.071 | 2.889 | ||||||||||||
|
2004 (through March 31, 2004)
|
2.988 | 2.802 | 2.921 | 2.908 | ||||||||||||
| Source: | Central Bank |
| Reais per U.S. Dollar | ||||||||
| Month | High | Low | ||||||
|
October 2003
|
2.903 | 2.827 | ||||||
|
November 2003
|
2.955 | 2.856 | ||||||
|
December 2003
|
2.943 | 2.888 | ||||||
|
January 2004
|
2.941 | 2.802 | ||||||
|
February 2004
|
2.988 | 2.904 | ||||||
|
March 2004
|
2.941 | 2.872 | ||||||
| Source: | Central Bank |
32
Table of Contents
SELECTED FINANCIAL AND OTHER INFORMATION
The following table presents selected financial and other information for our company at the dates and for each of the years indicated. The selected financial information has been derived from the financial statements of our company prepared in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. For a discussion of the significant differences relating to these financial statements and a reconciliation of net income (loss) and shareholders’ equity from Brazilian GAAP to U.S. GAAP, see note 29 to our consolidated and combined financial statements included in this prospectus. The selected financial and other data at December 31, 2003 and 2002 and for the three years in the period ended December 31, 2003 have been derived from our consolidated and combined financial statements included in this prospectus. The selected financial data at December 31, 2000 and 1999 and for the two years ended December 31, 2000 have been derived from audited financial statements of our company that are not included in this prospectus. This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated and combined financial statements in this prospectus.
All per thousand share data presented below for periods before October 21, 2003 have been adjusted to give effect to the 20-for-1 share split that was effective on that date.
| At and for the Year Ended December 31, | ||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | |||||||||||||||||||
| (in millions of | ||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | |||||||||||||||||||||||
| per thousand | operating data) | |||||||||||||||||||||||
| shares and per | ||||||||||||||||||||||||
| ADS amounts) | ||||||||||||||||||||||||
|
Statement of Operations Data
|
||||||||||||||||||||||||
|
Brazilian GAAP:
|
||||||||||||||||||||||||
|
Net sales revenue
|
US$ | 3,508.1 | R$ | 10,135.8 | R$ | 7,576.6 | R$ | 4,459.5 | R$ | 2,897.5 | R$ | 1,874.8 | ||||||||||||
|
Cost of sales and services rendered
|
(2,799.8 | ) | (8,089.3 | ) | (6,175.5 | ) | (3,637.6 | ) | (2,357.1 | ) | (1,344.1 | ) | ||||||||||||
|
Gross profit
|
708.3 | 2,046.5 | 1,401.1 | 821.9 | 540.4 | 530.7 | ||||||||||||||||||
|
Selling and general and administrative expenses
|
(163.3 | ) | (471.9 | ) | (577.7 | ) | (210.3 | ) | (116.2 | ) | (101.7 | ) | ||||||||||||
|
Investment in associated companies, net(3)
|
(54.8 | ) | (158.2 | ) | (251.7 | ) | (214.3 | ) | (3.6 | ) | 4.2 | |||||||||||||
|
Depreciation and amortization
|
(67.0 | ) | (193.5 | ) | (222.4 | ) | (111.3 | ) | (36.5 | ) | (36.1 | ) | ||||||||||||
|
Financial expenses
|
(246.6 | ) | (712.6 | ) | (3,481.5 | ) | (801.2 | ) | (250.0 | ) | (346.6 | ) | ||||||||||||
|
Financial income
|
3.1 | 9.0 | 619.6 | 294.7 | 178.6 | 173.2 | ||||||||||||||||||
|
Zero-rated IPI credit
|
— | — | 1,030.1 | — | — | — | ||||||||||||||||||
|
Other operating income (expenses)
|
17.2 | 49.7 | 102.6 | 103.3 | (12.5 | ) | 5.5 | |||||||||||||||||
|
Operating income (loss)
|
196.9 | 569.0 | (1,379.9 | ) | (117.2 | ) | 300.2 | 229.2 | ||||||||||||||||
|
Non-operating expenses, net
|
(1.7 | ) | (4.8 | ) | (98.0 | ) | (120.8 | ) | (0.6 | ) | (9.1 | ) | ||||||||||||
|
Income (loss) before income tax and social
contribution (current and deferred) and minority interest
|
195.2 | 564.2 | (1,477.9 | ) | (238.0 | ) | 299.6 | 220.1 | ||||||||||||||||
|
Income tax and social contribution (current and
deferred)
|
(42.5 | ) | (122.9 | ) | (89.8 | ) | (77.6 | ) | (73.3 | ) | (54.4 | ) | ||||||||||||
|
Income (loss) before minority interest
|
152.7 | 441.3 | (1,567.7 | ) | (315.6 | ) | 226.3 | 165.7 | ||||||||||||||||
|
Minority interest
|
(78.3 | ) | (226.2 | ) | 189.0 | (108.9 | ) | 1.3 | 0.2 | |||||||||||||||
|
Net income (loss) for the year
|
US$ | 74.4 | R$ | 215.1 | R$ | (1,378.7 | ) | R$ | (424.5 | ) | R$ | 227.6 | R$ | 165.9 | ||||||||||
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Table of Contents
| At and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions of | |||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | ||||||||||||||||||||||||
| per thousand | operating data) | ||||||||||||||||||||||||
| shares and per | |||||||||||||||||||||||||
| ADS amounts) | |||||||||||||||||||||||||
|
Number of shares outstanding at year end,
excluding treasury shares (in thousands):
|
|||||||||||||||||||||||||
|
Common shares
|
— | 25,608,114 | 24,521,820 | 12,933,860 | 12,933,860 | 12,933,860 | |||||||||||||||||||
|
Class A preferred shares
|
— | 42,594,754 | 42,122,880 | 21,592,900 | 21,592,900 | 21,574,900 | |||||||||||||||||||
|
Class B preferred shares
|
— | 229,154 | 229,160 | 229,160 | 229,160 | 229,160 | |||||||||||||||||||
|
Net income (loss) per thousand shares at year end
|
US$ | 1.09 | R$ | 3.15 | R$ | (20.62 | ) | R$ | (12.21 | ) | R$ | 6.55 | R$ | 4.78 | |||||||||||
|
Net income (loss) per ADS(4) at year end
|
1.09 | 3.15 | (20.62 | ) | (12.21 | ) | 6.55 | 4.78 | |||||||||||||||||
|
Dividends declared per thousand shares:
|
|||||||||||||||||||||||||
|
Common shares
|
— | — | — | 1.73 | 3.44 | 2.42 | |||||||||||||||||||
|
Class A preferred shares
|
— | — | 0.52 | 2.08 | 3.44 | 2.42 | |||||||||||||||||||
|
Class B preferred shares
|
— | — | 0.52 | 2.08 | 2.08 | 2.08 | |||||||||||||||||||
|
Dividends declared per ADS(4)
|
— | — | 0.52 | 2.08 | 3.44 | 2.42 | |||||||||||||||||||
|
U.S. GAAP:
|
|||||||||||||||||||||||||
|
Net income (loss) for the year
|
US$ | 131.1 | R$ | 378.7 | R$ | (698.7 | ) | R$ | (470.0 | ) | |||||||||||||||
|
Basic earnings (loss) per thousand shares
(weighted average):
|
|||||||||||||||||||||||||
|
Common shares
|
1.95 | 5.64 | (29.14 | ) | (26.66 | ) | |||||||||||||||||||
|
Class A preferred shares
|
1.90 | 5.49 | — | — | |||||||||||||||||||||
|
Class B preferred shares
|
0.57 | 1.64 | — | — | |||||||||||||||||||||
|
Basic earnings (loss) per ADS (weighted
average)(4)
|
1.90 | 5.49 | — | — | |||||||||||||||||||||
|
Diluted earnings (loss) per thousand shares
(weighted average):
|
|||||||||||||||||||||||||
|
Common shares
|
US$ | 1.93 | R$ | 5.59 | R$ | (29.14 | ) | R$ | (26.66 | ) | |||||||||||||||
|
Class A preferred shares
|
1.89 | 5.47 | — | — | |||||||||||||||||||||
|
Class B preferred shares
|
0.57 | 1.64 | — | — | |||||||||||||||||||||
|
Diluted earnings (loss) per ADS (weighted
average)(4)
|
1.89 | 5.47 | — | — | |||||||||||||||||||||
|
Balance Sheet Data
|
|||||||||||||||||||||||||
|
Brazilian GAAP:
|
|||||||||||||||||||||||||
|
Cash, cash equivalents and marketable securities
|
US$ | 409.9 | R$ | 1,184.3 | R$ | 821.0 | R$ | 513.2 | R$ | 708.9 | R$ | 561.4 | |||||||||||||
|
Trade accounts receivable
|
420.9 | 1,216.2 | 959.0 | 484.1 | 231.6 | 188.6 | |||||||||||||||||||
|
Inventories
|
370.9 | 1,071.6 | 889.1 | 667.8 | 163.4 | 119.9 | |||||||||||||||||||
|
Property, plant and equipment, net
|
1,741.7 | 5,032.0 | 5,296.7 | 4,429.7 | 1,969.0 | 1,977.2 | |||||||||||||||||||
|
Total assets
|
4,805.1 | 13,883.0 | 13,898.2 | 9,555.3 | 3,748.7 | 3,544.3 | |||||||||||||||||||
|
Short-term loans and financing (including current
portion of long-term debt)
|
943.7 | 2,726.5 | 2,746.1 | 1,966.4 | 331.5 | 257.4 | |||||||||||||||||||
|
Short-term debentures
|
6.6 | 349.0 | 32.1 | 26.2 | — | — | |||||||||||||||||||
|
Short-term related company debt
|
0.1 | 0.2 | 8.2 | 88.7 | — | — | |||||||||||||||||||
|
Long-term loans and financing
|
1,251.3 | 3,615.3 | 3,891.6 | 3,101.7 | 861.8 | 915.6 | |||||||||||||||||||
|
Long-term debentures
|
509.8 | 1,143.0 | 1,190.2 | 473.6 | — | — | |||||||||||||||||||
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| At and for the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions of | |||||||||||||||||||||||||
| US$, except | (in millions of reais, except per thousand shares, per ADS amounts and | ||||||||||||||||||||||||
| per thousand | operating data) | ||||||||||||||||||||||||
| shares and per | |||||||||||||||||||||||||
| ADS amounts) | |||||||||||||||||||||||||
|
Long-term related company debt
|
61.5 | 177.6 | 189.3 | 626.7 | 0.9 | 1.1 | |||||||||||||||||||
|
Minority interest
|
191.9 | 554.4 | 433.1 | 738.0 | 27.4 | 30.1 | |||||||||||||||||||
|
Share capital
|
653.3 | 1,887.4 | 1,845.4 | 1,201.6 | 1,201.6 | 1,203.9 | |||||||||||||||||||
|
Shareholders’ equity
|
731.2 | 2,112.6 | 1,821.8 | 1,729.0 | 2,267.8 | 2,085.3 | |||||||||||||||||||
|
U.S. GAAP:
|
|||||||||||||||||||||||||
|
Total assets
|
US$ | 3,792.2 | R$ | 10,956.4 | R$ | 10,377.0 | R$ | 6,964.3 | |||||||||||||||||
|
Shareholders’ equity
|
2.5 | 7.1 | (416.5 | ) | 289.8 | ||||||||||||||||||||
|
Other Financial Information
|
|||||||||||||||||||||||||
|
Brazilian GAAP:
|
|||||||||||||||||||||||||
|
Net cash provided by (used in):
|
|||||||||||||||||||||||||
|
Operating activities
|
US$ | 200.9 | R$ | 580.5 | R$ | 790.0 | R$ | 1,453.9 | R$ | 550.3 | R$ | 613.6 | |||||||||||||
|
Investing activities
|
(159.4 | ) | (460.4 | ) | (646.7 | ) | (862.2 | ) | (115.6 | ) | (34.6 | ) | |||||||||||||
|
Financing activities
|
127.3 | 367.8 | (237.2 | ) | (404.9 | ) | (287.2 | ) | (210.7 | ) | |||||||||||||||
|
Capital expenditures:
|
|||||||||||||||||||||||||
|
Property, plant and equipment
|
74.3 | 214.7 | 419.9 | 318.0 | 18.4 | 48.0 | |||||||||||||||||||
|
Interest in other companies
|
24.8 | 71.7 | 13.1 | 1,172.3 | 82.6 | 26.6 | |||||||||||||||||||
|
EBITDA(5)
|
625.9 | 1,808.4 | 2,043.7 | 708.7 | 548.0 | 568.9 | |||||||||||||||||||
| At and for the Year Ended December 31, | |||||||||||||||||||||
| 2003 | 2002 | 2001(2) | 2000 | 1999 | |||||||||||||||||
| (in millions of reais, except per thousand shares, per ADS | |||||||||||||||||||||
| amounts and operating data) | |||||||||||||||||||||
|
Operating Data(6):
|
|||||||||||||||||||||
|
Ethylene:
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
1,047.3 | 994.8 | 1,064.8 | 1,103.8 | 1,121.1 | ||||||||||||||||
|
Average domestic price per ton (in R$)
|
1,634 | 1,292 | 1,135 | 1,046 | 633 | ||||||||||||||||
|
Propylene:
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
403.4 | 415.2 | 421.1 | 487.7 | 494.3 | ||||||||||||||||
|
Average domestic price per ton (in R$)
|
1,495 | 1,106 | 825 | 875 | 444 | ||||||||||||||||
|
Polyethylene(7):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
445.4 | 491.8 | 495.0 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,567 | 2,007 | 1,920 | ||||||||||||||||||
|
Polypropylene(7):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
374.9 | 395.1 | 338.5 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,689 | 1,931 | 1,623 | ||||||||||||||||||
|
PVC(8):
|
|||||||||||||||||||||
|
Domestic sales volume (in thousands of tons)
|
342.4 | 350.1 | 327.6 | ||||||||||||||||||
|
Average domestic price per ton (in R$)
|
2,358 | 1,969 | 1,623 | ||||||||||||||||||
|
Number of employees (at period end)
|
2,868 | 2,817 | 1,424 | 1,161 | 1,104 | ||||||||||||||||
| (1) | Translated for convenience only using the commercial selling rate as reported by the Central Bank at December 31, 2003 for reais into U.S. dollars of R$2.889=US$1.00. |
| (2) | The financial information for 2001 is not comparable with the financial information for 2000 and 1999 as a result of our merger with OPP Produtos, which we accounted for as if it had occurred on July 25, 2001 as a result of the common control exercised by the Odebrecht Group over our company and OPP Produtos. |
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| (3) | Investment in associated companies, net comprises equity in the results, amortization of goodwill, net, foreign exchange variation and tax incentives and other. |
| (4) | Net income (loss) per 1,000 shares or ADS under Brazilian GAAP is based on shares outstanding at the end of each year. Earnings (loss) per 1,000 shares or ADS under U.S. GAAP is based on the weighted average number of class A preferred shares outstanding during each period. |
| (5) | EBITDA is the sum of the following income statement lines, without giving effect to the proportional consolidation of our jointly controlled companies: Net income (loss) for the year; minority interest; income tax and social contribution (current and deferred); non-operating expenses, net; financial expenses, net; investment in associated companies; and depreciation and amortization, including depreciation and amortization within cost of sales. EBITDA is not a measurement under Brazilian GAAP and should not be considered in isolation or as a substitute for net income as a measure of performance, cash flow from operating activities or other measures of liquidity determined in accordance with Brazilian GAAP. However, we believe that EBITDA serves as a financial analysis tool for measuring our company’s performance in several areas, including liquidity, operating performance and leverage. In addition, EBITDA is commonly used by financial analysts in evaluating our company and its financial performance. EBITDA may not be comparable to similarly titled measures of other companies. EBITDA is calculated as follows: |
| For the Year Ended December 31, | |||||||||||||||||||||||||
| 2003(1) | 2003 | 2002 | 2001(2) | 2000 | 1999 | ||||||||||||||||||||
| (in millions | |||||||||||||||||||||||||
| of US$) | (in millions of reais) | ||||||||||||||||||||||||
|
Net income (loss) for the year
|
74.4 | 215.1 | (1,378.7 | ) | (424.5 | ) | 227.6 | 165.9 | |||||||||||||||||
|
Add:
|
|||||||||||||||||||||||||
|
Minority interest
|
77.7 | 224.4 | (199.1 | ) | 112.2 | 1.3 | 0.2 | ||||||||||||||||||
|
Income tax and social contribution (current and
deferred)
|
31.8 | 91.8 | 57.7 | 56.0 | 73.8 | 56.3 | |||||||||||||||||||
|
Non-operating expenses, net
|
1.6 | 4.6 | 74.2 | 116.1 | 0.7 | 9.0 | |||||||||||||||||||
|
Financial expenses, net
|
226.9 | 655.5 | 2,788.5 | 468.1 | 71.4 | 173.5 | |||||||||||||||||||
|
Investment in associated companies, net
|
41.3 | 119.4 | 313.7 | 232.8 | 3.6 | (4.2 | ) | ||||||||||||||||||
|
Depreciation and amortization, including
depreciation and amortization within cost of sales
|
172.2 | 497.6 | 387.4 | 148.0 | 169.6 | 165.2 | |||||||||||||||||||
|
EBITDA
|
625.9 | 1,808.4 | 2,043.7 | 708.7 | 548.0 | 568.9 | |||||||||||||||||||
| (6) | Excluding intra-company sales within Braskem. |
| (7) | Represents the sum of the sales volumes of Polialden and OPP Química for 2001. |
| (8) | Represents the sales volume of Trikem for 2001. |
36
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated and combined financial statements at December 31, 2003 and 2002 and for the three years ended December 31, 2003 included in this prospectus, as well as with the information presented under “Presentation of Financial and Other Information” and “Selected Financial and Other Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Forward-Looking Statements” and “Risk Factors.”
The discussion and analysis of our financial condition and results of operations has been organized to present the following:
| • | a brief overview of our company and the principal factors that influence our results of operations, financial condition and liquidity; | |
| • | a review of our financial presentation and accounting policies, including our critical accounting policies; | |
| • | a discussion of the principal factors that influence our results of operations; | |
| • | a discussion of developments since the end of 2003 that may materially affect our results of operations, financial condition and liquidity; | |
| • | a discussion of our results of operations for the years ended December 31, 2003, 2002 and 2001; | |
| • | a discussion of our liquidity and capital resources, including our working capital at December 31, 2003 and 2002, our cash flows for the years ended December 31, 2003, 2002 and 2001, and our material short-term and long-term indebtedness; | |
| • | a discussion of our off-balance sheet arrangements; | |
| • | a discussion of our capital expenditures and our contractual commitments; | |
| • | a qualitative and quantitative discussion of market risks that we face; and | |
| • | a brief overview of the differences between Brazilian GAAP and U.S. GAAP as they relate to our financial statements. |
Overview
We are the leading petrochemical company in Latin America and one of the five largest private sector industrial companies in Brazil, based on net sales revenue for 2003. We recorded net income of R$215.1 million in 2003 on net sales revenue of R$10,135.8 million. We produce a diversified portfolio of petrochemical products and have a strategic focus on polyethylene, polypropylene and PVC. We are the only Brazilian company with integrated first and second generation petrochemical production facilities, with 13 plants in Brazil.
Our results of operations have been influenced and will continue to be influenced by a variety of factors, including:
| • | our substantial increase in production capacity and product offerings through our acquisition of Nova Camaçari Participações S.A., or Nova Camaçari, our mergers with OPP Produtos and 52114 Participações and internal growth, and our ability to realize additional cost savings through the integration into our company of the companies that we have acquired during the past few years; | |
| • | the growth rate of Brazilian GDP, which affects the demand for our products and, consequently, our domestic sales volume; |
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Table of Contents
| • | the international market price of naphtha, our principal raw material, which significantly affects the cost of producing our products; | |
| • | the expansion of global production capacity for the products that we sell and the growth rate of the global economy; | |
| • | the exchange rate of the Brazilian real against the U.S. dollar; | |
| • | the level of our outstanding indebtedness and the interest rates we pay on this indebtedness, which affects our net financial expenses; | |
| • | the results of operations of those companies in which we have minority equity interests, such as Copesul and Politeno, a portion of which are consolidated into our results of operations as required by Brazilian GAAP; and | |
| • | the tax policies adopted by, and resulting tax obligations to, the Brazilian government and the governments of the Brazilian states in which we operate. |
Our financial condition and liquidity is influenced by a variety of factors, including:
| • | our ability to generate cash flows from our operations; | |
| • | prevailing domestic and international interest rates and movements in exchange rates, which affect our debt service requirements; | |
| • | our ability to continue to be able to borrow funds from Brazilian and international financial institutions and to sell our debt securities in the Brazilian and international securities markets, which is influenced by a number of factors discussed below; | |
| • | our ability to extend the average maturity of our loans and debt securities as we refinance our existing indebtedness; and | |
| • | our capital expenditure requirements, which consist primarily of maintenance of our operating facilities, expansion of our production capacity and research and development activities. |
Financial Presentation and Accounting Policies
| Consolidated and Combined Financial Statements |
We have prepared our consolidated and combined financial statements at December 31, 2003 and 2002 and for the three years ended December 31, 2003 in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. See note 29 to our consolidated and combined financial statements for an explanation of these differences. The financial information contained in this prospectus is in accordance with Brazilian GAAP, except as otherwise noted.
Since July 25, 2001, our company has grown substantially through acquisitions and mergers, principally the acquisition of Nova Camaçari and our mergers with OPP Produtos and 52114 Participações. See “History and Corporate Reorganization.” Prior to our mergers with OPP Produtos and 52114 Participações, Odebrecht, a member of the Odebrecht Group, owned all of the voting share capital of OPP Produtos, and Pronor, a member of the Mariani Group, owned all of the voting share capital of 52114 Participações.
We accounted for the acquisition of Nova Camaçari and our merger with 52114 Participações at the respective date of the acquisition or merger. However, as a result of the common control exercised by the Odebrecht Group over our company and OPP Produtos prior to the merger of OPP Produtos, we accounted for the merger of OPP Produtos as if this acquisition had occurred on July 25, 2001, the date we acquired Nova Camaçari and the date on which such common control had commenced. As a result:
| • | our consolidated balance sheet at December 31, 2001 reflects the inclusion of the assets acquired and liabilities assumed in the acquisition of Nova Camaçari and our merger with OPP Produtos; |
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Table of Contents
| • | our consolidated balance sheet at December 31, 2002 reflects the inclusion of the assets acquired and liabilities assumed in our acquisition of Nova Camaçari and our mergers with OPP Produtos and 52114 Participações; | |
| • | our consolidated statement of operations and cash flow accounts for the year ended December 31, 2001 reflect the operations and cash flows of Nova Camaçari and OPP Produtos and their subsidiaries for the period beginning on July 25, 2001; and | |
| • | our consolidated statement of operations and cash flow accounts for the year ended December 31, 2002 reflect the operations and cash flows of Nova Camaçari and OPP Produtos and their subsidiaries for that year and the operations and cash flows of 52114 Participações and its subsidiaries for the period beginning on August 16, 2002. |
Our consolidated and combined financial statements under Brazilian GAAP have been prepared in accordance with Brazilian Securities Commission Instruction No. 247/96, as amended by Brazilian Securities Commission Instruction Nos. 269/97, 285/98 and 319/99, which we refer to collectively as Instruction 247. Instruction 247 requires our company to proportionally consolidate jointly controlled companies that are not our subsidiaries, principally Copesul and Politeno.
Our results of operations for 2001 and 2002 are not fully comparable because our results of operations for 2001 include the results of OPP Química, Trikem, Polialden and Proppet and proportional consolidation of the results of Copesul and Politeno only for the period after July 25, 2001. Our results of operations for 2002 include the results of these companies for the full year.
Our results of operations for 2002 and 2003 are not fully comparable because our results of operations for 2002 include the results of Nitrocarbono only for the period after August 16, 2002, and our results of operations for 2003 include the results of Nitrocarbono for the full year. However, because of the size of our Business Development Unit relative to our company, we do not believe that this lack of full comparability is material.
| Business Segments and Presentation of Segment Financial Data |
In 2002, we implemented an organizational structure that we believe reflects our business activities and corresponds to our principal products and production processes. We report our results by four market segments to reflect this organizational structure:
| • | Basic Petrochemicals — This segment includes our production and sale of basic petrochemicals and our supply of utilities to second generation producers, including some producers owned or controlled by our company. These activities consist of operations historically conducted by our company; | |
| • | Polyolefins — This segment includes our production and sale of polyethylene and polypropylene and consists of the operations historically conducted by OPP Química and Polialden; | |
| • | Vinyls — This segment includes our production and sale of PVC, caustic soda and chlorine and consists of the operations historically conducted by Trikem; and | |
| • | Business Development — This segment includes our production and sale of other second generation petrochemical products, and consists of the operations historically conducted by Nitrocarbono and Proppet and our management of some minority equity investments, principally our investments in Petroflex Indústria e Comércio S.A., or Petroflex, and Cetrel. |
In 2003, sales by our Basic Petrochemicals Unit, our Vinyls Unit, our Polyolefins Unit and our Business Development Unit represented 47.8%, 13.7%, 33.9% and 4.6%, respectively, of our net sales revenue of all segments before reflecting the proportional consolidation of our jointly controlled companies.
We report business segment data in note 29 to our combined and consolidated financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 requires that segment data be presented on the basis of the internal information that is used by management to assess performance and
39
Table of Contents
| Critical Accounting Policies |
The presentation of our financial condition and results of operation in conformity with Brazilian GAAP requires us to make certain judgments and estimates regarding the effects of matters that are inherently uncertain and that impact the carrying value of our assets and liabilities. Actual results could differ from those estimates. In order to provide an understanding about how we form our judgments and estimates about certain future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to the following critical accounting policies under Brazilian GAAP:
| • | Revenue Recognition and Provision for Doubtful Accounts. We recognize net sales revenue for our product sales when risk and title to the product are transferred to our customer. Transfer generally occurs at the time when the product is delivered to our customers or their freight carriers. For the years ended December 31, 2002 and 2001, the Company recognized revenue for product sales when the products were shipped. We record a provision for doubtful accounts in selling expenses for an amount that we consider sufficient to cover any probable losses on realization of our accounts receivable. In order to determine the overall adequacy of the allowance for doubtful accounts, we evaluate the amount and characteristics of our accounts receivables on a quarterly basis. When significant payment delays occur and the likelihood of receiving payment in full of our accounts receivable decreases, we record a provision. We do not record a provision when the accounts receivable are guaranteed by a creditworthy entity or where there are other reasonable grounds to believe that they will be paid. | |
| • | Impairment and Depreciation and Amortization of Permanent Assets. We perform annual cash flow studies to determine if the accounting value of our assets, primarily our property, plant and equipment, goodwill and other intangible assets, is compatible with the profitability resulting from the respective business units. If the expected cash flows are lower than the accounting value, we record a provision for impairment of the asset’s value. In order to estimate future cash flows, we must make various assumptions about matters that are highly uncertain, including future production and sales, product prices (which we estimate based on current and historical prices, price trends and related factors), future taxes payable and operating costs. We regularly recognize expenses related to the depreciation of our property, plant and equipment and to the amortization of our deferred charges, goodwill and other intangible assets. The rates of depreciation or amortization are based on our or third-party estimates of the useful lives of the fixed assets or otherwise over the periods during which these assets can be expected to provide benefits to us. | |
| • | Valuation of Long-Term Investments. We record long-term investments at cost or under the equity accounting method, depending on our participation in voting capital and the degree of influence that we exercise over the operations of the companies involved. We evaluate the fair value of investments for impairment whenever the performance of the underlying entity indicates that impairment may exist. In such cases, the fair value of the investments is estimated principally based on discounted estimated cash flows using assumptions. Arriving at assumptions and estimates concerning these cash flows is a complex and often subjective process involving estimation of future revenues, costs and taxes. | |
| • | Valuation of Derivative Instruments. We use swaps, forwards, options and other derivative instruments to manage risks from changes in foreign exchange and interest rates. We record these instruments at their estimated fair market value based on market quotations for similar instruments and assumptions as to future foreign exchange and interest rates. During the periods presented, we |
40
Table of Contents
| did not designate any derivative financial instruments as hedges and the fair value adjustments to our derivatives were thus recorded in current net income. | ||
| • | Pension Plans. For defined benefit plans sponsored by us, we calculate our funding obligations based on calculations performed by independent actuaries using assumptions that we provide about interest rates, investment returns, levels of inflation, mortality rates and future employment levels. These assumptions directly impact our liability for accrued pension costs and the amounts we record as pension costs. | |
| • | Deferred Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using prevailing rates. We regularly review any deferred tax assets for recoverability and reduce their carrying value, as required, based on our historical taxable income, projected future taxable income and the expected timing of any reversals of existing temporary differences. If one of our subsidiaries operates at a loss or is unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or the time period within which the underlying temporary differences become taxable or deductible, we evaluate the need to reduce partially or completely the carrying value of our deferred tax assets. | |
| • | Contingencies. We are currently involved in numerous judicial and administrative proceedings, as described under “Business — Legal Proceedings” and in notes 11, 17, 18 and 21 to our consolidated and combined financial statements. We record accrued liabilities for contingencies that we deem probable of creating an adverse effect on the result of operations or financial condition. We believe that these contingencies are properly recognized in our financial statements. We are also involved in judicial and administrative proceedings that are aimed at obtaining or defending our legal rights with respect to taxes that we believe to be unconstitutional or otherwise not required to be paid by our company. We believe that these proceedings will ultimately result in tax credits or benefits, which we do not recognize in our financial statements until the contingency has been resolved. When, based on favorable but appealable court decisions, we use tax credits or benefits in dispute to offset current tax obligations, we establish a provision equal to the amount used and maintain the provision until a final decision on those credits or benefits. Our provisions include interest on the tax obligations we have offset with disputed credits or benefits at the interest rate defined in the relevant tax law. |
Principal Factors Affecting Our Results of Operations
| Nova Camaçari Acquisition and Mergers with OPP Produtos and 52114 Participações |
Before July 25, 2001, the date of our acquisition of Nova Camaçari, our operations consisted principally of the operations of our Basic Petrochemicals Unit.
As a result of our acquisition of Nova Camaçari on July 25, 2001:
| • | we acquired Proppet, whose operations are accounted for in our Business Development segment; | |
| • | we acquired control of Polialden, whose operations are accounted for in our Polyolefins segment; and | |
| • | we acquired a substantial minority interest in Politeno. |
On August 16, 2002, we merged with OPP Produtos and 52114 Participações. As a result of these mergers:
| • | we acquired OPP Química, whose operations are accounted for in our Polyolefins segment; | |
| • | we acquired control of Trikem, whose operations are accounted for in our Vinyls segment; | |
| • | we acquired control of Nitrocarbono, whose operations are accounted for in our Business Development segment; and |
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| • | we acquired a substantial minority interest in Copesul. |
As a result of these acquisitions and mergers, our net sales revenue, gross profit and operating income have increased significantly. Because we and OPP Produtos have been under common control since July 25, 2001 (the date of our acquisition of Nova Camaçari), the results of OPP Química and Trikem have been included in our results of operations and the results of Copesul and Politeno have been proportionally consolidated in our results since that date.
In 2001, we identified an estimated total of R$330 million in recurring and annualized cost reductions that could be realized as a result of the integration into our company of the companies that we have acquired since July 25, 2001. At December 31, 2003, we estimated that the implementation of our integration program will result in our achieving approximately R$285 million in annual recurring cost reductions as compared to costs that would have been incurred by our company and the companies that we have acquired, as estimated by our management. These cost reduction have been achieved primarily in the areas of tax, logistics, operations and information technology, and personnel. We believe that we will be able to achieve additional annual recurring cost reductions over the next three years through other actions that are expected to complete our integration program. We cannot assure you that we will realize the full benefit of the existing or future identified annual cost savings in future years. To the extent that we fail to do so, for any reason, in any year, our results of operations for that year will be adversely affected.
Growth of Brazil’s Gross Domestic Product and Domestic Demand for Our Products
In 2003, 74.2% of our net sales revenue was derived from sales in Brazil. As a Brazilian company with substantially all of our operations in Brazil, we are significantly affected by economic conditions in Brazil. Our results of operations and financial condition have been, and will continue to be, affected by the growth rate of GDP in Brazil because our products are used in the manufacture of a wide range of consumer and industrial products.
Because of our significant market share in many of the Brazilian markets in which our petrochemical products are sold, fluctuations in Brazilian demand for polyethylene, polypropylene and PVC affect our production levels and net sales revenue. GDP in Brazil grew at a compound average annual rate of 2.4% from 1994 through 2003, although Brazilian GDP declined by 0.2% in 2003. From 1994 through 2003, the consumption volumes in Brazil of polyethylene, polypropylene and PVC increased at compound average annual rates of 5.9%, 10.1% and 4.9%, respectively.
In 2001, GDP in Brazil increased by 1.4%. In 2001, Brazilian consumption volumes of polyethylene decreased by 2.5%, polypropylene increased by 5.1% and PVC decreased by 15.1% compared to consumption volumes in 2000. The decreased consumption volumes of polyethylene and PVC were primarily due to reductions in the operations of many of our customers as a result of the Brazilian government’s electric power rationing program that was initiated in June 2001.
In 2002, GDP in Brazil increased by 1.5%. In 2002, Brazilian consumption volumes of polyethylene, polypropylene and PVC increased by 0.2%, 11.3% and 11.0%, respectively, compared to depressed 2001 levels, principally as a result of increased production of third generation products following the termination of the Brazilian government’s electric power rationing program in February 2002.
In 2003, GDP in Brazil declined by 0.2%. In 2003, Brazilian consumption volumes of polyethylene decreased by 2.1%, polypropylene increased by 2.9% and PVC decreased by 12.4%, respectively, compared to 2002. The decreased consumption volumes of polyethylene and PVC were primarily a result of reduced economic activity.
Brazilian GDP growth has fluctuated significantly, and we anticipate that it will likely continue to do so. Our management believes that economic growth in Brazil would positively affect our future net sales revenue and results of operations. However, continued low growth or a recession in Brazil would likely reduce our future net sales revenue and have negative impacts on our results of operations.
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Our management believes that there has been a trend in Brazil during the last several years toward the substitution of plastics for more traditional packaging materials, such as glass and paper. Our management anticipates that this trend will continue to stimulate the domestic demand for petrochemical products suitable for use as packaging materials. However, trends in the substitution of packaging materials depend on many factors beyond our control, and the current beliefs of our management may prove to be incorrect.
Effects of Fluctuations in Naphtha Prices
Fluctuations in the international market price of naphtha have significant effects on our costs of goods sold and the prices that we are able to charge our customers for our first and second generation products.
Effects on Cost of Sales
Naphtha is the principal raw material used by our Basic Petrochemicals Unit. In 2003, naphtha represented 81.8% of the total cost of sales and services rendered of our Basic Petrochemicals Unit and, directly and indirectly through the cost of basic petrochemicals that we bought from Copesul, 65.2% of our consolidated cost of sales and services rendered.
The cost of naphtha varies in accordance with international market prices, which fluctuate depending upon the supply and demand for oil and other refined petroleum products. We purchase naphtha under a long-term supply contract with Petrobras and we import naphtha through our terminal at Aratú. The prices that we pay for naphtha under all of these arrangements are based on the Amsterdam-Rotterdam-Antwerp market price. As a result, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha have a direct impact on the cost of our first generation products.
Because the primary raw materials of our Polyolefins and Vinyls Units, principally ethylene and propylene, are first generation products produced by our Basic Petrochemicals Unit and Copesul, fluctuations in the Amsterdam-Rotterdam-Antwerp market price for naphtha result in similar fluctuations in the cost of the primary raw materials of these Units.
The international price of naphtha has fluctuated significantly in the past, and we expect that it will continue to do so in the future. Significant increases in the price of naphtha and, consequently, the cost of producing our products, would likely reduce our gross margins and our results of operations to the extent that we are unable to pass all of these increased costs on to our customers and could result in reduced sales volumes of our products. Conversely, significant decreases in the price of naphtha and, consequently, the cost of producing our products, would likely increase our gross margins and our results of operations and could result in increased sales volumes if this lower cost leads us to lower our prices.
We do not currently hedge our exposure to changes in the prices of naphtha because a portion of our sales are exports payable in foreign currencies and linked to the international market prices of naphtha and also because the prices of our polyethylene, polypropylene and PVC products sold in Brazil generally reflect changes in the international market prices of these products.
Effects on Prices of Our Products
The prices that we charge for ethylene reflect both the international market prices for naphtha and the international and domestic prices for second generation products. The price of ethylene is calculated based on a margin sharing system described in “Business — Basic Petrochemicals Unit — Sales and Marketing of Our Basic Petrochemicals Unit.”
The prices that we charge for propylene are based on our ethylene prices and the ratio of the European contract price for propylene to the European contract price for ethylene. Over the past several years, this ratio has increased. The prices that we charge for butadiene are based on the European contract price for butadiene. Because European producers of these products primarily use naphtha as a raw material, changes in the European contract prices are strongly influenced by fluctuations in international
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We negotiate the real prices for certain of our products, principally polyethylene, polypropylene and PVC, on a monthly basis with our domestic customers. We attempt to revise our prices to reflect changes in the international market prices of these products and the appreciation or depreciation of the real against the U.S. dollar. However, during periods of high volatility in international market prices or exchange rates, we are sometimes unable to reflect these changes fully in our prices quickly.
The international market prices of our petrochemical products have fluctuated significantly, and we believe that they will continue to do so. Significant increases in the international market prices of our petrochemical products and, consequently, the prices that we are able to charge, would likely increase our net sales revenue and our results of operations to the extent that we are able to maintain our operating margins and increased prices do not reduce sales volumes of our products. Conversely, significant decreases in the international prices of our petrochemical products, and, consequently, the prices that we are able to charge, would likely reduce our net sales revenue and our results of operations if we are unable to increase our operating margins or these reduced prices do not result in increased sales volumes of our products.
Cyclicality Affecting the Petrochemical Industry and Capacity Utilization
Capacity Expansions
Global consumption of petrochemical products has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased capacity utilization rates and international market prices for our products, leading to increased operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates and international selling prices, leading to declining operating margins.
We expect that these cyclical trends in international selling prices and operating margins relating to global capacity shortfalls and additions will likely persist in the future, principally due to the continuing impact of four general factors:
| • | cyclical trends in general business and economic activity produce swings in demand for petrochemicals; | |
| • | during periods of reduced demand, the high fixed cost structure of the capital intensive petrochemicals industry generally leads producers to compete aggressively on price in order to maximize capacity utilization; | |
| • | significant capacity additions, whether through plant expansion or construction, can take two to three years to implement and are therefore necessarily based upon estimates of future demand; and | |
| • | as competition in petrochemical products is generally focused on price, being a low-cost producer is critical to improved profitability. This favors producers with larger plants that maximize economies of scale, but construction of plants high capacity may result in significant increases in capacity that can outstrip demand growth. |
Rio Polímeros, a Brazilian petrochemical company, is currently constructing a petrochemical plant in Brazil that has announced plans to commence operations in December 2004. The announced annual capacity of this plant is 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of polyethylene, representing an increase of approximately 35% of the current total Brazilian production capacity of polyethylene. In 2003, Polibrasil Resinas S.A., or Polibrasil, commenced operation of polypropylene facility in Mauá, São Paulo with an annual capacity of 300,000 tons in 2003. In 2001, Dow Chemical commenced operation of a polyethylene facility in Argentina with an annual capacity of 700,000 tons. We plan to increase our annual production capacity of polypropylene by 100,000 tons by the end of 2004 and to increase our annual production capacity of PVC by 50,000 tons by the end of 2005.
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Based on historical growth of domestic demand for polyethylene, polypropylene and PVC, we believe that this additional capacity will be absorbed by the domestic market over the next several years. Although there may be a short period of overcapacity in the domestic market for several of our petrochemical products following Rio Polímeros’ commencement of operations, we believe that export opportunities will be available for the sale of these products not sold domestically. We cannot assure you, however, that the additional capacity will be so absorbed by the domestic market or that satisfactory export opportunities will be available for products not sold domestically. In the latter event, the additional capacity may result in pressure on prices for the affected products, which could adversely affect our net sales revenues, gross margins and overall results of operations.
Capacity Utilization
Our operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, we seek to maintain a high capacity utilization rate at all of our production facilities.
The table below sets forth capacity utilization rates with respect to the production facilities for some of our principal products for the years ended December 31, 2003, 2002 and 2001.
| Year Ended December 31, | ||||||||||||
| 2003 | 2002(1) | 2001(2) | ||||||||||
|
Ethylene(3)
|
84 | % | 83 | % | 89 | % | ||||||
|
Polyethylene
|
83 | 80 | 73 | |||||||||
|
Polypropylene
|
95 | 90 | 84 | |||||||||
|
PVC
|
85 | 86 | 76 | |||||||||
| (1) | Gives effect to our mergers with OPP Produtos and 52114 Participações as if they had occurred on January 1, 2002. |
| (2) | Gives effect to our acquisition of Nova Camaçari and our mergers with OPP Produtos and 52114 Participações as if they had occurred on January 1, 2001. |
| (3) | Based on production capacity of 1,280,000 tons in 2003 and 1,200,000 tons in 2002 and 2001. |
The utilization rate of our ethylene production capacity was adversely affected during 2003 as a result of an unscheduled shutdown of one of our olefins units for 11 days due to a maintenance problem.
Effect of Export Levels on our Financial Performance
We generally obtain higher prices in Brazil for our products than the prevailing international prices. The difference in prices between the Brazilian and export markets results from:
| • | high costs of transporting products to and within Brazil; | |
| • | warehousing, and other logistics costs; and | |
| • | tariffs and duties. |
In addition, we are generally able to charge higher prices for our products than the real price of imports because we are able to provide better product customization services to our customers than sellers of imported products.
During periods in which the domestic demand for our products is reduced, we actively pursue export opportunities for our products. In 2003, 25.8% of our net sales revenue were derived from export sales of our products. Exports to other countries in the Americas accounted for 54.0% of our export sales, with the remainder of our exports sold in Europe (20.0%), Far East (22.0%) and other regions (4.0%).
Our ability to export to other South American countries is a function of the level of economic growth in these countries and other economic conditions, including prevailing inflation rates. We believe that
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Effects of Fluctuations in Exchange Rates between Real and U.S. Dollar
Our results of operations and financial condition have been, and will continue to be, affected by the rate of depreciation or appreciation of the real against the U.S. dollar because:
| • | a substantial portion of our net sales revenue is linked to U.S. dollars; | |
| • | our costs for some of our raw materials, principally naphtha and certain catalysts required in our production processes, are incurred in U.S. dollars or are U.S. dollar-linked; | |
| • | we have operating expenses, and make other expenditures, that are denominated in or linked to U.S. dollars; and | |
| • | we have significant amounts of U.S. dollar-denominated liabilities that require us to make principal and interest payments in U.S. dollars. |
Virtually all of our sales are of petrochemical products, which generally trade freely in the international markets at prices expressed in U.S. dollars. We generally attempt to set prices that take into account the international market prices for our petrochemical products and variations in the U.S. dollar/real exchange rate. As a result, although a significant portion of our net sales revenue is in reais, substantially all of our products are sold at prices that are based on international market prices that are quoted in the U.S. dollars.
During the year ended December 31, 2003, 65.2% of our direct and indirect cost of sales and services was represented by the cost of naphtha, the price of which is linked to the U.S. dollar. Our naphtha purchase contract with Petrobras provides that the prices that we pay to Petrobras for naphtha in any month are established based on the average Amsterdam-Rotterdam-Antwerp market price for naphtha in U.S. dollars during the previous month, converted into reais at the U.S. dollar/real exchange rate in effect on the last day of the previous month. Fluctuations in the real affect the cost of naphtha and other U.S. dollar-linked or imported raw materials.
When the real depreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products increases and we generally attempt to increase the prices for our products in reais (to the extent possible in light of then-prevailing market conditions in Brazil), which may result in reduced sales volumes of our products. To the extent that our price increases are not sufficient to cover the increased costs for raw materials, our operating income decreases. Conversely, when the real appreciates against the U.S. dollar, assuming naphtha costs and international market prices of our products remain constant in U.S. dollars, the production cost for our products decreases and we generally decrease the prices for our products in reais, which may result in increased sales volumes of our products. In periods of high volatility in the U.S. dollar/real exchange rate, there is usually a lag between the time that the U.S. dollar appreciates or depreciates and the time that we are able to pass on increased or reduced costs in reais to our customers in Brazil. These pricing mismatches decrease when fluctuations in the U.S. dollar/real exchange rate are less volatile.
At December 31, 2003, 66.6% of our indebtedness was denominated in U.S. dollars. As a result, when the real depreciates against the U.S. dollar:
| • | the interest costs on our U.S. dollar-denominated indebtedness increases in reais, which negatively affects our results of operations in reais; |
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| • | the amount of our U.S. dollar-denominated indebtedness increases in reais, and our total liabilities and debt service obligations in reais increase; and | |
| • | our financial expenses increase as a result of foreign exchange losses that we must record. |
For example, the 34.3% devaluation of the real in 2002 substantially increased our financial expenses and was a significant factor in our net loss for that year.
Conversely, when the real appreciates against the U.S. dollar:
| • | the interest costs on our U.S. dollar-denominated indebtedness decreases in reais, which positively affects our results of operations in reais; | |
| • | the amount of our U.S. dollar-denominated indebtedness decreases in reais, and our total liabilities and debt service obligations in reais decrease; and | |
| • | our financial expenses tend to decrease as a result of foreign exchange gains that we must record. |
Any major devaluation of the real against the U.S. dollar would significantly increase our financial expenses and our short-term and long-term indebtedness, as expressed in reais. Conversely, any major appreciation of the real against the U.S. dollar would significantly decrease our financial expenses and our short-term and long-term indebtedness, as expressed in reais.
Export sales, which enable us to generate receivables payable in foreign currencies, tend to provide a hedge against a portion of our U.S. dollar-denominated debt service obligations, but they do not fully match them. Accordingly, we often enter into hedges to mitigate exchange rate fluctuations. To further mitigate our exposure to exchange rate risk, we try, where possible, to enter into trade finance loans for our working capital needs, which funding is generally available at a lower cost because it is linked to U.S. dollar exports. However, future U.S. dollars generated by us from exports may not be in an amount sufficient to cover our U.S. dollar trade finance liabilities.
Inflation affects our financial performance by increasing some of our operating expenses denominated in reais (and not linked to the U.S. dollar). A significant portion of our costs of sales and services rendered, however, are linked to the U.S. dollar and are not substantially affected by the Brazilian inflation rate. In addition, some of our real-denominated debt is indexed to take into account the effects of inflation. Under this debt, the principal amount generally is adjusted with reference to the General Price Index — Market (Índice Geral de Preços — Mercado), or IGP — M, an inflation index, so that inflation results in increases in our financial expenses and debt service obligations. In addition, a significant portion of our real-denominated debt bears interest at the Long-Term Interest Rate, or the CDI (Certificado Depositário Interbancário) rate, which are partially adjusted for inflation.
Effect of Level of Indebtedness and Interest Rates
At December 31, 2003, our total outstanding consolidated indebtedness on a consolidated basis, excluding related party debt and advances for purchase of credit rights, was R$7,833.8 million. The level of our indebtedness is responsible for significant financial expenses that are reflected in our statement of operations. Financial expenses consist of interest expense, exchange variations of U.S. dollar- and other foreign-currency denominated debt, foreign exchange losses or gains, and other items as set forth in note 23 to our consolidated and combined financial statements. In 2003, we recorded total financial expenses of R$712.6 million, of which R$543.6 million consisted of interest expense and R$969.4 million consisted of foreign exchange gains. By contrast, in 2002, we recorded total financial expenses of R$3,481.5 million, of which R$735.4 million consisted of interest expense and R$2,076.1 million consisted of foreign exchange losses. The interest rates that we pay depend on a variety of factors, including prevailing Brazilian and international interest rates and risk assessments of our company, our industry and the Brazilian economy made by potential lenders to our company, potential purchasers of our debt securities and the rating agencies that assess our company and its debt securities.
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Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and Fitch, Inc. maintain ratings of our company and our debt securities. As of the date of this prospectus, Standard and Poor’s maintains a local rating for our company of “Br A,” a local currency rating for our company of “BB-” stable, and a foreign currency rating for our company of “B+” positive, and Fitch maintains a local currency rating for our company of “Br A” with outlook stable. We have not been informed of any proposed actions by either of these ratings agencies to modify their ratings on our company or its indebtedness. Any rating downgradings in the future would likely result in increased interest and other financial expenses relating to borrowings and debt securities and could adversely affect our ability to obtain such financing on satisfactory terms or in amounts required by us.
Our debt obligations with variable interest rates expose our company to market risks from changes in the Long-Term Interest Rate, the CDI rate, IGP-M and LIBOR. The Long-Term Interest Rate is a Brazilian long-term interest rate that includes an inflation factor and is determined quarterly by the Central Bank. To mitigate our exposure to interest rate risk, we often have sought to enter into hedges to mitigate fluctuations in LIBOR.
Results of Operations of Jointly Controlled Companies
We own 29.5% of the voting and total share capital of Copesul. We also own 33.9% of Politeno’s total share capital, including 35.0% of its voting share capital. The operations of Copesul are similar to the operations of our Basic Petrochemicals Unit and the operations of Politeno are similar to the operations of our Polyolefins Unit. Accordingly, the results of operations of these companies are influenced by factors similar to the factors that influence our results of operations. However, these companies have management that is independent from ours and capital structures, including levels of indebtedness and corresponding levels of financing costs, that are different from ours. As a result of the application of Instruction 247 to our financial statements, we are required to proportionally consolidate the results of jointly controlled companies that are not our subsidiaries, such as Copesul and Politeno. Consequently, our results of operations are subject to fluctuations that depend on the results of these jointly controlled companies.
However, in evaluating our results of operations, cash flows and liquidity, our management relies on financial information that does not include the effects of proportional consolidation, principally because we have limited, if any, control over the operations and policies of the companies whose results we are required to proportionally consolidate with our own. In our discussion of our consolidated and combined results of operations and our discussion of our liquidity and capital resources, we have provided supplemental information drawn from our accounting records with respect to our results of operations, working capital, cash flows and indebtedness without giving effect to this proportional consolidation to provide you with information that our management believes more accurately reflects the consolidated and combined results of operations and financial position of our company.
Effect of Taxes on Our Income
We are subject to a variety of generally applicable Brazilian federal and state taxes on our operations and results.
Tax Exemptions
We are generally subject to Brazilian federal income tax at an effective rate of 25%, which is the standard corporate tax rate in Brazil. We have available certain federal tax exemptions based upon federal law that offers tax incentives to companies that locate their manufacturing operations in the northeastern region of Brazil. These exemptions entitle us to pay only 25% of the statutory income tax rate on the profit arising from the sale of basic petrochemical products and utilities until December 31, 2011. We are also exempt from corporate income tax until December 31, 2004 on the results of our industrial operations at our PVC plant in the Northeastern Complex and until December 31, 2008 on the results of our industrial operations at our PVC plant in Alagoas. We are entitled to pay only 25.0% of the statutory income tax rate on the results of our industrial operations at our polyethylene plant in the Northeastern Complex
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Our production of caustic soda and EDC in the States of Bahia and Alagoas, and our production of dimethyl teraphthalate, or DMT, are not covered by these exemptions, but in accordance with Law No. 9,532/97, we are entitled to reductions in the statutory income tax rate with respect to the profits arising from sales by these plants and must pay only:
| • | 62.5% of the statutory income tax rate from January 1, 1998 to December 31, 2003; | |
| • | 75.0% of the statutory income tax rate from January 1, 2004 to December 31, 2008; and | |
| • | 87.5% of the statutory income tax rate from January 1, 2009 to December 31, 2013. |
At the end of each year, if we or any of our affected subsidiaries has taxable profit resulting from the operations described above, the amount of the income tax exemption or reduction is credited to a capital reserve, which can only be used to increase capital or absorb losses.
Due to operating losses sustained by us in the past, we had R$322.8 million of deferred tax assets made up of tax loss carryforwards available at December 31, 2003. Income tax loss carryforwards available for offset in Brazil do not expire. However, the annual offset is limited to 30% of our adjusted net income. This limit also affects the Social Contribution on Net Income.
Our export sales are currently exempt from PIS, COFINS, IPI and ICMS under generally available exemptions, subject to our compliance with the requirements of these exemptions.
The eventual expiration of the income tax exemptions will not affect our net income because we record the full amount of the income tax in our income statement and credit the amount of the income tax exemptions to a reserve account in shareholders’ equity to increase our capital or absorb our losses.
Tax Disputes
We brought a suit against the Brazilian government claiming that we had the right to IPI tax credits on our purchases of raw materials that are in a zero percent tax bracket. In December 2002, the Brazilian Federal Supreme Court ruled in our favor in this suit. The Brazilian government has filed a special appeal requesting clarification of the calculation of these tax credits but not challenging their validity. Accordingly, we recognized a tax credit of R$1,030.1 million in our consolidated and combined financial statements for the year ended December 31, 2002. Of this total tax credit, we used R$265.6 million during the year ended December 31, 2002 and R$364.9 million during the year ended December 31, 2002 to offset federal tax assessments, and we will use the remainder of this tax credit to offset against federal tax assessments in the future based on our earnings and future results. Although the ruling of the Brazilian Federal Supreme Court only applies to our operations in the State of Rio Grande do Sul, we have also brought litigation against the Brazilian government in respect of our purchases of raw materials in the States of São Paulo, Bahia and Alagoas seeking to obtain a similar tax credit. We have not recognized any assets or gains in relation to our claims in these states.
We are currently involved in numerous tax proceedings. We have established reserves based on our obligations under current legislation, utilization of the contingent IPI tax credits, and our estimated costs of resolving other claims in which we believe we have a probable tax loss. The tax contingencies relate primarily to the Social Contribution on Net Income, PIS, COFINS and IPI. We do not believe these tax proceedings will have a material adverse effect on our financial position. It is possible, however, that future results of operations could be materially affected by changes in our assumptions and the effectiveness of our strategies with respect to these tax proceedings. For more information on our tax proceedings, see “Business — Legal Proceedings — Tax Proceedings.”
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Tax Reform
In April 2003, the Brazilian Government presented a tax reform proposal, mainly designed to simplify tax assessments, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposal provided for changes in the rules governing PIS, COFINS, ICMS, CPMF and other taxes. The implementation of such changes depended on the approval of an amendment to the Brazilian Constitution.
In December 2003, the Brazilian Federal Senate approved part of this tax reform proposal following its approval by the Brazilian Federal House of Representatives. These tax reforms were consolidated in Constitutional Amendment No. 42, which became effective on December 31, 2003.
Constitutional Amendment No. 42 provides for the assessment of PIS and COFINS on import transactions. Provisional Measure No. 164/04, which implemented this provision, requires PIS and COFINS to be assessed on the import of goods, as well as on the remuneration paid to nonresidents for the rendering of services. We understand that such assessments will apply beginning on May 1, 2004. Constitutional Amendment No. 42 also provides for an extension of the CPMF assessment until December 31, 2007. Prior to the adoption of Amendment No. 42, CPMF was scheduled to expire on December 31, 2004.
Other parts of the tax reform proposal were amended by the Senate and returned to the House of Representatives for further examination. These parts of the tax reform proposal relate to:
| • | harmonization of ICMS tax rules, which would be governed by a single federal legislation applicable to all Brazilian states; | |
| • | equalization of ICMS rates, that would be applied uniformly by all states in Brazil; and | |
| • | limitations on the grant of regional tax incentives. |
If approved, these tax reform measures will be gradually adopted in 2005 and 2007.
We are unable to predict the effect of these proposed tax reform measures, if approved, on our results of operations. Although some of these measures may result in increases in our tax payments, others are likely to reduce our tax obligations. We currently believe that the effects of the changes to COFINS will be neutral to our results of operation. In addition, as discussed above, we have significant income tax loss carryforwards, tax exemptions and tax credits that should, to a degree, mitigate the effects of the tax reform measures on us. We currently do not anticipate that the tax reform measures will have a material adverse effect on our results of operations in future periods, although we cannot provide you with any assurances in this regard.
Recent Developments
Merger of Trikem with Our Company
On January 15, 2004, our subsidiary Trikem merged with and into our company. Trikem has been fully consolidated in our consolidated and combined financial statements since July 25, 2001, the date of our acquisition of Nova Camaçari.
Issuance and Sale of Eleventh Issue of Debentures
On December 1, 2003, we issued R$1,200.0 million aggregate principal amount of our eleventh issue of secured non-convertible debentures in Brazil. These debentures were initially held in treasury and were sold on January 16, 2004 and February 4, 2004 following their registration with the Brazilian Securities Commission on January 14, 2004. These debentures will amortize in 36 equal monthly installments beginning on January 1, 2005, with a final maturity date of December 1, 2007, and bear interest at the CDI rate, an interbank rate, plus a margin of 4.5% per annum, payable monthly. These debentures are secured by a pledge of some of our current and future customer receivables.
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As part of our effort to extend the maturity profile of our indebtedness, we issued R$243.0 million of these debentures to existing creditors in exchange for outstanding obligations with shorter maturities; and we issued R$380.0 million of these new debentures in exchange for a portion of a series of our outstanding debentures that were scheduled to mature on October 1, 2006. We sold the remaining debentures for R$584.8 million in cash.
Issuance and Sale of 11.75% Notes due 2014
On January 22, 2004, we issued and sold US$250.0 million aggregate principal amount of our 11.75% Notes due 2014 pursuant to Rule 144A and Regulation S under our US$1.0 billion medium-term note program. The notes have the latest maturity date of any of our outstanding debt obligations. Interest on these notes is payable on January 22 and July 22 of each year, commencing on July 22, 2004 and ending on January 22, 2014, the final maturity date for the notes.
Results of Operations
The following discussion of our results of operations is based on our consolidated and combined financial statements prepared in accordance with Brazilian GAAP.
The discussion of the results of our business segments is based upon financial information reported for each of the four segments of our business, as detailed in note 29 to our consolidated and combined financial statements. There are certain differences between the concepts used by our company in preparing information about segments and the requirements of Brazilian GAAP as applied in the statutory financial statements. The principal differences are:
| • | investments in certain jointly controlled companies which are required to be proportionally consolidated under Brazilian GAAP are not considered as part of any segment for segment reporting purposes; and | |
| • | the concept of operating income for segment reporting purposes does not consider the results of investments in associated companies and financial income and expenses whereas such results and income and expenses are classified as operating items for statutory reporting purposes. |
As discussed above, the acquisitions of Nova Camaçari and OPP Produtos significantly affected our results due to the significant size of their operations in relation to the operations historically conducted by our company. As a result:
| • | The results of operations of our Basic Petrochemicals segment are comparable for 2003, 2002 and 2001. | |
| • | The results of operations of our Polyolefins segment, which consists of the operations historically conducted by OPP Química and Polialden, only include the results of these operations for the period after July 25, 2001. Therefore, the results of operations of our Polyolefins segment for 2002 and 2001 are not comparable. | |
| • | The results of operations of our Vinyls segment, which consists of the operations historically conducted by Trikem, only include the results of these operations for the period after July 25, 2001. Therefore, the results of operations of our Vinyls segment for 2002 and 2001 are not comparable. | |
| • | The results of operations of our Business Development segment, which consists of the operations historically conducted by Proppet and Nitrocarbono, only include the results of the operations of Proppet for the period after July 25, 2001, the date on which we acquired Proppet, and the results of the operations of Nitrocarbono for the period after August 16, 2002, the date of our merger with 52114 Participações. Therefore, the results of operations of our Business Development segment for 2003, 2002 and 2001 are not comparable. |
In evaluating the results of operations of our business segments, our management relies on financial information that includes the aggregate results of operations of the companies that have historically
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| • | the results of operations of our Polyolefins segment during 2002 and the aggregate results of operations of the OPP Química and Polialden during 2001; and | |
| • | the results of operations of our Vinyls segment during 2002 and the results of operations of Trikem for 2001. |
The supplemental financial information for 2001 is not necessarily indicative of the results of operations of our Polyolefins and Vinyls segments that would have occurred had we acquired Nova Camaçari and merged with OPP Produtos on January 1, 2001. In addition, the supplemental financial information is not necessarily indicative of our future results of operations. We have not provided supplemental information with respect to our Business Development Unit because of its small size relative to our company.
In the following discussion, references to increases or decreases in any year are made by comparison with the corresponding prior year, except as the context otherwise indicates.
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| Year Ended December 31, 2003 Compared with Year Ended December 31, 2002 |
| Consolidated and Combined Results |
The following table sets forth consolidated and combined financial information for each of the two years ended December 31, 2003 and 2002.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2003 | 2002 | |||||||||||||||||||||||
| Excluding | Excluding | |||||||||||||||||||||||
| Effects of | Effects of | Effects of | Effects of | |||||||||||||||||||||
| Instruction | Instruction | Instruction | Instruction | |||||||||||||||||||||
| Consolidated | 247 | 247 | Combined | 247 | 247 | |||||||||||||||||||
| (in millions of reais) | ||||||||||||||||||||||||
|
Net sales revenue
|
R$ | 10,135.8 | R$ | (944.9 | ) | R$ | 9,190.9 | R$ | 7,576.6 | R$ | (709.0 | ) | R$ | 6,867.6 | ||||||||||
|
Cost of sales and services rendered
|
(8,089.3 | ) | 747.7 | (7,341.6 | ) | (6,175.5 | ) | 546.6 | (5,628.9 | ) | ||||||||||||||
|
Gross profit
|
2,046.5 | (197.2 | ) | 1,849.3 | 1,401.1 | (162.4 | ) | 1,238.7 | ||||||||||||||||
|
Selling, general and administrative expenses
|
(471.9 | ) | 70.4 | (401.5 | ) | (577.7 | ) | 54.0 | (523.7 | ) | ||||||||||||||
|
Investment in associated companies, net
|
(158.2 | ) | 38.8 | (119.4 | ) | (251.7 | ) | (62.0 | ) | (313.7 | ) | |||||||||||||
|
Depreciation and amortization
|
(193.5 | ) | 5.3 | (188.2 | ) | (222.4 | ) | 49.9 | (172.5 | ) | ||||||||||||||
|
Financial expenses, net
|
(703.6 | ) | 48.1 | (655.5 | ) | (2,861.9 | ) | 73.4 | (2,788.5 | ) | ||||||||||||||
|
Other operating income
|
49.7 | 1.5 | 51.2 | 1,132.7 | (18.9 | ) | 1,113.8 | |||||||||||||||||
|
Operating income (loss)
|
569.0 | (33.1 | ) | 535.9 | (1,379.9 | ) | (66.0 | ) | (1,445.9 | ) | ||||||||||||||
|
Non-operating expenses, net
|
(4.8 | ) | 0.2 | (4.6 | ) | (98.0 | ) | 23.8 | (74.2 | ) | ||||||||||||||
|
Income (loss) before income tax and social
contribution and minority interest
|
564.2 | (32.9 | ) | 531.3 | (1,477.9 | ) | (42.2 | ) | (1,520.1 | ) | ||||||||||||||
|
Income tax and social contribution
|
(122.9 | ) | 31.1 | (91.8 | ) | (89.8 | ) | 32.1 | (57.7 | ) | ||||||||||||||
|
Income (loss) before minority interest
|
441.3 | (1.8 | ) | 439.5 | (1,567.7 | ) | (10.1 | ) | (1,577.8 | ) | ||||||||||||||
|
Minority interest
|
(226.2 | ) | 1.8 | (224.4 | ) | 189.0 | 10.1 | 199.1 | ||||||||||||||||
|
Net income (loss) for the year
|
R$ | 215.1 | R$ | — | R$ | 215.1 | R$ | (1,378.7 | ) | R$ | — | R$ | (1,378.7 | ) | ||||||||||
| Net Sales Revenue |
Net sales revenue increased by 33.8% in 2003, primarily as a result of the growth in net sales revenue in each of our segments (as discussed below), particularly the 36.2% growth in net sales revenue of our Basic Petrochemicals segment and the 36.4% growth in net sales revenue of our Polyolefins segment. Without giving effect to the proportional consolidation of our jointly controlled companies, our net sales revenue increased by 33.8% in 2003.
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| Cost of Sales and Services Rendered and Gross Profit |
Cost of sales and services rendered increased by 31.0% in 2003, primarily as a result of the growth in cost of sales in each of our segments, particularly the 31.2% growth in cost of sales and services rendered of our Basic Petrochemicals segment and the 31.9% growth in cost of sales of our Polyolefins segment, both related to the greater direct and indirect cost of naphtha. Without giving effect to the proportional consolidation of our jointly controlled companies, our cost of sales and services rendered increased by 30.4% in 2003.
As a result, gross profit increased by 46.1% in 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, gross profit increased by 49.3% in 2003.
Gross profit as a percentage of net sales revenue, or gross margin, for 2003 was 20.2% compared to 18.5% in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, gross margin increased to 20.1% for 2003 compared to 18.0% in 2002.
| Selling, General and Administrative Expenses |
Selling, general and administrative expenses decreased by 18.3% in 2003, primarily as a result of the incurrence of non-recurring expenses in 2002 in an aggregate amount of R$136.0 million arising from our mergers with OPP Produtos and 52114 Participações and the integration into our company of the companies that we acquired and with whom we merged. Our ongoing integration process generated efficiencies that reduced our selling, general and administrative expenses in both periods, particularly in 2003. Selling, general and administrative expenses represented 4.7% of net sales revenue in 2003 compared to 7.6% of net sales revenue in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, selling, general and administrative expenses decreased by 23.3% in 2003, and selling, general and administrative expenses represented 4.4% of net sales revenue in 2003 compared to 7.6% of net sales revenue in 2002.
| Investment in Associated Companies, Net |
Investment in associated companies, net, decreased by 37.1% in 2003, primarily as a result of the effect of tax benefits from our associated companies and a decrease of the amortization of goodwill. Without giving effect to the proportional consolidation of our jointly controlled companies, investment in associated companies, net, decreased by 61.9% in 2003.
| Depreciation and Amortization |
Depreciation and amortization decreased by 13.0% in 2003, primarily as a result of decrease of depreciation and amortization from proportional consolidation of our jointly controlled companies. Without giving effect to the proportional consolidation of our jointly controlled companies depreciation and amortization increased by 9.1% in 2003.
| Financial Expenses, Net |
Financial expenses, net, decreased by 75.4% in 2003, primarily as a result of the effects of the real/ U.S. dollar exchange rate on our U.S. dollar-denominated and U.S. dollar-indexed assets and liabilities. The 34.3% devaluation of the real against the U.S. dollar in 2002 resulted in a financial expense of R$2,076.1 million related to the exchange rate effect on our U.S. dollar-denominated and U.S. dollar-indexed liabilities and financial income of R$137.5 million related to the exchange rate effect on our U.S. dollar-denominated assets. By contrast, as a result of the 22.3% appreciation of the real against the U.S. dollar in 2003, we recorded financial income of R$969.4 million related to the exchange rate effect on our monetary liabilities and financial expense of R$211.1 million related to the exchange rate effect on our monetary assets. Without giving effect to the proportional consolidation of our jointly controlled companies, financial expenses, net decreased by 76.5% in 2003.
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| Other Operating Income, Net |
Other operating income, net decreased by 95.6% in 2003, primarily as a result of our recognition of the IPI tax credit of R$1,030.1 million that was recorded in the fourth quarter of 2002 as a result of a final judgment by the Brazilian Federal Supreme Court. See “— Principal Factors Affecting Our Results of Operations — Effect of Taxes on Our Income — Tax Disputes.” Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income, net decreased by 95.4% to R$51.2 million in 2003 from R$1,113.8 million in 2002.
| Operating Income (Loss) |
Operating income was R$569.0 million in 2003 as compared to an operating loss of R$1,379.9 million in 2002. Operating income represented 5.6% of net sales revenue in 2003, while operating loss represented 18.2% of net sales revenue in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, operating income was R$535.9 million in 2003 as compared to an operating loss of R$1,445.9 million in 2002, and operating income was 5.8% of net sales revenue in 2003, while operating loss represented 21.1% of net sales revenue in 2002.
| Non-Operating Expenses, Net |
Non-operating expenses decreased by 95.1% in 2003. This decrease was primarily as a result of the effects of a reversal in 2002 of the provision for losses in investments in Cetrel and Codeverde – Companhia de Desenvolvimento Rio Verde in the amount of R$70.7 million because we no longer expect to incur losses on these investments. Without giving effect to the proportional consolidation of our jointly controlled companies, non-operating expenses decreased by 93.8% in 2003.
| Income Tax and Social Contribution |
Income tax and social contribution increased by 36.9% in 2003. This increase was primarily as a result of our recording taxable income in 2003 as compared to our loss in 2002, the effect of which was partially offset by the net changes in the valuation of our deferred tax assets. Without giving effect to the proportional consolidation of our jointly controlled companies, income tax and social contribution increased by 59.1% in 2003.
| Minority Interest |
Minority interest was an expense of R$226.2 million in 2003 compared to a gain of R$189.0 million in 2002. This change was primarily as a result of the improved net results recorded in 2003 by Trikem, compared to the losses recorded by Trikem in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, minority interest was an expense of R$224.4 million in 2003 compared to a gain of R$199.1 million in 2002.
| Net Income (Loss) |
We recorded net income of R$215.1 million, or 2.1% of net sales revenue, in 2003 compared to a net loss of R$1,378.7 million, or 18.2% of net sales revenue, in 2002.
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Business Segment Results
The following table sets forth consolidated and combined financial information for our business segments for each of the two years ended December 31, 2003 and 2002.
| Year Ended December 31, | ||||||||
| 2003 | 2002 | |||||||
| Consolidated | Combined | |||||||
| (In millions of reais, | ||||||||
| except percentages) | ||||||||
|
Basic Petrochemicals
|
||||||||
|
Net sales revenue
|
R$ | 4,765.3 | R$ | 3,499.1 | ||||
|
Cost of sales
|
(4,111.5 | ) | (3,006.3 | ) | ||||
|
Gross profit
|
653.8 | 492.8 | ||||||
|
Operating income(1)
|
499.9 | 409.1 | ||||||
|
Gross margin (%)
|
13.7 | % | 14.1 | % | ||||
|
Operating margin (%)
|
10.5 | % | 11.7 | % | ||||
|
Polyolefins
|
||||||||
|
Net sales revenue
|
R$ | 3,386.8 | R$ | 2,482.3 | ||||
|
Cost of sales
|
(2,719.7 | ) | (2,062.4 | ) | ||||
|
Gross profit
|
667.1 | 419.9 | ||||||
|
Operating income(1)
|
529.5 | 284.7 | ||||||
|
Gross margin (%)
|
19.7 | % | 16.9 | % | ||||
|
Operating margin (%)
|
15.6 | % | 11.5 | % | ||||
|
Vinyls
|
||||||||
|
Net sales revenue
|
R$ | 1,371.8 | R$ | 1,117.8 | ||||
|
Cost of sales
|
(1,007.0 | ) | (804.7 | ) | ||||
|
Gross profit
|
364.8 | 313.1 | ||||||
|
Operating income(1)
|
313.7 | 265.8 | ||||||
|
Gross margin (%)
|
26.6 | % | 28.0 | % | ||||
|
Operating margin (%)
|
22.9 | % | 23.8 | % | ||||
|
Business Development
|
||||||||
|
Net sales revenue
|
R$ | 455.3 | R$ | 290.8 | ||||
|
Cost of sales
|
(416.8 | ) | (246.1 | ) | ||||
|
Gross profit
|
38.5 | 44.7 | ||||||
|
Operating income(1)
|
28.8 | 35.3 | ||||||
|
Gross margin (%)
|
8.5 | % | 15.4 | % | ||||
|
Operating margin (%)
|
6.3 | % | 12.1 | % | ||||
| (1) | Operating income does not include financial income and expenses. |
Basic Petrochemicals
Net Sales Revenue. Net sales revenue of the Basic Petrochemicals segment increased by 36.2% in 2003. Significant factors contributing to this growth were:
| • | a R$266.3 million, or 39.1%, increase in net sales revenue from domestic sales of ethylene to third parties; | |
| • | a R$165.8 million, or 38.5%, increase in net sales revenue from domestic sales of propylene to third parties; and |
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| • | a R$103.9 million, or 58.6%, increase in net sales revenue from domestic sales of butadiene to third parties. |
For more information about the sales volumes and net sales revenue of our basic petrochemicals products by product lines and markets, see “Business — Basic Petrochemicals Unit — Products of Our Basic Petrochemicals Unit.”
Sales of basic petrochemicals by our Basic Petrochemicals segment to our other segments increased by 8.1% to R$910.7 million in 2003 from R$842.8 million in 2002 and sales of utilities by our Basic Petrochemicals segment to our other segments increased by 36.1% to R$103.8 million in 2003 from R$76.3 million in 2002. Sales of utilities to third parties increased by 15.1% to R$280.7 million in 2003 from R$244.0 million in 2002. Net export sales of the Basic Petrochemicals segment increased by 58.4% to R$490.7 million in 2003 from R$309.7 million in 2002, primarily as a result of the recovery of our production levels following the scheduled stoppage of the pyrolysis plant that is part of our Olefins 1 unit for 92 days in 2002.
Domestic sales volume of ethylene to third parties increased by 6.9% to 559.1 thousand tons in 2003 from 522.8 thousand tons in 2002, principally due to the recovery of our production of ethylene following the maintenance shutdown of our Olefins 1 unit in 2002 and our increased production capacity for this product. Average domestic prices for ethylene increased by 30.1% to R$1,694 per ton in 2003 from R$1,302 per ton in 2002.
Domestic sales volume of propylene to third parties increased by 2.9% to 399.2 thousand tons in 2003 from 388.1 thousand tons in 2002, principally due to the recovery of our production of propylene following the maintenance shutdown of our Olefins 1 unit in 2002. Average domestic prices for propylene increased by 34.7% to R$1,495 per ton in 2003 from R$1,110 per ton in 2002.
Domestic sales volume of butadiene to third parties increased by 2.0% to 150.3 thousand tons in 2003 from 147.3 thousand tons in 2002, principally due to the recovery of our production of butadiene following the maintenance shutdown of our Olefins 1 unit in 2002. Average domestic prices for butadiene increased by 55.4% to R$1,870 per ton in 2003 from R$1,203 per ton in 2002.
Cost of Sales and Services and Gross Profit. Cost of sales and services of the Basic Petrochemicals segment increased by 36.8% in 2003. This increase was primarily attributable to an increase of 34.1% in the average price of naphtha purchased in 2003, as well as the increased sales volume recorded in 2003. Naphtha accounted for 81.8% of the Basic Petrochemicals segment’s cost of sales in 2003 and 83.0% in 2002.
Gross profit of the Basic Petrochemicals segment increased by 32.7% in 2003, and gross margin decreased to 13.7% for 2003 compared to 14.1% for 2002.
Operating Income. Operating income of the Basic Petrochemicals segment (which excludes financial income and expense and results from investment in associated companies) increased by 22.2% in 2003, principally as a result of a R$161.0 million increase in gross profit. The increase in gross profit was partially offset by a R$37.9 million increase in selling, general and administrative expenses, primarily as a result of the allocation of overhead expenses in 2003, and a R$33.1 million decrease in other income, net, primarily as a result of the decline in amounts of PIS recovered in 2003 as compared to 2002. Operating margin of the Basic Petrochemical segment for 2003 was 10.5% compared with 11.7% in 2002.
Polyolefins
Net Sales Revenue. Net sales revenue of the Polyolefins segment increased by 36.4% in 2003. This increase was primarily attributable to a 32.1% increase in domestic sales of polypropylene, a 60.1% increase in export sales of polyethylene, a 16.0% increase in domestic sales of polyethylene and a 359.8% increase in export sales of polypropylene. Net export sales of the Polyolefins segment increased by 68.5% to R$1,233.7 million in 2003 from R$732.2 million in 2002. For more information about the sales volumes
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Domestic sales volume of polyethylene decreased by 9.4% to 444.8 thousand tons in 2003 from 490.7 thousand tons in 2002, principally due to our strategic decision to maintain our margins on polyethylene despite decreased demand for polyethylene as a result of the recession in Brazil. Average domestic prices for polyethylene increased by 27.9% to R$2,565 per ton in 2003 from R$2,004 per ton in 2002.
Domestic sales volume of polypropylene decreased by 5.1% to 374.9 thousand tons in 2003 from 395.1 thousand tons in 2002, primarily as a result of reduced demand for polypropylene in 2003 and increased competition in this market as a result of the commencement of operations of Polibrasil’s new polypropylene plant. Average domestic prices for polypropylene increased by 39.2% to R$2,689 per ton in 2003 from R$1,931 per ton in 2002.
Export sales volume of polyethylene increased by 32.8% to 204.4 thousand tons in 2003 from 153.9 thousand tons in 2002, principally due to our strategic decision to increase our exports of polyethylene despite the lower margins available in the international market rather than lower our capacity utilization rate in response to the reduced domestic demand for polyethylene. Average export prices for polyethylene increased by 20.6% to R$1,888 per ton in 2003 from R$1,565 per ton in 2002.
Export sales volume of polypropylene increased by 306.2% to 66.2 thousand tons in 2003 from 16.3 thousand tons in 2002, principally due to our strategic decision to increase our exports of polypropylene despite the lower margins available in the international market rather than lower our capacity utilization rate in response to the reduced domestic demand for, and increased domestic supply of, polypropylene. Average export prices for polypropylene increased by 13.2% to R$1,781 per ton in 2003 from R$1,573 per ton in 2002.
Cost of Sales and Gross Profit. Cost of sales of the Polyolefins segment increased by 31.9% in 2003. This increase was primarily attributable to increases in the prices of ethylene and propylene, the principal raw materials of this segment, as well as our increased sales volume in 2003.
Gross profit of the Polyolefins segment increased by 58.9% in 2003, and gross margin increased to 19.7% in 2003 compared to 16.9% in 2002.
Operating Income. Operating income of the Polyolefins segment (which excludes financial income and expenses and results from investment in associated companies) increased by 86.0% in 2003, primarily as a result of the R$247.2 million increase in the gross profit of this segment. Our Polyolefins segment reduced its selling, general and administrative expenses to 4.1% of net sales revenue in 2003 from 5.5% of net sales revenue in 2002, primarily as a result of cost cutting initiatives introduced and efficiencies achieved in this segment following our merger with OPP Produtos. Operating margin of the Polyolefins segment increased to 15.6% in 2003 compared to 11.5% in 2002.
Vinyls
Net Sales Revenue. Net sales revenue of the Vinyls segment increased by 22.7% in 2003. This increase was primarily attributable to an 18.4% increase in this segment’s domestic sales, principally as a result of the increase in the average domestic prices of our vinyls products. Net export sales of this segment increased by 55.5% to R$203.7 million in 2003 from R$131.0 million in 2002. This increase in net export sales was primarily attributable to our increased export sales of PVC and EDC. For more information about the sales volumes and net sales revenue of our vinyls products by product line and markets, see “Business — Vinyls Unit — Products of Our Vinyls Unit.”
Domestic sales volume of PVC decreased by 2.2% to 342.4 thousand tons in 2003 from 350.1 thousand tons in 2002, principally due to reduced demand for applications in the infrastructure, sanitation and construction sectors. This reduced demand was partially offset by increased exports of PVC and increased demand for PVC for applications in footwear, plastic films and laminates. Average domestic prices for PVC increased by 17.4% to R$2,390 per ton in 2003 from R$2,035 per ton in 2002.
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Export sales volume of PVC increased by 12.0% to 55.4 thousand tons in 2003 from 49.5 thousand tons in 2002, principally due to our strategic decision to increase our exports of PVC despite the lower margins available in the international market rather than lower our capacity utilization rate in response to the reduced domestic demand for PVC. Average export prices for PVC increased by 27.3% to R$1,710 per ton in 2003 from R$1,343 per ton in 2002.
Domestic sales of caustic soda increased by 6.4% to 426.6 thousand tons in 2003 from 400.9 thousand tons in 2002, principally due to increased demand by our customers in the domestic aluminum and pulp and paper industries. Average domestic prices for caustic soda increased by 20.1% to R$681 per ton in 2003 from R$567 per ton in 2002.
Export sales of EDC increased by 34.1% to 160.1 thousand tons in 2003 from 119.4 thousand tons in 2002, principally due to increased sales to our distributor in the Asian market as a result of increased demand by producers of PVC products in this market. Average export prices for EDC increased by 25.9% to R$680 per ton in 2003 from R$540 per ton in 2002, primarily due to the upward trend in international market prices for EDC in 2003 caused by, among other factors, the limited global production capacity for this product.
Cost of Sales and Gross Profit. Cost of sales of the Vinyls segment increased by 25.1% in 2003. This increase was primarily attributable to (1) the increased cost of ethylene, (2) the increased cost of electric power in 2003 resulting from the institution of a surcharge by the Brazilian federal energy regulator to compensate electric power companies for losses attributable to the Brazilian government’s electric power rationing program in 2001 and 2002, and (3) our increased sales volume for most of our vinyls products in 2003.
Gross profit of the Vinyls segment increased by 16.5% to R$364.8 million in 2003 from R$313.1 million in 2002, while gross margin declined to 26.6% in 2003 from 28.0% in 2002.
Operating Income. Operating income of the Vinyls segment (which excludes financial income and expenses and results from investment in associated companies) increased by 18.0% in 2003, primarily as a result of the increase in gross profits of this segment. Operating margin of the Vinyls segment declined to 22.9% in 2002 from 23.8% in 2002.
| Business Development |
Our Business Development Unit is responsible for managing certain of our minority investments, principally our investments in Petroflex and Cetrel. However, as the results of our investments managed by our Business Development Unit are reported as investments in associated companies, the results of these companies are not included in the following segment discussion.
Net Sales Revenue. Net sales revenue of our Business Development segment increased by 56.6% in 2003. This increase was primarily attributable to the effects of our merger with 52114 Participações, through which we acquired the caprolactam and other operations of Nitrocarbono in August 2002. Net export sales of this segment, consisting primarily of caprolactam, increased to R$34.3 million in 2003 from R$20.1 million in 2002 due to the effects of our merger with 52114 Participações. For more information about the sales volumes and net sales revenue of our business development products by product line and markets, see “Business — Business Development Unit — Products of Our Business Development Unit.”
Domestic sales volume of PET decreased by 7.9% to 55.1 thousand tons in 2003 from 59.8 thousand tons in 2002, principally due to reduced demand for PET for soft drink packaging applications. This reduced demand was partially offset by increased demand for PET for packaging applications in the cleaning products, cosmetics and pharmaceuticals industries. Average domestic prices for PET increased by 19.9% to R$3,056 per ton in 2003 from R$2,548 per ton in 2002.
Domestic sales volume of caprolactam increased by 181.7% to 42.5 thousand tons in 2003 from 15.1 thousand tons in 2002, principally due to the effect of our merger with 52114 Participações. Average domestic prices for caprolactam declined by 5.8% to R$4,237 per ton in 2003 from R$4,500 per ton in
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Cost of Sales and Gross Profit. Cost of sales of the Business Development segment increased by 69.4% in 2003, reflecting the effects of our merger with 52114 Participações and the increased cost for caprolactam on a unit basis due to the shutdown of our caprolactam plant in the first quarter of 2003 for maintenance, and in the third quarter of 2003 due to temporary problems with the quality of the ammonia delivered to this plant. Gross profit of the Business Development segment decreased by 13.9% in 2003, resulting in a gross margin for 2003 of 8.5% from 15.4% in 2002.
Operating Income. Operating income of the Business Development segment (which excludes financial income and expenses and results from investment in associated companies) declined by 18.4% in 2003, principally as a result of a R$9.6 million increase in the selling, general and administrative expenses of this segment due to the effects of our merger with 52114 Participações and the R$6.2 million decline in this segment’s gross profit. These factors were partially offset by a R$9.6 million increase in other income, net, primarily as a result of our receipt of insurance proceeds related to the interruption of our caprolactam plant’s operations. Operating margin of the Business Development segment declined to 6.3% in 2003 from 12.1% in 2002.
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| Year Ended December 31, 2002 Compared with Year Ended December 31, 2001 |
| Combined Results |
The following table sets forth combined financial information for our company for each of the two years ended December 31, 2002 and 2001.
| Year Ended December 31, | ||||||||||||||||||||||||
| 2002 | 2001 | |||||||||||||||||||||||
| Excluding | Excluding | |||||||||||||||||||||||
| Effects of | Effects of | Effects of | Effects of | |||||||||||||||||||||
| Instruction | Instruction | Instruction | Instruction | |||||||||||||||||||||
| Combined | 247 | 247 | Combined | 247 | 247 | |||||||||||||||||||
| (in millions of reais) | ||||||||||||||||||||||||
|
Net sales revenue
|
R$ | 7,576.6 | R$ | (709.0 | ) | R$ | 6,867.6 | R$ | 4,459.5 | R$ | (323.0 | ) | R$ | 4,136.5 | ||||||||||
|
Cost of sales and services rendered
|
(6,175.5 | ) | 546.6 | (5,628.9 | ) | (3,637.6 | ) | 254.2 | (3,383.4 | ) | ||||||||||||||
|
Gross profit
|
1,401.1 | (162.4 | ) | 1,238.7 | 821.9 | (68.8 | ) | 753.1 | ||||||||||||||||
|
Selling, general and administrative expenses
|
(577.7 | ) | 54.0 | (523.7 | ) | (210.3 | ) | 29.3 | (181.0 | ) | ||||||||||||||
|
Investment in associated companies, net
|
(251.7 | ) | (62.0 | ) | (313.7 | ) | (214.3 | ) | (18.5 | ) | (232.8 | ) | ||||||||||||
|
Depreciation and amortization
|
(222.4 | ) | 49.9 | (172.5 | ) | (111.3 | ) | (2.7 | ) | (114.0 | ) | |||||||||||||
|
Financial expenses, net
|
(2,861.9 | ) | 73.4 | (2,788.5 | ) | (506.5 | ) | 38.4 | (468.1 | ) | ||||||||||||||
|
Other operating income
|
1,132.7 | (18.9 | ) | 1,113.8 | 103.3 | (0.7 | ) | 102.6 | ||||||||||||||||
|
Operating loss
|
(1,379.9 | ) | (66.0 | ) | (1,445.9 | ) | (117.2 | ) | (23.0 | ) | (140.2 | ) | ||||||||||||
|
Non-operating expenses, net
|
(98.0 | ) | 23.8 | (74.2 | ) | (120.8 | ) | 4.7 | (116.1 | ) | ||||||||||||||
|
Income (loss) before income tax and social
contribution and minority interest
|
(1,477.9 | ) | (42.2 | ) | (1,520.1 | ) | (238.0 | ) | (18.3 | ) | (256.3 | ) | ||||||||||||
|
Income tax and social contribution
|
(89.8 | ) | 32.1 | (57.7 | ) | (77.6 | ) | 21.6 | (56.0 | ) | ||||||||||||||
|
Loss before minority interest
|
(1,567.7 | ) | (10.1 | ) | (1,577.8 | ) | (315.6 | ) | 3.3 | (312.3 | ) | |||||||||||||
|
Minority interest
|
189.0 | 10.1 | 199.1 | (108.9 | ) | (3.3 | ) | (112.2 | ) | |||||||||||||||
|
Net loss for the year
|
R$ | (1,378.7 | ) | R$ | — | R$ | (1,378.7 | ) | R$ | (424.5 | ) | R$ | — | R$ | (424.5 | ) | ||||||||
| Net Sales Revenue |
Net sales revenue increased by 69.9% in 2002, primarily as a result of the inclusion of the net sales revenue of the Polyolefins, Vinyls and Business Development Units in our net sales revenue following the date of our acquisition of Nova Camaçari and the OPP Produtos Merger. Without giving effect to the proportional consolidation of our jointly controlled companies, our net sales revenue increased by 66.0% in 2002, primarily as a result of the inclusion of the net sales revenue of the Polyolefins, Vinyls and Business Development Units following the date of our acquisition of Nova Camaçari and our merger with OPP Produtos.
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| Cost of Sales and Services Rendered and Gross Profit |
Cost of sales and services rendered increased by 69.8% in 2002, primarily as a result of the inclusion of the cost of sales of the Polyolefins, Vinyls and Business Development Units following the date of our acquisition of Nova Camaçari and our merger with OPP Produtos. Without giving effect to the proportional consolidation of our jointly controlled companies, our cost of sales and services rendered increased by 66.4% in 2002, primarily as a result of the inclusion of the cost of sales of the Polyolefins, Vinyls and Business Development Units following the date of our acquisition of Nova Camaçari and our merger with OPP Produtos.
As a result, gross profit increased by 70.5% in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, gross profit increased by 64.5% in 2002.
Gross margin increased slightly to 18.5% in 2002 from 18.4% in 2001.
Without giving effect to the proportional consolidation of our jointly controlled companies, gross margin declined to 18.0% for 2002 from 18.2% in 2001.
| Selling, General and Administrative Expenses |
Selling, general and administrative expenses increased by 174.7% in 2002, primarily as a result of the inclusion of the selling expenses of the Polyolefins, Vinyls and Business Development Units following the date of our acquisition of Nova Camaçari and our merger with OPP Produtos. As a percentage of net, sales, selling, general and administrative expenses increased to 7.6% of net sales revenue in 2002 from 4.7% in 2001, principally as a result of the incurrence of expenses related to our mergers with OPP Produtos and 52114 Participações in 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, selling, general and administrative expenses increased by 189.3% in 2002, and selling, general and administrative expenses increased to 7.6% of net sales revenue in 2002 from 4.4% in 2001.
| Investment in Associated Companies, Net |
Investment in associated companies, net, increased by 17.4% in 2002, primarily as a result of the amortization of goodwill on the associated companies from the acquisition of Nova Camaçari and our merger with OPP Produtos. Without giving effect to the proportional consolidation of our jointly controlled companies, investment in associated companies, net, increased by 34.7% in 2002.
| Depreciation and Amortization |
Depreciation and amortization increased by 99.8% in 2002, primarily as a result of the inclusion of a portion of the depreciation and amortization expenses of Copesul following the date of our merger with OPP Produtos.
Without giving effect to the proportional consolidation of our jointly controlled companies, depreciation and amortization increased by 51.3% in 2002.
| Financial Expenses, Net |
Financial expenses, net increased by 465.0% in 2002, primarily as a result of the inclusion of the indebtedness from the companies that we acquired in the acquisition of Nova Camaçari and our merger with OPP Produtos. In addition, our financial expenses, net increased as a result of the effects of the real/U.S. dollar exchange rate on our U.S. dollar-denominated and U.S. dollar-indexed assets and liabilities. The 34.3% devaluation of the real against the U.S. dollar in 2002 resulted in a financial expense of R$2,076.1 million related to the exchange rate effect on our U.S. dollar-denominated and U.S. dollar-indexed liabilities and financial income of R$137.5 million related to the exchange rate effect on our U.S. dollar-denominated assets. In contrast, as a result of the 15.7% depreciation of the real against the U.S. dollar in 2001, we recorded financial expense of R$290.7 million related to the exchange rate effect
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Without giving effect to the proportional consolidation of our jointly controlled companies, financial expenses, net increased by 495.7% in 2002.
| Other Operating Income |
Other operating income increased to R$1,132.7 million in 2002 from R$103.3 million in 2001, primarily as a result of our recognition of the IPI tax credit of R$1,030.1 million that was recorded in the fourth quarter of 2002 as a result of a final judgment by the Brazilian Federal Supreme Court. Without giving effect to the proportional consolidation of our jointly controlled companies, other operating income increased to R$1,113.8 million in 2002 from R$102.6 million in 2001.
| Operating Loss |
Operating loss increased to R$1,379.9 million in 2002 from R$117.2 million in 2001. Operating loss represented 18.2% of net sales revenue in 2002 compared to 2.6% of net sales revenue in 2001. Without giving effect to the proportional consolidation of our jointly controlled companies, operating loss increased to R$1,445.9 million in 2002 from R$140.2 million in 2001, and operating loss increased to 21.1% of net sales revenue in 2002 from 3.4% of net sales revenue in 2001.
| Non-Operating Expenses, Net |
Non-operating expenses decreased by 18.9% in 2002. This decrease was primarily as a result of higher expenses on disposal of permanent assets in 2001. Without giving effect to the proportional consolidation of our jointly controlled companies, non-operating expenses decreased by 36.1% in 2002.
| Income Tax and Social Contribution |
Income tax and social contribution increased by 15.7% in 2002, primarily as a result of a R$45.3 million increase of non-deductible amortization of goodwill, despite our larger losses in 2002 which was offset by a valuation allowance on our net operating loss carryforward. Without giving effect to the proportional consolidation of our jointly controlled companies, income tax and social contribution increased by 3.0% in 2002.
| Minority Interest |
Minority interest was R$189.0 million in 2002 compared to negative R$108.9 million in 2001. The gain recorded in 2002 primarily represented the proportion of the R$476.7 million loss sustained by Trikem in that year that was attributable to the interests in Trikem held by Trikem’s minority shareholders. In addition, the gain in 2002 was partially offset by the proportion of income earned by Polialden in 2002 that was attributable to the interests in Polialden held by its minority shareholders. In 2001, both Trikem and Polialden recorded net income, a portion of which was recorded as minority interest by our company to reflect the proportional interests of the minority shareholders in these companies. Without giving effect to the proportional consolidation of our jointly controlled companies, minority interest was R$199.1 million in 2002 compared to negative R$112.2 million in 2001.
| Net Loss |
Net loss increased by 224.8% in 2002. Net loss represented 18.2% of net sales revenue in 2002, compared to 9.5% of net sales revenue in 2001.
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| Business Segment Results |
The following table sets forth combined financial information for our business segments for each of the two years ended December 31, 2002 and 2001.
| Year Ended December 31, | ||||||||
| Combined | ||||||||
| 2002 | 2001 | |||||||
| (In millions of reais, | ||||||||
| except percentages) | ||||||||
|
Basic Petrochemicals
|
||||||||
|
Net sales revenue
|
R$ | 3,499.1 | R$ | 3,297.4 | ||||
|
Cost of sales
|
(3,006.3 | ) | (2,900.0 | ) | ||||
|
Gross profit
|
492.8 | 397.4 | ||||||
|
Operating income(1)
|
409.1 | 299.1 | ||||||
|
Gross margin (%)
|
14.1 | % | 12.1 | % | ||||
|
Operating margin (%)
|
11.7 | % | 9.1 | % | ||||
|
Polyolefins
|
||||||||
|
Net sales revenue
|
R$ | 2,482.3 | R$ | 896.8 | ||||
|
Cost of sales
|
(2,062.4 | ) | (679.1 | ) | ||||
|
Gross profit
|
419.9 | 217.7 | ||||||
|
Operating income(1)
|
284.7 | 139.2 | ||||||
|
Gross margin (%)
|
16.9 | % | 24.3 | % | ||||
|
Operating margin (%)
|
11.5 | % | 15.5 | % | ||||
|
Vinyls
|
||||||||
|
Net sales revenue
|
R$ | 1,117.8 | R$ | 377.5 | ||||
|
Cost of sales
|
(804.7 | ) | (274.9 | ) | ||||
|
Gross profit
|
313.1 | 102.6 | ||||||
|
Operating income(1)
|
265.8 | 141.7 | ||||||
|
Gross margin (%)
|
28.0 | % | 27.2 | % | ||||
|
Operating margin (%)
|
23.8 | % | 37.5 | % | ||||
|
Business Development
|
||||||||
|
Net sales revenue
|
R$ | 290.8 | R$ | 72.7 | ||||
|
Cost of sales
|
(246.1 | ) | (61.4 | ) | ||||
|
Gross profit
|
44.7 | 11.3 | ||||||
|
Operating income(1)
|
35.3 | 7.7 | ||||||
|
Gross margin (%)
|
15.4 | % | 15.5 | % | ||||
|
Operating margin (%)
|
12.1 | % | 10.6 | % | ||||
| (1) | Operating income does not include financial income and expenses. |
Basic Petrochemicals
Net Sales Revenue. Net sales revenue of our Basic Petrochemicals segment increased by 6.1% in 2002. Significant factors contributing to this growth were:
| • | a R$111.9 million, or 35.1%, increase in net sales revenue from domestic sales of propylene to third parties; | |
| • | a R$99.1 million, or 167.4%, increase in net sales revenue from export sales of benzene to third parties; |
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| • | a R$72.1 million, or 83.4%, increase in net sales revenue from export sales of methyl tertiary butyl ether, or MTBE, to third parties; | |
| • | a R$68.8 million, or 61.4%, increase in net sales revenue from domestic sales of benzene to third parties; and | |
| • | a R$41.5 million, or 71.6%, increase in net sales revenue from export sales of propylene to third parties. |
These factors were partially offset by:
| • | a R$302.2 million, or 30.8%, decline in net sales revenue from domestic sales of ethylene to third parties; and | |
| • | a R$49.2 million, or 40.8%, decline in net sales revenue from domestic sales of para-xylene to third parties. |
Production and sales volumes of some of our basic petrochemical products were affected in 2002 by the scheduled stoppage of one of our pyrolysis plants for 92 days in 2002. Domestic sales volumes of certain of our basic petrochemical products decreased in 2002 primarily due to the effects of our acquisition of Nova Camaçari and our merger with OPP Produtos. Prior to the date of our acquisition of Nova Camaçari, sales of our basic petrochemicals products to the companies that currently form our other segments were classified as sales to third parties. Sales to Polialden, OPP Química, Trikem and Proppet following our acquisition of Nova Camaçari were classified as intercompany sales in our consolidated accounting records.
Sales of basic petrochemicals by our Basic Petrochemicals segment to our other segments increased by 84.4% to R$842.8 million in 2002 from R$457.0 million in 2001, and sales of utilities by our Basic Petrochemicals segment to our other segments increased by 34.3% to R$76.3 million in 2002 from R$56.8 million in 2001. Sales of utilities to third parties increased by 8.5% to R$244.0 million in 2002 from R$224.9 million in 2001. Net export sales of the Basic Petrochemicals segment increased by 55.6% to R$674.5 million in 2002 from R$433.6 million in 2001, primarily as a result of the commencement of exports of gasoline and of a 68.8% increase in the average export price of benzene.
Domestic sales volume of propylene to third parties decreased by 5.9% to 388.1 thousand tons in 2002 from 412.6 thousand tons in 2001, principally due to a scheduled stoppage of one of our pyrolysis plants and the effects of our acquisition of Nova Camaçari and our merger with OPP Produtos. Average domestic prices for propylene increased by 43.6% to R$1,110 per ton in 2002 from R$773 per ton in 2001.
Export sales volume of benzene increased by 2.8% in 2002 to 96.3 thousand tons from 93.7 thousand tons in 2001, principally due to attractive export opportunities. Average export prices for benzene increased by 68.8% to R$1,067 per ton in 2002 from R$632 per ton in 2001.
Export sales volume of MTBE decreased by 5.7% in 2002 to 104.6 thousand tons from 110.9 thousand tons in 2001, principally due to a scheduled stoppage of our pyrolysis plants. Average export prices for MTBE increased by 26.3% to R$985 per ton in 2002 from R$780 per ton in 2001.
Domestic sales volume of benzene to third parties increased by 13.9% to 198.5 thousand tons in 2002 from 174.2 thousand tons in 2001, principally due to the recovery and growth in 2002 of the domestic benzene market. Average domestic prices for benzene increased by 41.7% to R$911 per ton in 2002 from R$643 per ton in 2001.
Export sales volume of propylene decreased by 31.4% in 2002 to 48.4 thousand tons from 70.6 thousand tons in 2001, principally due to a scheduled stoppage of our pyrolysis plants. Average export prices for propylene increased by 62.8% to R$1,335 per ton in 2002 from R$820 per ton in 2001.
Domestic sales volume of ethylene to third parties decreased by 42.8% to 522.8 thousand tons in 2002 from 914.6 thousand tons in 2001, principally due to a scheduled stoppage of one of our pyrolysis plants and the effects of our acquisition of Nova Camaçari and our merger with OPP Produtos. Prior to the date
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Domestic sales volume of para-xylene to third parties decreased by 52.8% to 54.2 thousand tons in 2002 from 114.8 thousand tons in 2001, principally due to a scheduled stoppage of one of our pyrolysis plants and the effects of our acquisition of Nova Camaçari. Average domestic prices for para-xylene increased by 25.3% to R$1,317 per ton in 2002 from R$1,051 per ton in 2001, primarily as a result of increases in international market prices for ethylene in 2002 coupled with the effect of the significant devaluation of the real in 2002.
Cost of Sales and Services and Gross Profit. Cost of sales and services of the Basic Petrochemicals segment increased by 3.7% in 2002. This increase was primarily attributable to a 22.7% increase in the average price of naphtha we purchased in 2002. Naphtha accounted for 83.0% of the Basic Petrochemicals segment’s cost of sales in 2002 and 75.0% in 2001.
Gross profit of the Basic Petrochemicals segment increased by 24.0% in 2002, and gross margin increased to 14.1% in 2002 from 12.1% in 2001.
Operating Income. The operating income of the Basic Petrochemicals segment (which excludes financial income and expenses and results from investment in associated companies) increased by 36.8% in 2002, principally as a result of a R$95.4 million increase in the gross profit of this segment and a R$59.3 million increase in other income, net, primarily as a result of the increase in amounts of PIS recovered in 2002 as compared to 2001. These factors were partially offset by a R$41.7 million increase in selling, general and administrative expenses due to certain non-recurring expenses incurred in connection with our acquisitions and mergers and the integration into our company of the companies that we acquired and with which we merged. The Basic Petrochemical segment’s operating margin increased to 11.7% in 2002 from 9.1% in 2001.
Polyolefins
Net Sales Revenue. Net sales revenue of our Polyolefins segment increased by 176.8% in 2002. This increase was primarily attributable to the effects of our merger with OPP Produtos and the acquisition of Nova Camaçari, as we did not produce polyolefins products prior to the date of our acquisition of Nova Camaçari. Net export sales of the Polyolefins segment increased by 267.9% to R$732.2 million in 2002 from R$199.0 million in 2001. This increase in net export sales was primarily attributable to the effects of our merger with OPP Produtos.
Net sales revenue of our Polyolefins segment increased by 27.6% to R$2,482.3 million in 2002 as compared to aggregate net sales revenue of OPP Química and Polialden of R$1,945.5 million in 2001. This increase was primarily attributable to the 18.9% increase of net export sales of polyethylene by the Polyolefins segment to R$241.0 million in 2002 as compared to aggregate net export sales of polyethylene by OPP Química and Polialden of R$202.7 million in 2001 and the 24.6% increase of domestic sales of polypropylene by the Polyolefins segment to R$763.2 million in 2002 as compared to aggregate domestic sales of polypropylene by OPP Química and Polialden of R$612.7 million in 2001.
Domestic sales volume of polyethylene decreased by 0.2% to 490.7 thousand tons in 2002 as compared to an aggregate of 491.9 thousand tons for OPP Química and Polialden in 2001, principally as a result of the reduced supply of ethylene available from our Basic Petrochemicals Unit as a result of the maintenance shutdown of our Olefins Unit 1 in 2002. Average domestic prices for polyethylene increased by 5.1% to R$2,004 per ton in 2002 from R$1,906 per ton in 2001.
Domestic sales volume of polypropylene increased by 16.7% to 395.1 thousand tons in 2002 as compared to an aggregate of 338.5 thousand tons for OPP Química and Polialden in 2001, reflecting improved demand for polypropylene in 2002 as a result of the growth of the Brazilian economy and the termination in February 2002 of the Brazilian government’s electric power rationing program initiated in
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Export sales volume of polyethylene increased by 17.7% to 153.9 thousand tons in 2002 as compared to an aggregate of 130.7 thousand tons for OPP Química and Polialden in 2001, principally as a result of favorable export prices. Average export prices for polyethylene increased by 0.9% to R$1,565 per ton in 2002 from R$1,551 per ton in 2001.
Export sales volume of polypropylene decreased by 57.5% to 16.3 thousand tons in 2002 as compared to an aggregate of 38.4 thousand tons for OPP Química and Polialden in 2001, reflecting our decision to decrease exports of polypropylene to take advantage of the improved demand for polypropylene in the domestic market. Average export prices for polypropylene increased by 24.2% to R$1,573 per ton in 2002 from R$1,267 per ton in 2001.
Cost of Sales and Gross Profit. Cost of sales of the Polyolefins segment increased by 203.7% in 2002. This increase was primarily attributable to the effects of our merger with OPP Produtos and the acquisition of Nova Camaçari. Gross profit of the Polyolefins segment increased by 92.9% in 2002, primarily due to the effects of our merger with OPP Produtos and the acquisition of Nova Camaçari.
Cost of sales of the Polyolefins segment increased by 37.3% to R$2,062.4 million in 2002 as compared to aggregate cost of sales of OPP Química and Polialden of R$1,502.4 million in 2001. This increase was primarily due to (1) increases in the cost of ethylene and propylene in 2002, (2) the inclusion of freight costs in cost of sales in 2002, and (3) our increased sales volume in 2002. Freight costs were previously classified as selling, general and administrative expenses.
Gross margin for the Polyolefins segment decreased to 16.9% in 2002 from 24.3% in 2001. This decrease was primarily due to increases in the cost of ethylene and propylene in 2002 resulting from the significant devaluation of the real, which we were not able to pass through quickly to our customers through increases in the prices of our polyolefins products and to the inclusion of freight costs in cost of sales in 2002.
Gross profit of the Polyolefins segment decreased by 5.3% to R$419.9 million in 2002 as compared to aggregate gross profit of OPP Química and Polialden of R$443.2 million in 2001, and gross margin decreased to 16.9% in 2002 from 22.8% in 2001, primarily as a result of our inability to pass through quickly the increased cost of raw materials to our customers through increases in the prices of our polyolefins products.
Operating Income. Operating income of the Polyolefins segment (which excludes financial income and expenses and results from investment in associated companies) increased by 104.5% in 2002, primarily due to a R$202.2 million increase in this segment’s gross profit and a R$49.6 million increase in selling, general and administrative expenses, primarily due to the effects of our merger with OPP Produtos and the acquisition of Nova Camaçari.
Operating income of the Polyolefins segment increased by 13.5% to R$284.7 million in 2002 as compared to aggregate operating income of OPP Química and Polialden of R$250.8 million in 2001, principally due to a R$54.3 million decline in selling, general and administrative expenses, primarily due to the effects of the reclassification of freight expenses as part of cost of sales in 2002. Operating margin for 2002 decreased to 11.5% from 12.9% in 2001.
Vinyls
Net Sales Revenue. Net sales revenue of the Vinyls segment increased by 196.1% in 2002. This increase was primarily attributable to the effects of our merger with OPP Produtos, as we did not produce vinyls products prior to July 25, 2001. Net export sales of the Vinyls segment increased by 249.3% to R$131.0 million in 2002 from R$37.5 million in 2001. This increase in net export sales was primarily attributable to the effects of our merger with OPP Produtos.
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Net sales revenue of our Vinyls unit increased by 18.4% to R$1,117.8 million in 2002 as compared to net sales revenue of Trikem of R$944.2 million in 2001. This increase was primarily attributable to a 30.6% increase in domestic sales of PVC and a 284.7% increase in export sales of EDC. Net export sales of the Vinyls segment increased by 60.7% in 2002 to R$131.0 million as compared to net export sales by Trikem of R$81.5 million in 2001.
Domestic sales volume of PVC by the Vinyls segment increased by 6.9% to 350.1 thousand tons in 2002 as compared to Trikem’s sales volume of 327.6 thousand tons in 2001, principally as a result of the return to normal production and consumption levels in 2002 following the termination of the Brazilian government’s electric power rationing program, which had depressed domestic consumption in 2001. Average domestic prices for PVC increased by 22.3% to R$2,035 per ton in 2002 from R$1,664 per ton in 2001.
Domestic sales volume of caustic soda by the Vinyls segment increased by 11.8% to 400.9 thousand tons in 2002 as compared to Trikem’s sales volume of 358.7 thousand tons in 2001, principally due to higher domestic demand for caustic soda stemming from the termination of the Brazilian government’s electric power rationing program. Average domestic prices for caustic soda decreased by 31.8% to R$567 per ton in 2002 from R$832 per ton in 2001.
Export sales volume of EDC by the Vinyls segment increased by 16.0% to 119.4 thousand tons in 2002 as compared to Trikem’s sales volume of 102.9 thousand tons in 2002, principally due increased sales to our distributor in the Asian market as a result of increased demand for EDC by producers of PVC products in this market. Average export prices for EDC increased by 231.3% to R$540 per ton in 2002 from R$163 per ton in 2001, primarily due to the upward trend in international market prices for EDC in 2002 caused by, among other factors, the limited global production capacity for this product, coupled with the effects of the significant devaluation of the real in 2002.
Cost of Sales and Gross Profit. Cost of sales of the Vinyls segment increased by 192.7% in 2002. This increase was primarily attributable to the effects of our merger with OPP Produtos.
Cost of sales of the Vinyls segment increased by 25.5% to R$804.7 million in 2002 as compared to Trikem’s cost of sales of R$641.1 million in 2001. This increase was primarily a result of increases in the prices that this segment paid for ethylene and electric power, as well as our increased sales volume in 2002.
Gross profit of the Vinyls segment increased by 205.2% in 2002, and gross margin of the Vinyls segment declined to 28.0% for 2002 from 27.2% in 2001. This decline in gross margin was primarily due to the higher unit costs of the products of this segment in 2002 as a result of increases in the prices that this segment paid for ethylene and electric power.
Gross profit of the Vinyls segment increased by 3.3% to R$313.1 million in 2002 as compared to Trikem’s gross profit of R$303.1 million in 2001, and gross margin decreased to 28.0% in 2002 from 32.1% in 2001.
Operating Income. The operating income of the Vinyls segment (which excludes financial income and expenses and results from investment in associated companies) increased by 87.6% in 2002, primarily as a result of an increase of R$210.5 million in this segment’s gross profit. This increase was partially offset by a decrease of R$42.0 million in other income, net, primarily as a result of the effects of an insurance recovery recorded in 2001 in connection with an industrial accident at our PVC plant in Alagoas. This segment’s selling, general and administrative expenses in 2002 decreased as a percentage of its net sales revenue from 1.4% in 2001 to 4.3% in 2002. Operating margin of the Vinyls segment declined to 23.8% in 2002 from 37.5% in 2001.
Operating income of our Vinyls segment declined by 13.9% to R$265.8 million in 2002 as compared to Trikem’s operating income of R$308.8 million in 2001, principally as a result of a decrease of R$41.5 million in other income, net, primarily as a result of the effects of an insurance recovery recorded
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Business Development
Net Sales Revenue. Net sales revenue of the Business Development segment increased by 300.0% in 2002. This increase was primarily attributable to effects of our merger with 52114 Participações and the acquisition of Proppet on July 25, 2001. Domestic sales volumes of PET increased by 148.2% to 59.8 thousand tons in 2002 from 24.1 thousand tons in 2001. Domestic sales volume of caprolactam was 15.1 thousand tons in 2002. We did not sell caprolactam prior to our acquisition of Nitrocarbono in our merger with 52114 Participações. Net export sales of this segment, consisting primarily of caprolactam, was R$20.1 million in 2002. Exports of this segment were insignificant in 2001.
Cost of Sales and Gross Profit. Cost of sales of the Business Development segment increased by 300.8% in 2002, reflecting the effects of our merger with 52114 Participações and our acquisition of Proppet.
Gross profit of this segment increased by 295.6% in 2002. The gross margin of this segment remained relatively stable at 15.4% in 2002 compared to 15.5% in 2001.
Operating Income. Operating income of the Business Development segment (which excludes financial income and expenses and results from investment in associated companies) increased by 358.4% in 2002, primarily as a result of an increase of R$33.4 million in this segment’s gross profit. This increase was partially offset by a R$7.6 million increase in selling, general and administrative expenses attributable to effects of our merger with 52114 Participações and the acquisition of Proppet on July 25, 2001. Operating margin of the Business Development segment increased to 12.1% in 2002 from 10.6% in 2001.
Liquidity and Capital Resources
Our principal cash requirements consist of the following:
| • | working capital requirements; | |
| • | the servicing of our indebtedness; | |
| • | capital expenditures related to investments in operations, maintenance and expansion of plant facilities; and | |
| • | in the future, dividends on our shares, including in the form of interest attributable to shareholders’ equity. |
Our principal sources of liquidity have traditionally consisted of the following:
| • | cash flows from operating activities; | |
| • | short-term and long-term borrowings; and | |
| • | sales of debt securities in domestic and international capital markets. |
In 2003, cash flow generated by operations was used primarily for investing activities, for working capital requirements and to service our outstanding debt obligations. At December 31, 2003, our consolidated cash and cash equivalents and marketable securities amounted to R$1,184.3 million, including R$148.1 million that has been included in our consolidated financial statements due to the effects of proportional consolidation and to which we do not generally have access because we jointly control our proportionally consolidated companies with third parties.
Working Capital
We had consolidated negative working capital of R$726.8 million at December 31, 2003. Without giving effect to the proportional consolidation of our jointly controlled companies, we had consolidated
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After December 31, 2003, we reduced our short-term indebtedness by issuing and selling US$250.0 million aggregate principal amount of our 11.75% Notes due 2014 under our medium-term note program and R$1,200.0 million aggregate principal amount of our eleventh series of debentures in January and February 2004. See “— Recent Developments.” Some of these debentures were issued in exchange for a portion of our outstanding debt and the remainder of the proceeds of these transactions was used to repay a portion of our short-term debt. As a result, the average tenor of our indebtedness has been extended and we have experienced an increase in our liquidity. We believe that the proceeds of the offerings concluded in January and February 2004, together with our cash flows generated by operations, will be sufficient to meet our short-term financial obligations during 2004.
Our consolidated current assets increased by R$527.1 million to R$4,077.5 million at December 31, 2003 from R$3,550.4 million at December 31, 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, our consolidated current assets increased by R$580.7 million to R$3,654.5 million at December 31, 2003 compared to R$3,073.8 million at December 31, 2002. The increase in our consolidated current assets was largely due to:
| • | an increase of R$363.3 million in cash and cash equivalents and marketable securities, primarily as a result of our strategy to increase the amount of our liquid assets; | |
| • | an increase of R$257.2 million in trade accounts receivable, primarily as a result of our higher sales volume and prices during the period in which the receivables recorded at December 31, 2003 were generated than during the corresponding period in 2002; and | |
| • | an increase of R$182.5 million in inventories, primarily as a result of our production of certain products for inventory in late 2003 in anticipation of the shutdown of our Olefins 2 Unit in February 2004 for maintenance. |
Our marketable securities balance totaled R$494.7 million at December 31, 2003 compared with R$619.3 million at December 31, 2002. Of the year-end 2003 balance, R$434.6 million consisted of interests in an investment fund managed, on a discretionary basis, by a leading international bank. The substantial portion of the assets of this investment fund at year-end 2003 was comprised of U.S. dollar-denominated debt securities issued by our company. We believe that the fund manager plans to remarket these debt securities from time to time and realize funds from the resale of these debt securities. In the event that investor interest in debt securities of our company specifically or Brazilian issuers generally deteriorates, then the market value of the investment fund would decline and the fund manager’s ability to resell our debt securities would be affected, which could adversely impact our working capital and liquidity position. In addition, the U.S. GAAP reconciliation of shareholders’ equity eliminates the marketable securities balances consisting of our own debt securities in the fund on the asset side of our balance sheet against long-term indebtedness on the liability side of our balance sheet. See note 29(p) to our consolidated and combined financial statements.
Our consolidated current liabilities decreased by R$419.0 million to R$4,804.3 million at December 31, 2003 compared to R$5,223.3 million at December 31, 2002. Without giving effect to the proportional consolidation of our jointly controlled companies, our consolidated current liabilities decreased by R$165.2 million to R$4,567.5 million at December 31, 2003 compared to R$4,732.7 million at
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Cash Flows
Cash Flows from Operating Activities
Net cash provided by operating activities was R$580.5 million in 2003, R$790.0 million in 2002 and R$1,453.9 million in 2001. Without giving effect to the proportional consolidation, net cash provided by operating activities was R$431.9 million in 2003, R$708.6 million in 2002 and R$1,196.2 million in 2001.
The significant factors that led to the generation of our consolidated cash flows from operating activities in 2003 included our net income of R$215.1 million, and a R$321.2 million decrease in our taxes recoverable primarily as a result of the use of our tax credits to offset R$364.9 million of our federal tax assessment in 2003.
These positive effects on our cash flows from operations were partially offset by the effects of:
| • | a R$609.7 million decrease in our accounts payable to suppliers as a result of our reduced reliance on this high-cost source of financing; | |
| • | a R$238.9 million increase in our trade accounts receivable resulting from increased prices for certain of our principal products due to our realignment of the prices of certain of our principal products with international market prices in 2003; and | |
| • | a R$197.3 million increase in inventories resulting from our production of certain products for inventory in late 2003 in anticipation of the shutdown of our Olefins 2 unit for maintenance in early 2004. |
The significant factors that led to the generation of our consolidated cash flows from operating activities in 2002 included a R$1,482.5 million increase in our balance due to suppliers as a result of our increased reliance on financing of purchases of our primary raw materials in 2002. This positive effect on our cash flows from operations was partially offset by the effects of (1) a R$809.6 million increase in our trade accounts receivable resulting from increased prices for our products primarily due to the significant devaluation of the real in 2002, and (2) a R$425.3 million increase in our marketable securities in 2002.
The significant factors that led to the generation of our consolidated cash flows from operating activities in 2001 included:
| • | a R$213.0 million decrease in our marketable securities as a result of our disposition of these investments; and | |
| • | a R$191.3 million decrease in our trade accounts receivable resulting from the reduced volume of our domestic sales as a result of the Brazilian government’s electric power rationing program that was initiated in June 2001. |
Cash Flows Used in Investing Activities
Investing activities used net cash of R$460.4 million in 2003, compared to R$646.7 million in 2002, and R$862.2 million in 2001. Without giving effect to the proportional consolidation of our jointly controlled companies, investing activities used net cash of R$494.8 million in 2003, compared to R$611.0 million in 2002, and R$1,086.4 million in 2001. In 2003, our cash investments on a consolidated basis primarily consisted of additions to equipment related to upgrading, maintaining and modernizing the Olefins 1 unit of our Basic Petrochemicals Unit during a scheduled stoppage. In 2002, our cash investments on a consolidated basis primarily consisted of additions to property, plant and equipment related to maintaining one of our pyrolysis plants and expanding the production capacity of the Olefins Unit 1 of our Basic Petrochemicals Unit during a scheduled stoppage. In 2001, our cash investments on a
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Cash Flows from Financing Activities
Financing activities provided net cash of R$367.8 million in 2003, used net cash of R$237.2 million in 2002, and used net cash of R$404.9 million in 2001. Without giving effect to the proportional consolidation of our jointly controlled companies, financing activities provided net cash of R$481.9 million in 2003, used net cash of R$185.0 million in 2002, and provided net cash of R$88.4 million in 2001.
In 2003, our principal source of long-term borrowed funds were issuances in an aggregate amount of US$461.0 million under our medium-term note program and US$30 million of proceeds of a syndicated, secured pre-export finance facility. We used cash in 2003 to repay R$389.3 million of our outstanding long-term debt and to reduce our outstanding short-term debt by R$854.7 million as part of our strategy to increase the average maturity of our indebtedness. We borrowed R$833.6 million on market terms from related parties, principally from Copesul Trading International Inc. and Petroflex, to finance our working capital requirements during 2003 and repaid R$843.2 million to these related parties.
In 2002, our principal sources of long-term borrowed funds were an issuance of unsecured convertible debentures in an aggregate amount of R$591.9 million, and an export prepayment financing in an aggregate amount of US$97.2 million. We used cash in 2002 to reduce our outstanding short-term debt by R$566.8 million as part of our strategy to increase the average maturity of our indebtedness. We borrowed R$1,140.6 million on market terms from related parties, including members of the Odebrecht Group, Copesul Trading International Inc. and Petroflex, to finance our working capital requirements during 2002 and repaid R$1,920.9 million to these related parties. All of these transactions to which members of the Odebrecht Group were parties were conducted by OPP Produtos prior to the legal date of its merger with our company.
In 2001, our principal sources of long-term borrowed funds were:
| • | our issuance of two series of secured, nonconvertible debentures, in an aggregate principal amount of R$625.0 million; | |
| • | a syndicated export prepayment credit agreement in an aggregate principal amount equal to US$250.0 million; | |
| • | an export pre-payment loan entered into by Trikem in an aggregate principal amount equal to US$50 million; and | |
| • | a loan from BNDES Participações S.A. — BNDESPAR, or BNDESPAR, in an aggregate principal amount of R$163.9 million extended in connection with our purchase of BNDESPAR shares of Conepar. |
We used cash in 2001 to repay R$228.8 million of our outstanding long-term debt and to reduce our outstanding short-term debt by R$2,862.3 million as part of our strategy to increase the average maturity of our indebtedness. We borrowed R$1,476.8 million on market terms from related parties, primarily members of the Odebrecht Group, to finance our working capital requirements during 2001 and repaid R$1,152.7 million to these related parties. All of these transactions to which members of the Odebrecht Group were parties were conducted by OPP Produtos prior to the legal date of its merger with our company.
We paid cash dividends and interest attributable to shareholders’ equity (including withholding taxes paid by our company on behalf of our shareholders in respect thereof) of R$19.1 million and R$60.0 million for 2002 and 2001, respectively. Since May 20, 2002, we have suspended payment of the mandatory distribution because we did not have retained earnings (but rather had an accumulated deficit). As a result, we did not pay cash dividends or interest attributable to shareholders’ equity in 2003. We anticipate that we will, in the future, resume paying dividends on our shares, including in the form of interest attributable to shareholders’ equity, when our net income in future periods results in our having
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Indebtedness and Financing Strategy
At December 31, 2003, our total outstanding indebtedness on a consolidated basis, excluding related party debt and advances for purchase of credit rights, was R$7,833.8 million, consisting of R$3,075.5 million of short-term indebtedness (or 39.3% of our total indebtedness), including current portion of long-term indebtedness, and R$4,758.3 million of long-term indebtedness (or 60.7% of our total indebtedness). Without giving effect to the proportional consolidation of our jointly controlled companies, at December 31, 2003, our total outstanding indebtedness was R$7,343.1 million, consisting of R$2,858.0 million of short-term indebtedness, including current portion of long-term indebtedness, and R$4,485.1 million of long-term indebtedness.
On a consolidated basis, our real-denominated indebtedness at December 31, 2003 was R$2,613.8 million, and our foreign currency-denominated indebtedness was R$5,220.0 million. Without giving effect to the proportional consolidation of our jointly controlled companies, our real-denominated indebtedness at December 31, 2003 was R$2,540.0 million, and our foreign currency-denominated indebtedness was R$4,803.1 million. At December 31, 2003, our total outstanding indebtedness to related parties on a consolidated basis was R$177.8 million.
Our financing strategy has been to extend the average maturity of our outstanding indebtedness, including by repaying short-term debt through longer-term borrowings and issuing longer-term debt securities. In addition, we intend to use a portion of the proceeds of this offering to repay short-term debt. Part of our financing strategy over the next several years involves our use of a substantial portion of our consolidated cash flow, including from synergies resulting from our mergers with OPP Produtos and 52114 Participações, to pay principal and interest with respect to its outstanding indebtedness.
Short-Term Indebtedness
Our consolidated short-term debt, including debentures and current portion of long-term debt, increased to R$3,075.5 million at December 31, 2003 from R$2,778.2 million at December 31, 2002 primarily as a result of the reclassification of debentures in the amount of R$329.8 million as current portion of long-term debt to reflect a put option which may be exercised by the holders of these debentures on October 1, 2004. The effects of this reclassification were partially offset by our successful completion of several financing transactions. Without giving effect to the proportional consolidation of our jointly controlled companies, our short-term debt decreased to R$2,858.0 million at December 31, 2003, compared to R$2,540.9 million at December 31, 2002.
We maintain short-term finance lines denominated in reais with a number of financial institutions in Brazil. Although we have no committed lines of credit with these financial institutions, we believe that we will continue to be able to obtain sufficient credit to finance our working capital needs based on current market conditions. At December 31, 2003, the consolidated outstanding balance under our working capital lines denominated in reais was R$556.0 million. Without giving effect to the proportional consolidation of our jointly controlled companies, the aggregate outstanding balance under our working capital lines was R$516.4 million.
We also obtain advances on certain export contracts from a variety of Brazilian financial institutions. These advances generally have a maturity of less than one year and relatively low interest rates. These advances on export contracts are generally secured by receivables to be generated from future export sales under those contracts. At December 31, 2003, our consolidated outstanding advances on export contracts
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| Long-Term Indebtedness |
The following table sets forth selected information with respect to certain of our principal outstanding long-term debt instruments at December 31, 2003.
| Outstanding | |||||||
| Principal Amount | |||||||
| at December 31, | |||||||
| Instrument | 2003 | Final Maturity | Principal Covenants | ||||
|
Debentures:
|
|||||||
|
10th Issue of Debentures (1st series)
|
R$410.8 million | October 2006 | Limitations on liens, dividends, indebtedness, financial ratios, asset sales and mergers | ||||
|
10th Issue of Debentures (2nd series)
|
R$299.0 million | October 2006 | Limitations on liens, dividends, indebtedness, financial ratios, asset sales and mergers | ||||
|
Subordinated Convertible Debentures
|
R$636.6 million | July 2007 | Limitations on liens, indebtedness and mergers | ||||
|
Medium-Term Notes:
|
|||||||
|
10.50% Notes due 2004
|
US$121.0 million | July 2004 | Limitations on liens, indebtedness and mergers | ||||
|
9.25% Notes due 2005
|
US$65.0 million | October 2005 | Limitations on liens, indebtedness and mergers | ||||
|
12.50% Notes due 2008
|
US$275.0 million | November 2008 | Limitations on liens, indebtedness and mergers | ||||
|
9.0% Notes due 2007
|
US$150.0 million | June 2007 | Limitations on liens | ||||
|
11.5% Notes due 2004
|
US$50.7 million | February 2004 (repaid) | Limitations on liens, dividends, indebtedness, related party transactions, asset sales, and mergers | ||||
|
11.0% Notes due 2004
|
US$100.0 million | October 2004 | Limitations on liens, dividends, indebtedness, related party transactions, asset sales, and mergers | ||||
|
10.625% Notes due 2007
|
US$250.0 million | July 2007 | Limitations on liens, dividends, indebtedness, related party transactions, asset sales, and mergers | ||||
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| Outstanding | |||||||
| Principal Amount | |||||||
| at December 31, | |||||||
| Instrument | 2003 | Final Maturity | Principal Covenants | ||||
|
Bank Credit Facilities:
|
|||||||
|
Syndicated Bank Loan (acquisition financing)
|
US$80.0 million | July 2004 (repaid) | Limitations on mergers (applicable to Odebrecht Química and OPE Investimentos) | ||||
|
Bank Loan (construction financing)
|
US$15.0 million | December 2007 | Limitations on liens and mergers | ||||
|
Acquisition Financing:
|
|||||||
|
Bank Loans (acquisition financing)
|
R$74.6 million | October 2004/ March 2005 | Limitations on liens | ||||
|
BNDESPAR Loan (acquisition financing)
|
R$167.7 million | August 2006 | Limitation on share transfers | ||||
|
Export Finance Facilities:
|
|||||||
|
Export Prepayment Credit Facility (1st and
2nd tranches)
|
US$193.6 million | December 2004 (1st tranche) December 2006 (2nd tranche) | Limitations on liens, dividends, investments, indebtedness, asset sales and mergers | ||||
|
6.73% Investor Certificates
|
US$35.9 million | June 2004 | |||||
|
Export Prepayment Loan
|
US$16.4 million | June 2004 | Limitations on liens, dividends, indebtedness, investments and mergers | ||||
|
Customer Export Prepayment
|
US$93.9 million | June 2006 | Limitations on liens, dividends, indebtedness, investments, mergers and asset sales | ||||
|
Syndicated Secured Pre-Export Finance Facility
|
US$30.0 million | February 2005 | Limitations on liens on receivables, indebtedness, dividends, investments, asset sales and mergers | ||||
Many of the instruments governing our long-term indebtedness contain covenants that limit our ability to, among other things, incur additional indebtedness and grant liens on our property. We were in full compliance with the financial covenants in these instruments at December 31, 2003, and we believe that we will be able to comply with these financial covenants for the foreseeable future without any material effect on our business or financial performance.
At December 31, 2003, R$840.8 million of our real-denominated debt and R$232.8 million of our foreign currency-denominated debt (in each case, excluding related party debt) was secured. In order to secure this debt, we have pledged (1) a substantial number of shares owned by our company in subsidiaries and affiliates, including Copesul, Polialden and Odebrecht Química, and (2) certain of our property and equipment. The security arrangements for our secured debt vary depending on the transaction. In connection with our repayment of a syndicated bank loan on March 3, 2004, part of the pledge of our Copesul shares was released.
The following discussion briefly describes certain of our significant financing transactions. We have assumed the obligations of predecessor companies, including, among others, OPP Química (and its predecessor OPP Petroquímica) and Trikem, under these financing transactions as a result of mergers referred to under “— Principal Factors Affecting Our Results of Operations — Nova Camaçari Acquisition and Mergers with OPP Produtos and 52114 Participações,” “— Recent Developments” and “History and Corporate Reorganization.”
Tenth Issue of Debentures. On October 1, 2001, we issued our tenth issue of secured non-convertible debentures. The debentures were issued in two series and are secured by a floating lien (garantia
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Interest on the first series accrues at the rate of 118.33% of the CDI rate per annum and is payable semi-annually. The first series matures on October 1, 2006. Interest on the second series accrues at a rate of 13.25% per annum, payable annually, and the principal amount is adjusted for inflation on each payment date using the IGP-M. The second series matures on October 1, 2006. The initial interest rates described above in respect of both series of debentures will be in effect until October 1, 2004, when our board of directors will establish new interest rates for the period commencing on October 1, 2004 through the final maturity date thereof. We must redeem in full the debentures of any holders who do not accept the new interest rates established by our board of directors.
Subordinated Convertible Debentures. On May 31, 2002, OPP Produtos issued subordinated convertible debentures. As a result of our merger with OPP Produtos, these debentures became our obligations. At December 31, 2003, the outstanding principal amount of these debentures was R$636.6 million. Interest and monetary adjustment on these debentures accrues at the Long-Term Interest Rate plus 5.0% per annum and will be accreted until their maturity on July 31, 2007. ODBPAR Investments, as the holder of these debentures, has the option to convert the debentures into shares of our share capital at any time. The initial conversion price of these debentures was R$48.76 per 1,000 of our class A preferred shares, plus accrued interest. The conversion price increases at a rate equal to the Long-Term Interest Rate less 6.0% per annum from the date of the issuance of these debentures. At March 31, 2004, the conversion price of these debentures was R$52.94 per 1,000 shares of our class A preferred stock. Upon conversion, we will issue class A preferred shares up to the legal limit for preferred shares of two-thirds of our total share capital. After this two-thirds limit is reached, we will issue any remaining shares to be converted in the following proportions: one-third in common shares; and two-thirds in class A preferred shares. If ODBPAR Investments had exercised its option to convert these debentures in full on March 31, 2004, ODBPAR Investments would have received 4,913,401,489 of our common shares and 9,826,802,978 of our class A preferred shares in exchange for these debentures.
Medium-Term Note Program. On July 16, 2003, we established a medium-term note program permitting us to issue up to US$500.0 million aggregate principal amount of notes with maturities of up to five years from date of issuance. On December 16, 2003, we amended our medium-term note program to increase the maximum aggregate principal amount that we are permitted to issue to US$1,000.0 million and to extend the maximum maturity of the notes issued under the program to ten years from the date of issuance. We have issued four series of notes under the program.
Between July 16, 2003 and October 23, 2003, we issued and sold US$121.0 million aggregate principal amount of our 10.50% Notes due 2004. Interest on these notes is payable on January 16, 2004 and July 16, 2004, and the notes mature on July 16, 2004.
On October 28, 2003, we issued and sold US$65.0 million in aggregate principal amount of our 9.25% Notes due 2005 under the medium-term note program. Interest on these notes is payable in April and October of each year, commencing on April 28, 2004, and the notes mature on October 28, 2005.
Between November 5, 2003 and November 26, 2003, we issued and sold US$275.0 million aggregate principal amount of our 12.50% Notes due 2008. Interest on these notes is payable in May and November of each year, commencing on May 5, 2004, and the notes mature on November 5, 2008.
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Fixed Rate Notes. On June 25, 1997, we issued and sold US$150.0 million aggregate principal amount of our 9.0% Notes due 2007. Interest on these notes is payable semi-annually in arrears in June and December in each year, and these notes mature on June 25, 2007.
On February 22, 1996, OPP Petroquímica issued and sold US$125.0 million aggregate principal amount of its 11.5% Notes due 2004. At December 31, 2003, the outstanding principal amount of these notes was US$50.7 million. These notes matured and were paid on February 23, 2004.
On October 29, 1996, OPP Petroquímica issued and sold US$100.0 million aggregate principal amount of its 11.0% Notes due 2004. Interest on these notes is payable semi-annually in arrears in April and October in each year, and these notes mature on October 29, 2004.
On July 24, 1997, Trikem issued and sold US$250.0 million aggregate principal amount of its 10.625% Notes due 2007. Interest on these notes is payable semi-annually in arrears in January and July in each year, and these notes mature on July 24, 2007. We assumed the obligations of Trikem under these notes as a result of the merger of Trikem with and into our company on January 15, 2004. We have the right to repurchase these notes on July 24 of each year.
Bank Credit Facilities. In July 1999, Odequi Overseas Inc., now one of our direct subsidiaries, received a loan in the principal amount of US$110.0 million from a syndicate of financial institutions. The remaining amounts due under this loan were repaid on March 3, 2004.
In January 1998, several financial institutions granted a loan in the amount of US$30.0 million to Proppet to finance construction of its PET plant in Camaçari, Bahia. This loan has since been amended to, among other provisions, reflect the merger of Proppet with and into our company. ODBPAR Investments, Norquisa and Mitsubishi Chemical Corporation, or Mitsubishi, have guaranteed this loan. ODBPAR Investments and Norquisa have also agreed to reimburse Mitsubishi for any payments that it makes in respect of this guarantee if we default on our payment obligations under the loan. To guarantee their reimbursement obligations, Norquisa and ODBPAR Investments have caused our company to grant Mitsubishi a second mortgage on its DMT and PET plants and to pledge the equipment related to its DMT and PET production. The loan amortizes in equal semi-annual installments until its final maturity in December 2007. At December 31, 2003, the outstanding principal balance of this loan was US$15.0 million. The loan bears interest at the rate of LIBOR plus 3.875% per annum, payable semi-annually in arrears in June and December of each year. Ninety-five percent of the principal and interest of this loan is supported by insurance from Nippon Export and Investment Insurance, and we pay annual premiums in yen for this insurance.
Acquisition Financing. In September 1992, Odebrecht Química purchased shares of PPH Companhia Industrial de Polipropileno and Poliolefinas S/ A, predecessor companies of OPP Química. Odebrecht Química paid 10.0% of the purchase price in cash and the remaining 90.0% was financed by Banco do Brasil. At December 31, 2003, the aggregate outstanding principal balance of the Banco do Brasil loans was R$74.6 million. On January 16, 2004, we issued R$75.1 million aggregate principal amount of our eleventh series of debentures in exchange for the outstanding balance of these loans. See “— Recent Developments — Issuance and Sale of Eleventh Issue of Debentures.”
On December 17, 2003, we pledged 2,554,061 shares of Odebrecht Química with an aggregate estimated value of R$153.7 million to Banco do Brasil in part as collateral security for these loans. Although these loans were exchanged for our eleventh series of debentures, the pledge of the Odebrecht Química shares continues to secure certain additional outstanding indebtedness that we owe to Banco do Brasil, as well as future indebtedness incurred with Banco do Brasil that we and Banco do Brasil agree will be subject to the pledge.
In September 2001, BNDESPAR sold 1,000,000,000 class B preferred shares of Conepar to Nova Camaçari for a purchase price of R$163.9 million and, as part of this transaction, BNDESPAR extended a loan to Nova Camaçari in a principal amount equal to the purchase price. This loan bears interest at the Long-Term Interest Rate plus 4.0% per annum, payable annually each August 15, and matures on
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Subject to the preemptive rights of existing shareholders, BNDESPAR has the option to convert the principal amount of and accrued interest on this loan into our class A preferred shares at any time prior to the maturity of this loan. If this loan is converted in connection with a public offering, the conversion price will be the offering price. If this loan is converted other than in connection with a public offering, the conversion price will be the greater of the offering price in our last public offering occurring within the nine months prior to the conversion, monetarily restated by the IGP-M, and the weighted average of the average daily prices for our class A preferred shares on the São Paulo Stock Exchange during the 60 days prior to the conversion. Upon conversion, we will issue class A preferred shares up to the legal limit for preferred shares of two-thirds of our total share capital. After this two-thirds limit is reached, we will issue any remaining shares to be converted in the following proportions: one-third in common shares; and two-thirds in class A preferred shares.
Export Prepayment Facilities. In December 2001, we entered into a US$250.0 million syndicated credit agreement. The loan is secured by certain of our exports. We used the proceeds from the loan to refinance in part our obligations in connection with our acquisition of Nova Camaçari. The first tranche of this loan in the principal amount of US$80.0 million bears interest at the rate of three-month LIBOR plus 3.75% per annum, payable quarterly in arrears. Principal on the first tranche is payable in seven installments beginning in June 2003 with a final maturity date in December 2004. Amortization of the principal is scheduled to match sales of our exports that are not pledged to support other obligations. The second tranche of this loan in the principal amount of US$170.0 million bears interest at the rate of three-month LIBOR plus 4.75% per annum, payable quarterly in arrears. Principal on the second tranche is payable in 15 installments beginning in June 2003 with a final maturity date in December 2006. Amortization of the principal is scheduled to match sales of our exports that are not pledged to support other obligations. At December 31, 2003, the aggregate outstanding principal balance of the two tranches of this loan was US$193.6 million.
On August 1, 1997, a trust formed by Trikem issued and sold US$100 million aggregate principal amount of 6.73% Investor Certificates due 2004. The investor certificates are to be paid from the proceeds of accounts receivable generated from export sales of PVC and EDC to a Japanese company. The investor certificates represent fractional interests in the trust whose sole asset is receivables generated pursuant to a supply agreement with the Japanese company. At December 31, 2003, the aggregate outstanding principal amount of the investor certificates was US$35.9 million. Interest on the investor certificates is payable quarterly in arrears in March, June, September and December of each year. Our obligation to sell products to our subsidiary is supported by a surety bond. We also guarantee payment on the investor certificates.
In April 2001, Trikem received an export pre-payment loan of US$50.0 million from two financial institutions. This bears interest at the rate of three-month LIBOR plus 2.375% per annum payable quarterly in arrears. We assumed the obligations of Trikem under this loan as a result of its merger with and into our company on January 15, 2004. This loan amortizes in 13 equal quarterly installments structured to correspond to excess distributions to our company from the trust that issued the 6.73% Investor Certificates due 2004. At December 31, 2003, the outstanding principal balance of this loan was US$16.4 million. This loan is secured by our right to payments from the trustee of that trust. Odebrecht Química guarantees payment of this loan.
In December 2002, OPP Química entered into a prepayment advance for products to be exported to a foreign customer in the amount of US$97.2 million. This prepayment advance bears interest at the rate of six-month LIBOR plus 3.75% per annum. This prepayment advance will be paid through partial semi-annual shipments from December 2003 to June 2006. At December 31, 2003, the outstanding principal amount of this prepayment advance was US$93.9 million. Our obligation to deliver export products is guaranteed by a surety bond.
On August 19, 2003, we entered into a syndicated, secured pre-export finance facility in an aggregate principal amount of US$30.0 million. The loans under this facility are secured by certain of our exports
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BNDES Development Loans. We maintain credit facilities that are granted directly or indirectly by BNDES to fund general capital expenditures associated principally with the expansion of our production capacity, environmental projects and the development of operation control centers, laboratories and waste treatment station, of which R$274.4 million principal amount was outstanding at December 31, 2003. Amounts borrowed from BNDES are secured by a pledge of certain equipment and machinery owned by us. The interest rate on most of the amounts we borrowed from BNDES is based on the Long-Term Interest Rate plus a margin of 2% to 5% per annum. Other amounts borrowed from BNDES bear interest at the Taxa Referencial, a government reference rate, plus a margin of 6.5%, or at a rate based on the UM, a BNDES rate based on a basket of currencies (which rate reflects the daily exchange rate fluctuations in the currencies in which BNDES borrows), plus a margin. The principal and interest on these credit facilities is payable monthly through July 2007.
Related Party Debt. During the second and third quarters of 2003, we, through our subsidiary Lantana Trading Co. Inc., entered into several loan agreements with Copesul International Trading Inc., an affiliate of Copesul, which loans have an aggregate outstanding amount of R$157.4 million.
Assignment of Accounts Receivable
On October 24, 2003, we entered into a conditional receivables assignment agreement with a Brazilian financial institution under which we transferred a portion of the accounts receivable resulting from a specific polyethylene supply contract with a Brazilian company for the period from October 2003 through September 2004. In consideration of this assignment, this financial institution advanced to our company R$66.7 million, net of taxes and a monthly fee equal to 1.89% of each monthly installment under the supply contract. We will repay this advance through collections on the assigned receivables. If the amount of receivables collected is greater than the amount of this advance, then the financial institution will pay us the outstanding balance, net of a monthly fee in an amount to be agreed from time to time. However, if the outstanding balance is negative, we must pay the difference to the financial institution. We are responsible for collecting the receivables, and if a receivable is past due, we must pay the financial institution the value thereof within 10 days from its due date. In connection with the receivables assignment, our company executed a promissory note in favor of the financial institution in an aggregate principal amount of R$86.7 million and made the financial institution the beneficiary of an insurance policy in the amount of the advance. At December 31, 2003, the outstanding balance under this assignment of account receivables was R$49.7 million.
Advance for Purchase of Credit Rights
In June 2002, OPP Química and Trikem entered into a facility under which they received advances for the assignment of credit rights. See note 7 to our consolidated and combined financial statements. At December 31, 2003, the aggregate outstanding principal balance under this advance for the assignment of credit rights was R$113.4 million. On January 16, 2004, we issued R$107.7 million in aggregate principal amount of our eleventh series of debentures in exchange for the outstanding balance under this facility. See “— Recent Developments — Issuance and Sale of Our Eleventh Issue of Debentures.”
Off-Balance Sheet Arrangements
We have retained an interest in subordinated quotas (shares) of the investment fund on securitization of receivables described below. The securitization of receivables is accounted for as a sale to the extent that consideration other than beneficial interests in transferred assets is received in exchange. This investment fund is qualified as a special-purpose entity and was not consolidated in our financial statements.
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On November 6, 2003, our company, Trikem and Polialden entered into a receivables purchase and sale agreement with a special purpose receivables investment fund under which our company, Trikem and Polialden agreed to sell to the fund from time to time, without recourse, certain trade receivables represented by negotiable invoices (duplicatas). Under this agreement, this fund may purchase these receivables using (1) the net proceeds that it obtains from the sale of interests, or senior quotas, in the fund to certain qualified investors in Brazil and (2) past due receivables that our company, Trikem or Polialden have previously sold to the fund and, although not obligated to do so, agree to repurchase. The fund may also invest a portion of such net proceeds in cash and certain cash equivalents. The aggregate amount of the quotas of all series outstanding at any time may not exceed R$500.0 million. Each series of quotas will have a maturity of not less than 12 months from the date of issuance and will amortize on June 15 and December 15 of each year. The amortization payments will include amounts in respect of interest calculated as a multiple of the CDI rate.
The fund may cause the early amortization of quotas to the extent necessary to meet specified coverage ratios or to ensure that receivables constitute at least a specified percentage of the fund’s net worth. We, Trikem and Polialden also agreed to purchase subordinated quotas from the fund to the extent necessary to enable the fund to meet specified coverage ratios, whether measured on periodic calculation dates or measured on a pro forma basis before the issuance of quotas to investors. In addition, we, Trikem and Polialden are required to maintain an insurance policy covering an aggregate amount of 20% of the value of any series of quotas issued by the fund, and the fund may demand payment under the insurance policy in the amount of the receivables under any negotiable invoice for which documents necessary to pursue a collection action against the applicable obligor are unavailable. We assumed the retained interests of Trikem under the sale of receivables as a result of its merger into our company on January 15, 2004.
On November 13, 2003, the fund commenced the offering of an initial series of quotas to be issued by the fund. On December 15, 2003, the fund issued R$100.0 million in aggregate amount of quotas, and on January 9, 2004, the fund issued another R$100.0 million in aggregate amount of quotas. These quotas will mature on December 15, 2006. The first series of quotas consists of 8,000 quotas, each with a unit value of R$25,000. The quotas begin amortizing on June 15, 2004, and the amortization payments will include an amount in respect of interest based on the rate of 113.5% of the CDI rate. At December 31, 2003, we held R$15.0 million of subordinated quotas. We purchased an additional R$15.0 million of subordinated quotas on January 9, 2004.
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Contractual Commitments and Capital Expenditures
Contractual Commitments
The following table summarizes significant contractual obligations and commitments at December 31, 2003 that have an impact on our liquidity:
| Payments Due by Period | ||||||||||||||||||||
| Less than | One to | Three to | More than | |||||||||||||||||
| One Year | Three Years | Five Years | Five Years | Total | ||||||||||||||||
| (In millions of reais) | ||||||||||||||||||||
|
Loans and financings
|
R$ | 2,726.5 | R$ | 1,546.1 | R$ | 2,069.2 | R$ | — | R$ | 6,341.8 | ||||||||||
|
Debentures
|
349.0 | 390.1 | 752.9 | — | 1,492.0 | |||||||||||||||
|
Purchase obligations(1)
|
3,757.0 | 5,634.6 | 4,951.1 | 1,304.0 | 15,646.7 | |||||||||||||||
|
Other long-term liabilities
|
— | 270.4 | 37.8 | — | 308.2 | |||||||||||||||
|
Total contractual obligations
|
6,832.5 | 7,841.2 | 7,811.0 | 1,304.0 | 23,788.7 | |||||||||||||||
|
Exclusion of proportional consolidation:
|
||||||||||||||||||||
|
Loans and financings
|
(217.5 | ) | (219.5 | ) | (53.5 | ) | — | (490.5 | ) | |||||||||||
|
Other long-term liabilities
|
— | (19.6 | ) | — | — | (19.6 | ) | |||||||||||||
|
Total contractual obligations, excluding the
effects of proportional consolidation
|
R$ | 6,615.0 | R$ | 7,602.1 | R$ | 7,757.5 | R$ | 1,304.0 | R$ | 23,278.6 | ||||||||||
| (1) | Consists of purchase commitments for raw material and electric power pursuant to binding obligations which include all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Based upon the applicable purchase prices at December 31, 2003. |
We are also subject to contingencies with respect to tax, labor, distributors, and other claims and has made provisions for accrued liability for legal proceedings related to certain tax claims of R$1,149.1 million at December 31, 2003. The tax contingencies relate primarily to the COFINS, PIS, IPI federal income tax and Social Contribution on Net Income. See “Business — Legal Proceedings” and notes 17, 18 and 21 to our consolidated and combined financial statements.
Capital Expenditures
Our capital expenditures on property, plant and equipment were R$214.7 million in 2003, R$419.9 million in 2002 and R$318.0 million in 2001. Additionally, our investments in interest in other companies were R$71.7 million in 2003, R$13.1 million (excluding cash acquired of R$4.1 million) in 2002 and R$1,172.3 million (excluding cash acquired of R$595.2 million) in 2001. Our principal capital expenditures projects during 2001 through 2003 were:
| • | the acquisition of Nova Camaçari in 2001; | |
| • | the expansion of our ethylene production capacity at the Northeastern Complex; | |
| • | the upgrade in the facilities of the Aratú port terminal and the related pipeline system; and | |
| • | other operating improvements made in our Vinyls, Polyolefins and Business Development Units to improve the operating reliability of our manufacturing facilities and to expand our production capacity. |
In response to the termination of Petrobras’ monopoly over naphtha supply in Brazil, in 2001, we invested in the adaptation of the maritime pier located at Aratú and the construction of pipelines, storage tanks and other facilities necessary to receive and transport imported naphtha to our basic petrochemicals plants. This project was undertaken between 2001 and 2003 at a total cost of R$83.5 million.
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In 2003, we completed the expansion of the ethylene production capacity of one of our pyrolysis plants. As a result of this expansion, this plant’s ethylene production capacity has reached 1,280,000 tons of annual nominal capacity. The total cost of this expansion was R$237.1 million. In connection with this expansion, we also (1) increased our steam production, which we intend to use to produce electric power, (2) installed new turbines, and (3) improved the technology and automation of our electric power production in the Northeastern Complex.
Our ability to compete in the Brazilian and foreign markets that we serve depends on our ability to integrate new production processes developed by our company and third parties in order to lower our costs and offer new thermoplastic products. In addition, our relationships with our customers are enhanced by our ability to develop new products and customize existing products to meet their needs. To meet these challenges, we maintain a research and development program that is primarily implemented at the Braskem Center for Innovation and Technology in the Southern Complex. We invested R$35.5 million, R$20.1 million and R$14.5 million in research and development during 2003, 2002 and 2001, respectively.
In 2003, we conducted studies to identify potential efficiency enhancements for our polyethylene plants and our polypropylene plants. We are investing approximately R$21 million in an efficiency enhancement project at one of our polypropylene plants in the Southern Complex that we believe will increase its annual production capacity by 100,000 tons. This project was commenced in 2003, and we anticipate completing this project in 2004. In addition, we plan to invest approximately R$84 million during 2004 and 2005 in an expansion project at our Alagoas PVC plant that we believe will increase its annual production capacity by 50,000 tons.
We currently are budgeting total capital expenditures of approximately R$400 million for 2004. Our principal capital expenditures for 2004 consist of, in addition to the projects referred to in the preceding paragraph, approximately R$100 million for health, environmental and quality improvement projects, approximately R$88 million for the replacement of depreciated equipment, approximately R$74 million for productivity improvements and approximately R$55 million for plant modernization and information systems.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks arising from our normal business activities. These market risks principally involve the possibility that changes in interest rates, exchange rates or commodity prices will adversely affect the value of our financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rates and prices. We enter into derivatives and other financial instruments for purposes other than trading, in order to manage and reduce the impact of fluctuations in foreign currency exchange rates and LIBOR. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial activities.
We developed a risk management policy as from December 31, 2001 to mitigate our exposure to exchange rate risks and risks of fluctuations of LIBOR with the objective of maintaining coverage of principal and interest settlements maturing within 12 months for, at a minimum:
| • | 60% of our total U.S. dollar-denominated indebtedness that is related to exports, or trade finance, excluding advances on currency contracts with a remaining maturity of up to six months and advances on export contracts; and | |
| • | 75% of the total in U.S. dollar-denominated indebtedness unrelated to exports, or non-trade finance. |
Compliance with this policy varies based upon applicable market conditions, credit availability and our cash balances.
To further mitigate our exposure to exchange rate risk, we try, when possible, to borrow for our working capital needs using trade finance loans, which are generally available at a lower cost than other working capital financing because these loans are linked to our U.S. dollar-denominated exports. However,
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On December 31, 2003, we had swap contracts for foreign currency and interest, with a total notional amount of US$157.5 million. These instruments are intended to reduce the impacts of any devaluation of the real against the U.S. dollar and any increase in international interest rates on U.S. dollar liabilities. In addition, we have U.S. dollar-denominated cash equivalents, marketable securities and time deposits, which may partially offset the effects of any devaluation of the real against the U.S. dollar on our ability to service our U.S. dollar-denominated debt to the extent of these U.S. dollar denominated cash equivalents, marketable securities and time deposits.
Our derivative instruments do not qualify for deferral, hedge, accrual or settlement accounting and are marked to market, with the resulting gains and losses reflected in the statement of operations as financial income and expenses, respectively. See note 22 to our consolidated and combined financial statements for a discussion of our accounting policies and information on derivative financial instruments.
Interest Rate Risk
Our variable interest rate exposure is primarily subject to the variations of (1) LIBOR for U.S. dollar-denominated borrowings, and (2) the Long-Term Interest Rate, the CDI rate for real-denominated borrowings. In addition, the principal amounts of certain of our real-denominated obligations are periodically restated by the IGP-M.
The improvement of economic conditions in Brazil during 2003 due to the positive perception of the new administration resulted in a substantial decrease of risk spreads both in public and private internationally traded securities. The second half of 2003 was marked by an increase of international capital availability to Brazil and the maintenance of inflation indicators under control. As a result, the Central Bank lowered short term interest rates, expressed by the SELIC rate from 26.5% per annum to 16.5% per annum at December 31, 2003. The SELIC rate averaged 23.6% per annum during 2003. In addition, there was a gradual decrease in other interest rates during 2003 with:
| • | the short-term domestic CDI rate ranging from 25.3% per annum at January 31, 2003 to 16.3% per annum at December 31, 2003, and averaging 23.2% per annum during 2003; | |
| • | the Long-Term Interest Rate at 11.0% per annum in January 2003, increasing in April through September 2003 to 12.0% per annum and then returning to 11.0% per annum through December 2003; and | |
| • | the IGP-M at 8.7% in 2003 compared to 25.3% in 2002. |
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The table below provides information about our significant interest-rate sensitive instruments:
| Interest Rate Sensitivity — Principal (Notional) Amount by Expected Maturity — | ||||||||||||||||||||||||||||||||||
| Average Interest Rate | ||||||||||||||||||||||||||||||||||
| At December 31, 2003 | ||||||||||||||||||||||||||||||||||
| Expected Maturity Date | ||||||||||||||||||||||||||||||||||
| Fair | ||||||||||||||||||||||||||||||||||
| 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Value | |||||||||||||||||||||||||||
| (in millions of reais) | ||||||||||||||||||||||||||||||||||
|
LIABILITIES:
|
||||||||||||||||||||||||||||||||||
|
Loans and financings (excluding debentures):
|
||||||||||||||||||||||||||||||||||
|
Fixed rate, denominated in U.S dollars
|
1,440.0 | 213.2 | 25.4 | 1,167.3 | 794.6 | — | 3,640.5 | 4,140.2 | ||||||||||||||||||||||||||
|
Average interest rate
|
8.7 | % | 8.8 | % | 5.8 | % | 10.0 | % | 12.5 | % | 9.9 | % | ||||||||||||||||||||||
|
Variable rate, denominated in U.S. dollars
|
523.6 | 434.0 | 197.9 | — | — | — | 1,155.5 | 1,881.9 | ||||||||||||||||||||||||||
|
Average interest rate (over LIBOR)
|
6.3 | % | 5.6 | % | 5.9 | % | 0.0 | % | 0.0 | % | 5.5 | % | ||||||||||||||||||||||
|
Fixed rate, denominated in Japanese yen
|
2.6 | 1.3 | 1.3 | 1.3 | 0.6 | — | 7.1 | 6.0 | ||||||||||||||||||||||||||
|
Average interest rate
|
6.8 | % | 6.9 | % | 6.9 | % | 6.9 | % | 6.9 | % | 6.9 | % | ||||||||||||||||||||||
|
Fixed rate, denominated in reais
|
85.5 | 0.1 | — | — | — | — | 85.6 | 67.9 | ||||||||||||||||||||||||||
|
Average interest rate
|
27.3 | % | 21.4 | % | 27.2 | % | ||||||||||||||||||||||||||||
|
Variable rate, denominated in reais
|
356.1 | 7.1 | — | — | — | — | 363.2 | 199.6 | ||||||||||||||||||||||||||
|
Average interest rate (of CDI)
|
121.6 | % | 130.0 | % | 121.4 | % | ||||||||||||||||||||||||||||
|
Variable rate, denominated in reais
|
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