UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
OR | ||
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended December 31, 2002 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-14894
BRASKEM S.A.
N/A
Federative Republic of Brazil
Av. das Nações Unidas, 4777
São Paulo, SP - CEP 05477-000 Brazil
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class | Name of Each Exchange in which Registered | |
|
|
|
Preferred Shares, Class A, no par value | New York Stock Exchange* | |
American Depositary Shares (ADSs), | ||
each representing 50 Preferred Shares, Class A | New York Stock Exchange |
* | Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the United States Securities and Exchange Commission. |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
The total number of issued shares of each class of stock of BRASKEM S.A.
as of December 31, 2002 was:
Common Shares, no par value per share
Preferred Shares, Class A, no par value per share
Preferred Shares, Class B, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark which financial statement item the Registrant has elected to follow Item 17 o Item 18 x .
TABLE OF CONTENTS
PART I
|
||||
ITEM 1. Identity of Directors, Senior Management and Adviser
|
1 | |||
ITEM 2. Offer Statistics and Expected Timetable
|
1 | |||
ITEM 3. Key Information
|
1 | |||
ITEM 4. Information on the Company
|
10 | |||
ITEM 5. Operating and Financial Review and Prospects
|
61 | |||
ITEM 6. Directors, Senior Management and Employees
|
99 | |||
ITEM 7. Major Shareholders and Related Party Transactions
|
106 | |||
ITEM 8. Financial Information
|
114 | |||
ITEM 9. The Offer and Listing
|
121 | |||
ITEM 10. Additional Information
|
125 | |||
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
|
144 | |||
ITEM 12. Description of Securities Other than Equity Securities
|
148 | |||
PART II
|
||||
ITEM 13. Defaults, Dividend Arrearages and Delinquencies
|
149 | |||
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
|
149 | |||
ITEM 15. Controls and Procedures
|
149 | |||
ITEM 16A.Audit Committee Financial Expert
|
150 | |||
ITEM 16B.Code of Ethics
|
150 | |||
PART III
|
||||
ITEM 17. Financial Statements
|
151 | |||
ITEM 18. Financial Statements
|
151 | |||
ITEM 19. Exhibits
|
151 |
GLOSSARY OF CERTAIN PETROCHEMICAL TERMS
Acrylonitrile is an intermediate chemical product used in the production of acrylic fibers, nitrylic rubber, ABS and SAN resins and acrylic paint.
Aromatics is a major group of organic chemical compounds, which are hydrocarbons containing one or more benzene rings, typified by benzene, derived chiefly from petroleum and coal tar, and used to make a broad range of downstream chemical products.
Basic petrochemicals are the petrochemicals produced by crackers or first generation producers, such as ethylene, propylene, butadiene, benzene, toluene, xylene and other chemicals.
Benzene is an aromatic used to make phenol, chlorobenzene, styrene and other chemicals.
Butadiene is a basic organic chemical used to make polybutadiene, styrene-butadiene and neoprene rubbers, chlorobenzene and other chemicals.
Capacity means the annual output capacity of a given facility or, where appropriate, the annual throughput capacity, calculated by estimating the number of days in a year that such facility is expected to operate, deducting downtime for regular maintenance, and multiplying that number by an amount equal to the facilitys optimal daily output or throughput, as the case may be.
Caprolactam or CPL is an intermediate chemical product used in the production of nylon 6.
Crackers are Brazils three first generation producers that transform or crack naphtha and gas oil into basic petrochemicals, such as ethylene and propylene.
Debottlenecking is the making of technical and operational improvements in order to maximize the output and performance of a facility within the existing limits of such facility.
DMT means dimethyl terephthalate and is an intermediate chemical product used in the production of fibers or polyester resins.
EDC is an intermediate chemical product used in the production of PVC.
Ethylene is a basic organic chemical, mainly derived from thermal cracking of feedstocks such as ethane, naphtha and gas oil, and is used to make polyethylene and many other organic chemical intermediates, such as ethylene dichloride, VCM, ethylene oxide and styrene.
Feedstocks are the major raw materials of a petrochemical plant.
First generation producer is a petrochemical cracker.
First generation petrochemicals are Basic Petrochemicals. See definition of Basic Petrochemicals above.
Gasoil or Gas oil is an intermediate distillate product used as diesel fuel, heating fuel and, sometimes, as feedstock.
HDPE means high density polyethylene.
Isoprene is a hydrocarbon compound with two unsaturated bounds and is mainly used as a starting material for the manufacture of SIS.
LDPE means low density polyethylene.
(ii)
LLDPE means linear low density polyethylene.
LPG means liquified petroleum gas.
MTBE means methyl tertiary butyl ether and is an additive used to improve gasoline performance.
Naphtha is a by-product of crude oil refining which is used by the crackers as a feedstock.
Olefin is a hydrocarbon such as ethylene or propylene, without benzene rings and with a double bond connection between two carbon atoms.
Ortho-xylene is a feedstock used in the production of fibers and polyester resins.
Oxidation is a chemical reaction in which a substance is combined with oxygen.
Para-xylene is a feedstock used in the production of fibers and polyester resins.
Polybutadiene is a polymer derived from the polymerization of butadiene and is used to make synthetic rubber.
Polyethylene is a polymer derived from polymerization of ethylene and is used to make various plastics, including film and sheet, piping and containers.
Polymer is a chemical compound or mixture of compounds formed by polymerization and consisting essentially of repeating structural units (monomers).
Polymerization is a chemical reaction in which two or more molecules combine to form larger molecules that contain repeating structural units (monomers).
Polypropylene (PP) is a polymer derived from the polymerization of propylene and is used to make various plastics such as film and sheet, piping and containers.
Polystyrene or (PS) is a thermoplastic resin used mainly to produce disposable containers.
Propylene is a basic organic chemical, mainly derived from thermal cracking of naphtha or from catalytic cracking of crude oil in refineries, used to make polypropylene and many organic chemical intermediaries such as propylene oxide, cumene and alcohols.
PVC means polyvinylchloride, a polymer derived from the polymerization of VCM, and used to make various plastics for use in film, sheet, piping, containers and other products.
Resin is a synthetic polymer such as polyethylene, polypropylene or PVC made from a chemical reaction. The synthetic resin is the polymer itself, while the plastic is the polymer plus additives such as colorants or plasticizer.
Second generation producer is a producer of intermediate petrochemical products.
Second generation petrochemicals are the intermediate products generated by the second generation producers, such as resins and fibers.
Third generation producer is a producer that transforms resins and other intermediate products into end products.
Toluene is a liquid aromatic hydrocarbon.
VCM means vinylchloride monomer.
(iii)
INTRODUCTION
All references herein (1) to Braskem or the Company are references to Braskem S.A. and its consolidated subsidiaries, except where the context indicates that such references are solely to Braskem S.A. and (2) to the Brazilian Government are references to the federal government of the Federative Republic of Brazil.
References to real , reais or R$ are to Brazilian reais (plural) and to the Brazilian real (singular), the official currency of Brazil; and references to U.S. dollars, dollars or U.S.$ are to United States dollars.
Unless otherwise specified, metric units have been used, e.g. , tons refer to metric tons.
Some of the figures included in this annual report have been rounded.
The Company has prepared its consolidated financial statements as of December 31, 2002 and 2001 and for the three years ended December 31, 2002 included herein (the Consolidated Financial Statements) in conformity with generally accepted accounting principles in the United States (U.S. GAAP).
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements. Some of the matters discussed concerning the Companys business operations and financial performance include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (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 the Company believes that these forward-looking statements are based upon reasonable assumptions, including projections of net sales, operating margins, earnings, cash flows, research and development costs, working capital, capital expenditures and other projections, these statements are subject to several risks and uncertainties and are made in light of information currently available to the Company. Accordingly, the Company cannot assure holders of its American Depository Shares (ADSs) that these statements will be achieved.
The Companys forward-looking statements will also be influenced by factors such as:
| general economic, political and business conditions in its markets, both in Brazil and abroad, including the level of spending; | ||
| interest rate fluctuations, inflation and devaluation of the real in relation to the U.S. dollar; | ||
| the outcome of pending litigation; | ||
| competition; | ||
| its ability to obtain financing; | ||
| approval by Brazilian antitrust authorities of the corporate restructuring involving the Company; and | ||
| other factors discussed under Item 3. Key InformationRisk Factors. |
Holders of ADSs are cautioned that the Companys 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.
(iv)
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 and may be better or worse than projected. Because of these uncertainties, holders of ADSs should not place any reliance on these forward-looking statements. These forward-looking statements also represent the Companys estimates and assumptions only as of the date that they were made. The Company expressly disclaims a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this annual report to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.
The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. Holders of ADSs are advised, however, to consult any additional disclosures the Company makes in its Form 6-K reports to the SEC. Holders of ADSs should also note that the Company provides cautionary discussions of risk and uncertainties under the caption Risk Factors in Item 3 of this Annual Report. These are factors that the Company believes could cause its actual results to differ materially from expected results. Additional factors besides those listed in Item 3 could adversely affect the Company.
(v)
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISER
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Selected Financial Data
The following table presents selected financial information for the
Company at the dates and for each of the years indicated. The selected
financial information set forth below has been derived from financial
statements of the Company prepared in accordance with U.S. GAAP. The selected
financial data as of December 31, 2002 and 2001 and for each of the three years
ended December 31, 2002 have been derived from, and should be read in
conjunction with, the Consolidated Financial Statements included in this Annual
Report. The selected financial data as of December 31, 2000, 1999 and 1998 and
for each of the two years in the period ended December 31, 1999 have been
derived from audited financial statements of the Company that are not included
elsewhere in this Annual Report. This information should be read in
conjunction with Item 5. Operating and Financial Review and Prospects and is
qualified in its entirety by reference to the Consolidated Financial Statements
and the notes thereto appearing elsewhere herein.
As at and for the year ended December 31,
2002
2001
2000
1999
1998
(in millions of U.S. dollars, except
per thousand shares and per ADS amounts)
U.S.$
2,391.1
U.S.$
1,771.9
U.S.$
1,555.1
U.S.$
1,011.5
U.S.$
1,039.0
(1,901.0
)
(1,447.2
)
(1,252.4
)
(719.0
)
(804.1
)
490.1
324.7
302.7
292.5
234.9
522.2
244.1
225.7
236.3
174.3
167.9
80.4
94.9
102.2
87.4
(1,159.8
)
(294.6
)
(134.0
)
(220.2
)
(173.0
)
(57.3
)
(26.3
)
(2.5
)
(9.7
)
(0.1
)
(527.1
)
3.6
184.1
108.7
88.6
(25.5
)
13.9
(0.3
)
(1.3
)
(0.8
)
5.0
0.5
(2.6
)
(3.1
)
15.6
22.5
(6.1
)
6.9
0.6
(1.5
)
65.0
(63.8
)
0.0
(1.0
)
(0.7
)
(460.0
)
(52.0
)
188.1
103.9
101.1
1.8
14.9
(0.2
)
1
As at and for the year ended December 31,
2002
2001
2000
1999
1998
(in millions of U.S. dollars, except
per thousand shares and per ADS amounts)
U.S.$
(460.0
)
U.S.$
(50.2
)
U.S.$
188.1
U.S.$
118.8
U.S.$
100.9
119.2
75.7
64.0
0.3
0.4
(460.0
)
(50.2
)
68.6
43.1
36.5
106.10
66.57
56.42
21.12
22.53
33.34
(0.38
)
(0.06
)
106.10
66.57
56.42
5.31
3.33
2.82
U.S.$
35.5
U.S.$
109.2
U.S.$
18.5
U.S.$
70.9
U.S.$
42.0
1,183.7
1,758.6
989.9
1,072.8
1,615.7
2,935.0
3,703.2
1,915.4
1,998.2
2,584.5
413.0
578.8
177.8
170.8
225.2
1,058.7
1,216.0
439.9
521.1
635.6
(362.4
)
195.4
1,171.7
1,160.8
1,555.3
U.S.$
429.6
U.S.$
124.4
U.S.$
166.6
U.S.$
225.5
U.S.$
227.0
(217.2
)
(118.5
)
(65.9
)
(137.8
)
(39.6
)
(191.1
)
91.2
(149.8
)
(55.1
)
(220.6
)
(115.5
)
(146.3
)
(58.4
)
(24
)
(66
)
(1) | Income from discontinued operations includes equity in discontinued operations and result from sale of assets. | |
(2) | Earnings per ADS have been calculated on the basis that each ADS represents 50 preferred class A shares. Earnings per ADS is calculated by reference to the income available to preferred class A shares and the weighted average number of preferred class A shares outstanding during each period. |
Exchange Rates
There are two principal legal foreign exchange markets in Brazil:
| the commercial rate exchange market; and | ||
| the floating rate exchange market. |
On January 25, 1999, the Brazilian government announced the unification of the operational limits applicable to both markets. However, each market continues to have a specific regulation. Most trade and financial foreign-exchange transactions are carried out on the commercial rate exchange market. Foreign currencies may only be purchased through a Brazilian bank authorized to operate in these markets. In both markets, rates are freely negotiated but may be strongly influenced by the intervention of the Central Bank of Brazil (the Central Bank).
From March 1995 through January 1999, the real gradually devalued against the U.S. dollar. In January 1999, the Central Bank abolished the band system and 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 interbank market and has fluctuated considerably. From December 31, 1998 through April 30, 2003, the U.S. dollar appreciated by approximately 139.1% against the real . The Central Bank has only intervened occasionally to control unstable movements in the foreign exchange rate. The Company cannot predict, however, whether the Central Bank will continue to let the real float freely, or if in the future, the real will remain at its present level or devalue further.
2
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.
Year
High
Low
Average
Period End
3.955
2.271
2.998
3.533
2.800
1.935
2.353
2.320
1.985
1.723
1.835
1.956
2.165
1.208
1.851
1.789
2.209
1.117
1.164
1.209
Source:
Central Bank
Month
High
Low
3.798
3.428
3.662
3.276
3.658
3.483
3.564
3.353
3.336
2.890
3.028
2.865
Source:
Central Bank
As of June 23, 2003, the U.S. dollar- real exchange rate was R$2.879 per U.S.$1.00.
Risk Factors
Risks Relating to Brazil
The Brazilian government exercises influence over the Brazilian economy, and Brazilian and economic conditions have a direct effect on the Company and its financial performance
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 Brazils economy. The Brazilian governments actions to control inflation and effect other policies have at times involved wage and price controls, as well as other interventionist measures, such as blocking access to bank accounts, imposing capital controls and limiting imports into Brazil. The Company has no control over, and cannot predict, what measures or policies the Brazilian government may take in the future. The Companys operations and financial condition may be adversely affected by factors, including, without limitation:
| fluctuations in exchange rates; | ||
| interest rates; | ||
| inflation; | ||
| exchange control policies; | ||
| tax policies; |
3
| GDP growth; | ||
| 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 Labor Party took office as President of Brazil on January 1, 2003. While President da Silvas government has adopted economic measures that are more conservative than expected by some observers, there is no certainty that these policies will continue or that President da Silva will continue to pursue economic stabilization and liberalization policies. The Company cannot predict what future fiscal, monetary, social security and other policies will be adopted by Mr. da Silvas administration and whether these policies will result in adverse consequences to the economy and to the Companys business, results of operations or financial condition.
The Brazilian governments actions to combat inflation may contribute significantly to economic uncertainty in Brazil and may adversely affect the market price of the Preferred Shares and ADSs
Historically, Brazil experienced high rates of inflation. Inflation itself, as well as government efforts to combat inflation, had significant negative effects on the Brazilian economy. Inflation, actions to combat inflation and public speculation about possible future actions also contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
Inflation rates, as measured by the Índice Geral de Preços Disponibilidade Interna (the General Price Index Internal Availability, or IGP-DI) were approximately 1.7%, 20.0%, 9.8%, 10.4% and 26.4% in 1998, 1999, 2000, 2001 and 2002, respectively.
Brazil may again experience high levels of inflation in the future. Increasing prices for petroleum, the devaluation of the real and future governmental actions, including further actions taken to attempt to maintain the value of the real , may trigger increases in inflation. Periods of higher inflation may have a material adverse effect on the Brazilian economy, the Brazilian financial markets and the market price of the Companys preferred shares (the Preferred Shares) and the ADSs. High inflation may also have a material adverse effect on the Companys business, financial condition and operations, especially if that inflation dampens demand for the Companys products.
A devaluation of the real could adversely affect the Brazilian economy and the Companys ability to service its foreign currency-denominated debt and could lead to a decline in the market price of the Preferred Shares and ADSs
The exchange rate between the real and the U.S. dollar and the relative rates of real devaluation and inflation have affected the Companys financial results and may continue to do so in the future.
The Brazilian currency has been devalued frequently during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and used 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 8.5% in 2000, 15.7% in 2001 and 34.3% in 2002.
Devaluation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary government policies to curb aggregate demand. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the countrys current account and the balance of payments, as well as dampen export-driven growth.
4
Although the Company manages a portion of its exchange rate risk through foreign currency derivative instruments, a significant devaluation of the real in relation to the U.S. dollar or other currencies could adversely affect the Companys ability to pay the its foreign currency-denominated obligations, and to pay financial expenses on that debt, particularly as the Companys revenues are based primarily in reais . The Company had total foreign currency denominated obligations in an aggregate amount equal to approximately U.S.$1.41 billion at March 31, 2003.
Brazilian government exchange control policies could adversely affect the Companys ability to service its foreign currency-denominated debt
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 a more restrictive exchange control policy, including, without limitation, the extent of Brazils foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazils debt service burden relative to the economy as a whole, Brazils policy towards the International Monetary Fund, or IMF, and political constraints to which Brazil may be subject. A more restrictive policy could affect the ability of Brazilian debtors (including the Company) to make payments outside of Brazil to meet foreign currency obligations under foreign currency-denominated liabilities.
Events in other emerging markets and the Brazilian governments monetary policies may adversely affect the availability of credit
External events have from time to time resulted in considerable outflows of funds and declines in the aggregate amount of foreign investment in Brazil. Such events include the Asian economic crisis of 1997, the Russian currency crisis of 1998, the currency instability that Brazil encountered in 1999, the ongoing economic crisis in Argentina and the market uncertainty before the election of President da Silva. To defend the value of the real during such events and to control inflation, the Brazilian government has maintained a tight monetary policy with associated high interest rates and has constrained the growth of credit and the economy. These disruptions in the Brazilian economy could adversely affect the ability of the Companys customers to make timely payments to the Company and could adversely affect its ability to obtain credit in Brazil and maintain its liquidity.
Risks Relating to The Company
The Companys indebtedness will require that a significant portion of its cash flow be used to pay the principal and interest with respect to that indebtedness
As a result of the corporate reorganization that led to the formation of the Company, the Company had approximately U.S.$2.1 billion of total indebtedness as at December 31, 2002. The Company had consolidated negative working capital of U.S.$594.7 million at December 31, 2002, principally as a result of its outstanding short-term indebtedness and the current portion of its long-term debt. Part of the Companys debt strategy over the next several years involves the Companys use of a substantial portion of its consolidated cash flow (including from synergies resulting from the mergers that formed part of the Companys consolidation and possibly from the sale of certain non-core assets) to pay principal and interest with respect to this indebtedness. The Company is also attempting to extend the average maturity of its outstanding indebtedness, including by repaying short-term debt through longer-term borrowings and issuing longer-term debt securities. Any failure by the Company to refinance indebtedness coming due during the next 12-18 months that it does not repay using cash flow generated from its operations and from the sale of non-core assets would adversely affect the Company and its financial condition.
The level of its indebtedness could have important consequences to holders of ADSs, including the following:
| the Companys ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes could be limited; |
5
| a substantial portion of the Companys cash flow from operations, if any, must be dedicated to the payment of principal and interest on the Companys indebtedness and may not be available for other purposes; | ||
| the Companys level of indebtedness could limit its flexibility in planning for, or reacting to changes in, its business; and | ||
| the Companys level of indebtedness could make the Company more vulnerable in the event of a downturn in its business. |
The cyclical nature of the petrochemical industry may adversely affect the Companys results of operations
The Brazilian petrochemical industry, including the markets in which the Company competes, 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 the Companys financial performance. In particular:
| downturns in general business and economic activity may cause demand for the Companys products to fall; | ||
| when demand falls, the Company may be under competitive pressure to lower its prices; and | ||
| if the Company decides to expand its plants or construct new plants, it may do so based on an estimate of future demand that materializes at levels lower than the Company 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 capacity additions, which have resulted in oversupply and declining prices and profit margins. The Brazilian petrochemical industry is becoming more integrated with the global petrochemical industry for a number of reasons, including increased demand for, and consumption of, these products in Brazil and the ongoing integration of regional and world markets for commodity products. In addition, the Companys prices in Brazil are related to price trends in the global markets.
The Company faces competition from producers of polyethylene, polypropylene, vinyls and other petrochemical products
The Company faces competition from other producers of petrochemicals in Brazil and abroad, and prices for many of the Companys products are determined with reference to international market prices for these products. The Company anticipates that it may experience increasingly intense competition from international producers, both in Brazil and in selected foreign markets in which the Company plans to attempt to increase sales of its polyolefins products. For example, Dow Chemical (Dow Chemical) recently built a linear low density polyethylene facility in Bahía Blanca, Argentina, which became operational in 2001 with an annual capacity of 210,000 tons. In addition, Rio Polímeros, a Brazilian petrochemical company is constructing a petrochemical plant in Duque de Caxias, Rio de Janeiro, with an announced projected annual capacity of 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of linear low density polyethylene and high density polyethylene, which will increase Brazilian annual production capacity of polyethylene by approximately 35%. In the vinyls market, the Companys primary competitor is Solvay Indupa do Brasil S.A. (Solvay), with an installed annual PVC production capacity of 250,000 tons and production facilities closer to the primary PVC market in Brazil than the Companys production facilities. In the domestic PET market, the company competes with importers and Rhodia ster S.A., (Rhodia) which has an installed PET and fiber-related annual production capacity of 290,000 tons, more than four times larger than the Companys annual PET capacity.
The Company also competes with producers of imported petrochemical products. Many of the Companys foreign competitors are larger and have greater financial, manufacturing, technological and marketing resources than the Company.
6
Future adjustments in tariffs on imports that compete with its products could cause the Company to lower its prices
One of the factors that the Company takes into consideration when setting the prices for its products is the tariff rates imposed by the Brazilian government on imports of similar products and the products of the Companys customers. The Brazilian government has from time to time 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 force the Company to lower its prices and could have a material adverse effect on the Companys results of operations.
The Company may face conflicts of interest in transactions with certain related parties
The Company maintains trade accounts receivable and current and long-term payables with some of its affiliates, including COPESUL Companhia Petroquímica do Sul (Copesul) in the petrochemical complex located in Triunfo in the State of Rio Grande do Sul (the Southern Complex) (which supplies the Company with ethylene and propylene), Petróleo Brasileiro S.A. PETROBRAS (Petrobras) (which supplies the Company with naphtha) and Politeno Indústria e Comércio S.A. (Politeno)(which purchases ethylene from the Company). Through Petrobras Química S.A. (Petroquisa), Petrobras, a petroleum company controlled by the Brazilian government, is the indirect holder of 8.1% of the Companys common shares and 11.3% of its total capital stock. These accounts receivable and accounts payable balances result mainly from purchases and sales of goods and services, which are at prices and on terms equivalent to the average terms and prices of transactions that the Company enters into with third parties. Commercial and financial transactions between the Company and these affiliates could result in conflicting interests.
Some of the Companys shareholders may have the ability to influence the outcome of corporate actions or decisions, which could affect the holders of ADSs
The Odebrecht Group directly holds approximately 44.6% of the Companys voting common stock, and its designees currently constitute a majority of the members of the Companys Board of Directors (the Odebrecht Group). In addition, some of the Companys other shareholders, consisting of Petroquisa and two Brazilian pension funds, have veto and other rights under shareholders agreements as described under Item 7. Major ShareholdersShareholders Agreements. As a result, the Odebrecht Group and these other shareholders may have the ability to influence the outcome of some major corporate actions or decisions requiring the approval of the Companys shareholders or its Board of Directors, which could affect the holders of the ADSs.
The Company may be adversely affected by high naphtha costs
Naphtha is the principal raw material of the Companys Basic Petrochemical Unit. In 2002, naphtha accounted, directly and indirectly, for approximately 66% of the Companys consolidated cost of sales and represented approximately 90% of the total variable costs of the Basic Petrochemicals Unit. The price of naphtha supplied by Petrobras is linked to Amsterdam-Rotterdam-Antwerp (ARA) quotations of naphtha and to the U.S. dollar- real exchange rate.
During 2002, the price of naphtha increased by approximately 56%, from U.S.$168 per ton in January 2002 to U.S.$263 per ton on December 31, 2002, and reached a record high of U.S.$268.9 per ton in November 2002, due primarily to the threat of war between the United States and Iraq. Combined with the appreciation of the U.S. dollar against the real during 2002 of approximately 52%, the price of naphtha in reais increased by approximately 106% during 2002. Although the average monthly price of naphtha decreased by 25.3% during the first three months of 2003, from U.S.$294.9 in January 2003 to U.S.$269.6 in March 2003, and the U.S. dollar depreciated against the real between January 1, 2003 and May 31, 2003, the price of naphtha may increase significantly or the real may devalue significantly in the future. Although the majority of the Companys revenues are in reais , the Company does not currently hedge its exposure to changes in the price of naphtha, in part because a portion of its sales in 2002 were exports payable in foreign currencies and the prices of its polyethylene, polypropylene and PVC generally reflect changes in the international market prices of these 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 and the time that the Company can effectively pass on such increased cost in reais to its customers in Brazil. Accordingly, if the real depreciates precipitously against the U.S. dollar in the future, the Company may not immediately be able to pass on all of the corresponding increases in its naphtha costs to its customers in Brazil, which could materially adversely affect its results of operations and financial condition.
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One company supplies Braskem with a significant amount of its naphtha needs
Currently, Petrobras is the only Brazilian supplier of naphtha and supplies the majority of the naphtha consumed by producers of basic petrochemicals in Brazil, including the Company. Petrobras produces some of the naphtha it sells to the Company and imports the balance. Significant damage to Petrobrass refining operations or to the port facilities through which Petrobras imports naphtha, which refining operations and port facilities are located in several different parts of Brazil, or to any of the pipelines connecting the Company to Petrobrass facilities, whether as a consequence of an accident, natural disaster, fire or otherwise, could adversely affect the Companys operations.
The Company manufactures products that are subject to the risk of fire explosions and other hazards
The Companys operations are subject to the usual hazards, such as fires, explosions and other accidents, associated with the manufacture of petrochemicals and the storage and transportation of feedstocks and products. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage and may result in suspension of operations. Although the Company maintains 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.
The Companys business is subject to stringent environmental regulations and additional or more restrictive regulations could adversely affect the Company
Brazilian petrochemical producers, including the Company, are subject to stringent 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 also sometimes subject to unfavorable market perceptions of the environmental impact of their business, which can have an adverse effect on their results of operations. In view of the possibility of unanticipated regulatory or other developments, particularly as environmental laws become more stringent in Brazil and worldwide, the amount and timing of future expenditures required to maintain compliance could vary substantially from their current levels and could adversely affect the availability of funds to the Company for other capital expenditures and other purposes. See Item 4. Information on the Company Environmental Matters.
The Company may be adversely affected by any future adverse decision of the Brazilian antitrust authorities concerning its recent corporate restructuring
As part of its corporate restructuring process that began in 2001, the Company acquired the operations of OPP Química S.A. (OPP Química), Trikem S.A. (Trikem), Proppet S.A. (Proppet), Polialden Petroquímica S.A. (Polialden) and Nitrocarbono S.A. (Nitrocarbono). In accordance with Brazilian Law, the Company submitted the terms and conditions of the transactions consummated in the July 25, 2001 auction of petrochemical assets to the Brazilian antitrust authorities on September 18, 2001. These authorities will determine whether these transactions negatively impact competitive conditions in the relevant markets in which the Company competes or whether they would negatively affect consumers. The Company supplemented its submission to the Brazilian antitrust authorities in order to update these authorities concerning the additional steps that the Company took in its corporate restructuring process after September 2001. Brazilian antitrust law does not prevent parties from closing a transaction on a provisional basis until the Brazilian antitrust authorities render a final decision. However, if approved, the effectiveness of the merger is retroactive to the date on which the transaction closed. Although two of three Brazilian antitrust authorities issued non-binding opinions in July 2002 and May 2003, respectively, recommending true unconditional approval of these corporate restructuring transactions, the third and governing antitrust authority is still reviewing this matter and may not agree with these opinions and may not approve these transactions unconditionally. Any action by the Brazilian antitrust authorities to impose conditions or performance commitments on the Company could materially adversely affect its business, results of operations, financial condition and prospects. See Item 4. Information on the Company Antitrust Matters.
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The Company may be adversely affected by the unfavorable outcome of pending litigation
The Company is involved in a substantial number of tax, civil and labor disputes. In addition, the Company has challenged the application of Brazilian federal income (social contribution) taxes to its operations and federal excise taxes to purchases of ethylene and propylene by its Polyolefins Unit and its Vinyls Unit. Based on the opinion of the Companys Brazilian counsel, the Company has not made any provision in its consolidated financial statements for these unpaid taxes or in respect of a civil lawsuit filed against the Company by some of its class B preferred shareholders. The Company may not prevail in these proceedings, or it may have to pay significant amounts, including penalties and interest, to the Brazilian government in the future as payment for the Companys liabilities, which could adversely impact its business, results of operations, financial condition and prospects.
Risk Factors Relating to the Preferred Shares and ADSs
The Preferred Shares and ADSs generally do not have voting rights
In accordance with Law No. 6,404/76 and Law No. 10,303/2001 (together, the Brazilian Corporate Law) and the Companys bylaws, holders of the preferred shares and consequently the ADSs are not entitled to vote at meetings of the Companys shareholders, except in very limited circumstances. This means, among other restrictions, that preferred shareholders are not entitled to vote to approve corporate transactions, including mergers or consolidations of the Company with other companies. See Item 10. Additional Information Description of the Companys Bylaws Voting Rights Voting Rights of the Preferred Shares.
Exchange controls and restrictions on remittances abroad may adversely affect holders of ADSs
The Brazilian custodian for the Preferred Shares must obtain a certificate of registration from the Central Bank of Brazil to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds related thereto. If a holder of ADSs decides to exchange its ADSs for the underlying Preferred Shares, such holder will be entitled to continue to rely, for five business days from the date of exchange, on the depositarys certificate of registration. Thereafter, such holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of the Preferred Shares, or distributions relating to the Preferred Shares, unless such holder obtains its own certificate of registration with the Central Bank or qualifies under Resolution No. 2,689/00 of the Conselho Monetário Nacional (the National Monetary Council or CMN), which entitles qualified foreign investors to buy and sell securities on the Brazilian stock exchanges without obtaining a separate certificate of registration.
The relative volatility and liquidity of the Brazilian Securities Markets may adversely affect holders of ADSs
Investing in securities, such as the Preferred Shares or ADSs, involving emerging market risk, including risks relating to Brazil, involves a higher degree of risk than investments in securities of issuers from more developed countries, and such investments are generally considered speculative in nature. Investments involving risks relating to Brazil, such as the Preferred Shares and the ADSs, are subject to certain economic and political risks, including, without limitation, changes in the regulatory, tax, economic and political environment that may affect the ability of investors to receive payment, in whole or in part, in respect of their investments and restrictions on foreign investment and on repatriation of capital invested.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. These factors may substantially limit the ability of holders of ADSs to sell the Preferred Shares underlying their ADSs at a price and at a time at which holders of ADSs wish to do so. The Bolsa de Valores de São Paulo (the São Paulo Stock Exchange, or BOVESPA), which is the principal Brazilian stock exchange, had a market capitalization of approximately U.S.$124.0 billion as of December 31, 2002 and an average daily trading volume of approximately U.S.$190.7 million for 2002. In comparison, the New York Stock Exchange had a market capitalization of U.S.$13.4 trillion as of December 31, 2002 and an average daily trading volume of approximately U.S.$40.9 billion for 2002.
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There is also significantly greater concentration in the Brazilian securities markets. The 10 largest companies in terms of market capitalization represented approximately 46% of the aggregate market capitalization of the BOVESPA as of December 31, 2002. The 10 most widely traded stocks in terms of trading volume accounted for approximately 55.4% of all shares traded on the BOVESPA in 2002. See Item 9. The Offer and Listing Trading on the Brazilian Stock Exchanges.
The Companys corporate affairs are governed by the Companys bylaws and the Brazilian Corporate Law, which differ in certain respects from the legal principles that would apply if the Company were incorporated in a jurisdiction in the United States, such as Delaware or New York, or in certain other jurisdictions outside Brazil. In addition, rights of holders of ADSs or of the Preferred Shares under the Brazilian Corporate Law to protect their interests relative to actions taken by the Companys Board of Directors or common shareholders may be fewer and less well-defined than under the laws of those of other jurisdictions outside Brazil.
Holders of ADSs may not be able to exercise the preemptive rights relating to the Preferred Shares underlying their 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. The Company is not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and the Company cannot assure holders of ADSs that the Company will file any such registration statement. Unless the Company files a registration statement or an exemption from registration applies, holders of ADSs may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, such rights may lapse.
Developments in other emerging markets may adversely affect the market price of the Preferred Shares and ADSs
The market price of the Preferred Shares and 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. The economic recession in Argentina, Brazils largest trading partner in Latin America, continues to adversely affect Brazil. An escalation of the ongoing economic turmoil in Argentina, as well as adverse economic developments in other emerging markets ( i.e. , the Asian economic crisis of 1997 and the 1998 Russian debt moratorium and devaluation of the Russian currency), may adversely affect investor confidence in securities issued by Brazilian companies, causing their market price and liquidity to suffer and, more directly, may affect the Companys financial condition, its ability to raise capital when needed and the market price of the Preferred Shares and the ADSs.
ITEM 4. INFORMATION ON THE COMPANY
History and Development of the Company
Braskem S.A. is a sociedade anônima (corporation) organized under the laws of Brazil for the purpose of manufacturing, trading, importing and exporting chemical and petrochemical products and fuels, as well as producing and supplying steam, water, compressed air and electric power to companies operating in the Camaçari Petrochemical Complex in Bahia, Brazil (the Northeastern Complex), and the rendering of services to those companies. Braskem is the new corporate name of Copene Petroquímica do Nordeste S.A. (Copene). The current organizational structure of the Company is the result of a significant corporate restructurings undertaken in Brazil, integrating six major Brazilian petrochemical companies: Copene; OPP Química; Trikem; Proppet; Nitrocarbono and Polialden.
Copene was founded in 1972 as Petroquímica do Nordeste Copene Ltda. for the purpose of planning, executing and coordinating the activities of the Northeastern Complex. The construction of the Northeastern Complex formed part of a Brazilian federal government development policy implemented in the early 1970s to diversify the geographical distribution of industrial assets to promote economic growth across different regions in Brazil. At that time, the only petrochemical complex in Brazil was located in the State of São Paulo. On June 18, 1974, Copene was duly incorporated as a sociedade anônima (corporation) under the laws of Brazil and renamed Copene
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Petroquímica do Nordeste S.A. Since 1978, when Copene commenced operations, the Company has grown to become the largest basic petrochemicals company in Brazil and Latin America.
Acquisition of Control by Norquisa
Prior to August 1995, Petroquisa, the petrochemical affiliate of Petrobras, owned 36.2% of the total capital of Copene, representing 48.2% of the voting capital of Copene. Petrobras historically provided all of the Companys requirements of naphtha, its principal raw material. In August 1995, as part of the Brazilian governments privatization program, Petroquisa sold 14.8% of the total capital of Copene, representing 32.8% of its voting capital, through an auction. Nordeste Química S.A. - Norquisa (Norquisa), a company owned by petrochemical producers located in the Northeastern Complex, acquired a portion of the shares sold in the auction, and the remainder was acquired by various Brazilian pension funds. Each of the shareholders of Norquisa purchased basic petrochemical products and utilities from Copene under long-term contracts. At the time of this auction, the shareholders of Norquisa were:
| Participações Petroquímicas do Nordeste Ltda. (Petronor), which held 23.7% of the voting stock of Norquisa. Petronor was a wholly owned subsidiary of Polialden, which was controlled by Conepar - Companhia Nordeste de Participações (Conepar). | ||
| Pronor Petroquímica S.A. (Pronor), which held 16.0% of the voting stock of Norquisa. Pronor is a wholly owned subsidiary of Petroquímica da Bahia S.A. (PQBA), a member of a group of companies controlled by the Mariani family (the Mariani Group). | ||
| Trikem, which held 16.0% of the voting stock of Norquisa. Trikem was controlled at that time by Odebrecht S.A. (ODB), the holding company of the Odebrecht Group. | ||
| Politeno, which held 12.5% of the voting stock of Norquisa. The principal shareholders of Politeno at that time were Conepar, PSQ Investimentos e Participações Ltda. (Suzano), Sumitomo Chemical Company Limited (Sumitomo Chemical) and Itochu Corporation (Itochu). | ||
| EDN - Estireno do Nordeste S.A. (EDN), which held 12.5% of the voting stock of Norquisa. EDN is controlled by Dow Chemical. | ||
| Oxiteno do Nordeste S.A. (Oxiteno), which held 10.4% of the voting stock of Norquisa. Oxiteno is controlled by Ultrapar Participações S.A. | ||
| Polipropileno S.A. (Polipropileno), which held 8.9% of the voting stock of Norquisa. Polipropileno is controlled by Suzano. |
Following this auction, 58.4% of Copenes voting capital was owned by Norquisa, 1.7% was owned by Odebrecht Química S.A., a member of the Odebrecht Group (Odequi), 15.4% was owned by Petroquisa, 5.8% was owned by Previ Caixa de Previdência dos Funcionários do Banco do Brasil, the pension fund of Banco do Brasil (Previ), 5.7% was owned by Fundação Petrobras de Seguridade Social Petros, the pension fund of Petrobras (Petros), and the remainder was owned by various other Brazilian pension funds and by several private investors.
The Econômico S.A. Empreendimentos Auction
In 1995, Banco Econômico S.A., a Brazilian financial institution (Banco Econômico), collapsed and the Central Bank intervened. At the time of Banco Econômicos collapse, Banco Econômico owned 56.3% of the capital stock, representing 63.8% of the voting stock, of Conepar. The other shareholders of Conepar were:
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| Intercapital Comércio e Participações Ltda. (Intercapital), a company controlled by the Odebrecht Group and the Mariani Group, which held 31.9% of the capital stock, representing 36.2% of the voting stock, of Conepar; and | ||
| BNDES Participações S.A. BNDESPAR (BNDESPAR, the holding company of the Brazilian National Bank for Economic and Social Development or BNDES), which owned 11.8% of the capital stock of Conepar. |
Conepar, in turn, owned:
| less than 1.0% of the voting stock of Norquisa; | ||
| 35.0% of the voting stock, representing 31.0% of the capital stock, of Politeno, a producer of thermoplastic resins; and | ||
| 66.7% of the voting stock, representing 42.6% of the capital stock, of Polialden, a producer of thermoplastic resins. |
As part of an effort to restructure and reconsolidate the petrochemical sector in Brazil, the Central Bank, as liquidator of Banco Econômico, conducted an auction (the Auction) on July 25, 2001 to sell Econômico S.A. Empreendimentos (ESAE), a company formed to hold the capital stock of Conepar that was owned by Banco Econômico. In the Auction, Nova Camaçari Participações S.A. (Nova Camaçari), an entity formed by the Odebrecht Group with the specific purpose of participating in the Auction, acquired ESAE.
Under the terms of the Auction, Nova Camaçari was obligated to comply with the shareholders agreement of Conepar and the tag-along rights of Banco Econômico, ESAE, Odequi, Trikem, PQBA, Nitrocarbono, Pronor, Companhia Brasileira de Poliuretanos, Conepar and Intercapital. Members of the Odebrecht Group and of the Mariani Group exercised their tag-along rights with respect to their shares of Intercapital, and BNDESPAR exercised its tag-along rights with respect to its shares of Conepar. As a result, Nova Camaçari acquired all of the capital stock of Intercapital and was obligated to purchase the capital stock of Conepar owned by BNDESPAR. Following these acquisitions, Nova Camaçari owned, directly and indirectly, 100% of Conepars voting capital stock.
In addition, members of the Odebrecht Group and the Mariani Group exercised their tag-along rights with respect to their shares of Proppet, a company that was wholly owned by members of the Odebrecht Group and the Mariani Group. As a result, Nova Camaçari acquired all of the capital stock of Proppet.
In connection with the Auction, members of the Odebrecht Group acquired the capital stock of Norquisa held by Petronor for R$241.9 million and the capital stock of Norquisa held by Trikem. As a result, the Odebrecht Group owned 39.7% of the voting capital of Norquisa and, together with the Mariani Group, held a combined 55.8% of the voting stock of Norquisa. On July 27, 2001, Odequi and PQBA entered into a shareholders agreement with respect to their direct and indirect equity interests in and control of Norquisa and the Company. In addition, on July 3, 2001 and July 20, 2001, Odequi and PQBA entered into memoranda of understanding with respect to the terms of shareholders agreements with Petroquisa, Petros and Previ. See Item 7. Major Shareholders and Related Party Transactions Shareholders Agreements.
On the same day as the Auction, Copene acquired Nova Camaçari (the Nova Camaçari Acquisition). The main objective of the Nova Camaçari Acquisition was to restructure several Brazilian petrochemical companies to create a company with integrated operations, allowing greater operational and fiscal efficiency than was enjoyed by Copene alone. As part of the corporate restructuring process in September 2001:
| Nova Camaçari closed the acquisition of the non-voting capital stock of Conepar owned by BNDESPAR; | ||
| Nova Camaçari merged with and into Copene; |
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| Intercapital merged with and into Copene; and | ||
| Proppet merged with and into Copene. |
The structure of the Company immediately following these transactions is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity.
|
||
(1) | Copene did not control the operating and financial policies of Norcell S.A. (Norcell) because of certain covenants contained in a shareholders agreement dated April 20, 1989 between Copene and Riocell S.A. (Riocell). |
The Related Party Mergers
As part of the Companys strategy to create a company with integrated operations, on August 16, 2002:
| Copene merged with OPP Produtos Petroquímicos S.A. (OPP Produtos), the holding company of the Odebrecht Groups chemical and petrochemical assets (the OPP Produtos Merger), and exchanged a portion of its shares in an aggregate amount of U.S.$20.0 million for OPP Produtoss stock based on a net asset valuation of OPP Produtos (excluding OPP Produtoss interest in OPP Química and Trikem); and | ||
| Copene merged with 52114 Participações S.A. (52114 Participações), the holding company of the Mariani Groups chemical and petrochemical assets (the 52114 Merger and, together with the OPP Produtos Merger, the Related Party Mergers), and exchanged a portion of its shares in an aggregate amount of U.S.$20.9 million for 52114 Participaçõess stock based on a net asset valuation of 52114 Participações. |
Upon the completion of the Related Party Mergers, the corporate name of Copene was changed to Braskem S.A.
The principal assets of OPP Produtos were:
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| 100% of the voting stock, representing 81.2% of the capital stock, of OPP Química, a company engaged in the production of polyethylene and polypropylene. | ||
| 29.5% of the capital stock and voting stock of Copesul, a company that produces basic petrochemicals for the Southern Complex. |
OPP Produtos owned 64.4% of the voting stock, representing 36.3% of the capital stock, of Trikem, the only vertically integrated manufacturer of PVC in Brazil.
The Company issued shares representing 43.7% of its capital stock and voting stock to ODB as consideration for the capital stock of OPP Produtos.
The principal asset of 52114 Participações was 92.3% of the capital stock of Nitrocarbono, a public company engaged in the manufacture of caprolactam, which is used in the production of textile thread (Nylon-6) and ammonium sulfate, which is used as a fertilizer. The Company issued shares representing 3.6% of its capital stock and voting stock to Pronor as consideration for the capital stock of 52114 Participações.
The structure of the Company as of December 31, 2002 is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity.
(footnotes on following page)
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(1) | Represents 73.1% of the voting and total capital stock of Tegal Terminal de Gases, Ltda. (Tegal) owned by Braskem, 6.4% of the voting and total capital stock of Tegal owned by Trikem and 2.4% of the voting and total capital stock of Tegal owned by OPP Química. | |
(2) | Represents 17.7% of the voting and total capital stock of Cetrel S.A. Empresa de Proteção Ambiental (Cetrel) owned by Braskem, 14.5% of the voting and total capital stock of Cetrel owned by Trikem, 2.7% of the voting and total capital stock of Cetrel owned by Nitrocarbono, 0.7% of the voting and total capital stock of Cetrel owned by OPP Química, and 0.4% of the voting and total capital stock of Cetrel owned by Polialden. | |
(3) | Braskem has no control over the operating and financial policies of Norcell as a result of covenants contained in a shareholders agreement dated April 20, 1989 between Copene and Riocell. | |
(4) | Represents 20.7% of the voting and total capital stock of Copesul owned by Braskem, 3.0% of the voting and total capital stock of Copesul owned by OPP Química, and 5.8% of the voting and total capital stock of Copesul owned by OPE Investimentos S.A. (OPE Investimentos). OPP Química owns 89.4% of the capital stock, representing 92.1% of the voting stock, of OPE Investimentos. | |
(5) | The name of Conepar was changed to Copene Participações S.A. (Copene Participações) in April 2002. | |
(6) | Represents 5.3% of the capital stock Trikem owned by Braskem, and 64.4% of the voting capital stock, representing 36.3% of the total capital stock, of Trikem owned by OPP Química. The capital stock of Trikem owned by Braskem is non-voting. |
Recent Developments
Since December 31, 2002, the Company has completed the following transactions:
| In February 2003, as required by the Brazilian Corporate Law as a result of the merger of 52114 Participações into the Company, the Company conducted an exchange offer for the remainder of the voting capital of Nitrocarbono. On February 13, 2003, the Company purchased the tendered shares, and the Company at such time owned approximately 100% of the voting capital stock representing 93.8% of the total capital stock of Nitrocarbono. The Company exchanged 1,612,169 of its class A preferred stock for 2,257,935 common shares of Nitrocarbono. | ||
| On March 31, 2003, the Company merged with OPP Química, ESAE and Nitrocarbono. Before these mergers, OPP Química and ESAE were wholly owned subsidiaries of the Company. Before the Companys merger with OPP Química, Odequi distributed the shares of OPP Química to Braskem. In connection with its merger with Nitrocarbono, the Company issued 67,698 shares of its class A preferred stock to the former shareholders of Nitrocarbono. |
The Companys structure today is set forth below. The percentages above or to the left of the connecting lines represent the percentage of voting stock owned by the parent of each entity and the percentages below or to the right of the connecting lines represent the percentage of the total capital stock owned by the parent of each entity. All of these companies are organized under Brazilian law.
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(1) | Represents 84.4% of the voting and total capital stock of Tegal owned by the Braskem and 6.4% of the voting and total capital stock of Tegal owned by Trikem. | |
(2) | Represents 21.1% of the voting and total capital stock of Cetrel owned by Braskem, 14.5% of the voting and total capital stock of Cetrel owned by Trikem, and 0.5% of the voting and total capital stock of Cetrel owned by Polialden. | |
(3) | Braskem has no control over the operating and financial policies of Norcell as a result of covenants contained in a shareholders agreement dated April 20, 1989 between Copene and Riocell. | |
(4) | Represents 23.7% of the voting and total capital stock of Copesul owned by Braskem and 5.8% of the voting and total capital stock of Copesul owned by OPE Investimentos. Odequi owns 89.4% of the capital stock, representing 92.1% of the voting stock, of OPE Investimentos. |
Controlling Shareholder
The Odebrecht Group is a group of companies that was formed by the Odebrecht family in the Northeastern state of Bahia beginning in 1945. As of December 31, 2002, the Odebrecht Group was one of the 10 largest Brazilian private-sector conglomerates in terms of revenue. The main sectors in which the Odebrecht Group participates are:
| heavy construction and engineering through Construtora Norberto Odebrecht S.A.; | ||
| chemicals and petrochemicals through the Company; and | ||
| infrastructure and public services through Odebrecht Serviços de Infraestrutura S.A. |
Registered and Principal Executive Officers of the Company
The Companys registered office is at Rua Eteno 1561, Camaçari, Bahia 42810-000 and its telephone number at this address is 55-71-632-5200. The Companys principal executive office is at Av. Nações Unidas, 4777, CEP 05477-000 São Paulo, SP, Brazil, and its telephone number at this address is 55-11-3443-9999.
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Material Subsidiaries and Equity Investees
As of December 31, 2002, the Companys significant subsidiaries were Trikem, OPP Química, Polialden and Nitrocarbono. In addition, the Companys equity investments in Copesul and Politeno have a significant impact on the Companys Consolidated Financial Statements. Set forth below is a summary of the Companys equity investments in, and the operations of, these companies.
Trikem
Trikem is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned directly and indirectly 64.4% of the voting capital stock, and 41.5% of the total capital stock, of Trikem.
The Companys Vinyls Unit is comprised of the operations of Trikem. Trikem is the only vertically integrated producer of PVC in Brazil. Its production is integrated through the production of chlorine and other raw materials. Trikem also manufactures and sells caustic soda, EDC and chlorine. Trikems activities are conducted at five industrial plants, two located in the Northeastern Complex, one in São Paulo, and one in Maceió and Marechal Deodoro, Alagoas. For details of these operations, see Overview of Braskems OperationsThe Vinyls Unit.
The Company, through OPP Química, which merged with and into the Company on March 31, 2003, ODB and BNDESPAR have entered into a shareholders agreement in respect of their shares of Trikem. Under the shareholders agreement, the Company and ODB have agreed to vote their shares to elect one member of Trikems board of directors designated by BNDESPAR. To ensure that BNDESPAR always designates at least one member of Trikems board of directors, the Company and ODB agreed to maintain voting control over Trikem (through agreement or otherwise). If, however, the Company and ODB collectively are unable to elect a majority of the board of directors plus one member designated by BNDESPAR, the Company and ODB agree to take all steps in order to appoint a non-voting member of Trikems board of directors to represent BNDESPAR. Under the shareholders agreement, the Company and ODB also granted tag-along rights to BNDESPAR in the event that they sell their voting control of Trikem to a third party. BNDESPAR also may require the Company and ODB to purchase its Trikem shares if they do not comply with the terms of the shareholders agreement and do not cure any such non-compliance within a specified period. The shareholders agreement expires on August 24, 2011, or on any earlier date that BNDESPAR ceases to hold more than 10.0% of the Trikems capital stock, or more than 5.0% of the capital stock of any successor company.
OPP Química
OPP Química was a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company indirectly owned 100% of the capital stock of OPP Química. OPP Química was merged into the Company on March 31, 2003.
Prior to its merger into the Company, the activities of OPP Química included fabricating, processing, enhancing, manufacturing, mixing, importing, exporting, purchasing, distributing and selling plastic resins, as well as raw materials, derivates and related products, and providing technical and administrative consulting services relating to these activities. OPP Química also acted as a holding company for its subsidiaries and its equity investments in associated companies.
Prior to its merger into the Company on March 31, 2003, OPP Química operated four plants, three located at the Southern Complex and one located in the Northeastern Complex. For details of these operations, see Overview of the Companys OperationsThe Polyolefins Unit.
Polialden
Polialden is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company indirectly owned 66.6% of the voting capital stock and 42.6% of the total capital stock, of Polialden.
17
Polialden is engaged in manufacturing, processing, selling, importing and exporting high density polyethylene (ultra high molecular weight polyethylene) and other chemical and petrochemical products. Polialden operates an industrial unit in the Northeastern Complex. For details of these operations, see Overview of the Companys OperationsThe Polyolefins Unit.
The Companys subsidiary, Conepar has entered into a shareholders agreement with Mitsubishi Chemical Industries Limited (Mitsubishi) (representing itself and Nissho Iwai Corporation (Nissho Iwai)) with respect to its shares of Polialden. Mitsubishi owns 16.6% of the voting stock, representing 6.8% of the capital stock, of Polialden. Under this shareholders agreement, each of Conepar and Mitsubishi has agreed with Mitsubishi not to cause Polialden to take certain actions unless the other party agrees, including amending Polialdens bylaws, dissolving or liquidating Polialden, merging Polialden with another company, redeeming shares of its stock or debt obligations, selling its fixed assets, encumbering its property and engaging in transactions with certain related parties, in some cases subject to exceptions. The shareholders agreement provides that Conepar will agree with Mitsubishi with respect to the nomination of Polialdens board of directors, executive officers and fiscal council. However, as Conepar owns the majority of the voting stock, if it is unable to agree with Mitsubishi, Conepar has the right to appoint the directors and executive officers.
Nitrocarbono
Nitrocarbono was a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned 92.2% of the capital stock, representing 95.4% of the voting capital stock, of Nitrocarbono. Nitrocarbono was merged into the Company on March 31, 2003.
Prior to its merger into the Company, Nitrocarbono was engaged in the manufacture, processing, trade, import, export and other activities related to the production and sale of caprolactam, which is used in the production of textile thread (Nylon-6) and ammonium sulfate, which is used as a fertilizer, as well as by-products of caprolactam. Nitrocarbono also acted as a holding company for its equity investments in associated companies.
Nitrocarbono operated one industrial unit in the Northeastern Complex. For details of these operations, see Overview of the Companys OperationsThe Business Development Unit.
Copesul
Copesul is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned, directly and indirectly, 29.5% of the voting and total capital stock of Copesul.
Copesul is engaged in the manufacture, trade, import and export of basic petrochemical products and the production and supply of utilities, such as steam, water, compressed air and electrical energy, and the supply of those utilities to the companies in the Southern Complex, and the provision of services to companies in the Southern Complex. The Company currently purchases ethylene and propylene, the principal raw materials used by the Companys plants in the Southern Complex, from Copesul.
The Company has entered into a shareholders agreement with Ipiranga Petroquímica S.A. (Ipiranga) with respect to the Companys shares of Copesul. Ipiranga owns 29.4% of the voting and total capital stock of Copesul. Through this shareholders agreement, the Company and Ipiranga jointly control Copesul. The Company has a right of first refusal in respect of sales by Ipiranga of any of its shares in Copesul. The Company has agreed to consult with Ipiranga prior to any meeting of the board of directors or shareholders of Copesul and to vote its shares together with Ipiranga with respect to certain matters, including policies relating to the allocation of the excess amounts of raw materials, policies relating to the distribution of profits, the election of members of the board of directors, changes to Copesuls bylaws, approval of indebtedness in excess of certain limits, sales of assets in excess of certain limits, investments in excess of certain limits and any merger of Copesul with another company. The Company has also agreed that neither it nor Ipiranga will vote to approve any of the above matters unless the Company and Ipiranga vote at least three-quarters of the shares held by them and such action at a meeting of the parties to the shareholders agreement, or if no quorum is obtained at such meeting, of three-quarters of the shares present at a second meeting.
18
The shareholders agreement provides that the Company will vote with Ipiranga in a manner designed to ensure that both the Company and Ipiranga are able to elect the maximum possible directors of Copesul. This shareholders agreement is effective until August 2022. The parties to this shareholders agreement have agreed not to enter into shareholders agreements with any other shareholders of Copesul.
Politeno
Politeno is a sociedade anônima (corporation) organized under the laws of Brazil. At December 31, 2002, the Company owned 35.0% of the voting capital stock, representing 34.7% of the total capital stock of Politeno.
Politeno is engaged in the manufacture, processing, direct or indirect trade, consignment, export, import and transportation of polyethylene, principally LDPE, LLDPE and HDPE, and certain byproducts, principally ethylene vinyl acetate. Politeno also acts as a holding company for its subsidiaries and its equity investments in associated companies. Politeno currently purchases ethylene, its principal raw material, from the Company.
The Company (through Conepar) has entered into a shareholders agreement with Suzano, Sumitomo Chemical and Itochu with respect to its shares of Politeno. Suzano owns 35.0% of the voting stock, representing 34.7% of the total capital stock of Politeno, Sumitomo Chemical owns 20.0% of the voting stock, representing 16.8% of the total capital stock of Politeno, and Itochu owns 10.0% of the voting stock, representing 8.4% of the total capital stock of Politeno. The Company has the right to elect two of the seven members of the board of directors of Politeno and, together with Suzano, the right to elect a third member of the board of directors, which right is exercised alternatively by the Company and Suzano ( e.g ., Suzano elects a member of the board of directors for one term and then the company elects a member of the board of directors for the succeeding term). The Company also has the right to elect one of Politenos six executive officers.
The Company has agreed in the Politeno shareholders agreement that it will attempt to reach unanimous decisions with respect to certain actions to be taken by the board of directors or shareholders of Politeno, including changes to Politenos bylaws, subject to certain exceptions, dissolution or liquidation of Politeno, the merger of Politeno with another company, transactions with affiliates of Politeno in excess of specified amounts or in excess of specified durations, encumbering of assets of Politeno in excess of specified amounts and entering into contracts or indebtedness in excess of certain specified amounts.
The Company also has interests in other companies in respect of which it has entered into shareholders agreements, including Petroflex Indústria e Comércio S.A. (Petroflex), Norcell, Borealis-OPP S.A. (Borealis-OPP) and Copene Monômeros S.A. (Copene Monômeros).
Principal Capital Expenditures
The Companys capital expenditures were U.S.$115.5 million in 2002, U.S.$146.3 million in 2001 and U.S.$58.4 million in 2000. The Companys principal capital expenditure projects during 2000 through 2002 were:
| the expansion of the Companys ethylene production capacity at the Northeastern Complex; | ||
| the upgrade in the facilities of the Aratu port terminal and the related pipeline system; and | ||
| other operating improvements made in the Companys Vinyls, Polyolefins and Business Development Units. |
The Company is currently completing the expansion of the ethylene production capacity of its pyrolysis plant that is part of the Olefins Unit 1. Upon completion of this expansion by the end of 2003, this plants ethylene production capacity will reach 1,280,000 tons of annual nominal capacity. The total cost of this expansion is estimated at U.S.$67.5 million, of which U.S.$61.0 million was incurred in 2002.
19
In response to the termination of Petrobrass monopoly over naphtha supply in Brazil, in 2001, the Company invested in the adaptation of the existing maritime pier located at Aratu and the construction of pipelines, storage tanks and other facilities necessary to receive and transport imported naphtha to its basic petrochemicals plants. The total cost of this project was approximately U.S.$37 million.
Each of the Companys business units undertakes a regular program of maintenance shutdowns. The pyrolysis plant that is part of the Olefins Unit 1 was shutdown for 92 days in 2002, which shutdown took place for the performance of regular maintenance and expansion of the plants ethylene production capacity, which expansion project is expected to be completed by the end of 2003. The pyrolysis plant that is part of Olefins Unit 2 is scheduled to be shutdown for maintenance in November 2003. The Company coordinates the maintenance cycles of its polyolefins plants in the Northeastern Complex with those of its basic petrochemicals plants and of its polyolefins plants in the Southern Complex with those of Copesul. The Companys PVC, caustic soda, PET and caprolactam plants are shut down for maintenance every two years.
On December 19, 2000, OPP Petroquímica S.A. (OPP Petroquímica, a predecessor of OPP Química) sold 80% of its ownership and voting interest in OPP Polímeros Avançados S.A. (OPP Polímeros) to Borealis A/S, a European group, for cash. OPP Polímeros then changed its name to Borealis-OPP. The Company, through OPP Petroquímica, has agreed to continue to supply polypropylene resins to Borealis-OPP for a period of at least 10 years on market terms. Borealis-OPP produces specialized compounds in two production facilities for use in manufacturing applications in the automotive, appliance and injection-molded furniture industries.
Petrochemical Industry Overview
The petrochemical industry transforms crude oil by-products or natural gas into widely used consumer and industrial goods. The Brazilian petrochemical industry is generally organized into first, second and third generation producers based on the stage of transformation of various raw materials, or feedstocks.
First Generation Producers
Brazils first generation producers, which are referred to as crackers, break down or crack naphtha, their principal feedstock, into basic petrochemicals. The crackers purchase their naphtha, which is a by-product of the oil refining process, primarily from Petrobras, as well as other refineries located outside of Brazil. The basic petrochemicals produced by the crackers include (1) olefins, primarily ethylene, propylene and butadiene and (2) aromatics, such as benzene, toluene and xylenes. The Company, Copesul, and Petroquímica União (PQU), operate Brazils three crackers and sell these basic petrochemicals to second generation producers. The basic petrochemicals, which are in the form of either gases or liquids, are transported to the second generation producers plants, generally located near the crackers, through pipelines for further processing.
Second Generation Producers
Second generation producers process the basic petrochemicals purchased from the crackers to produce thermoplastic resins and intermediate petrochemicals. These products include (1) polyethylene, polystyrene and PVC (each produced from ethylene), (2) polypropylene and acrylonitrile (each produced from propylene), (3) caprolactam (produced from benzene) and (4) polybutadiene (produced from butadiene). There are approximately 48 second generation producers operating in Brazil. The intermediate petrochemicals are produced in solid form as plastic pellets or powders and are transported by truck to third generation producers, which generally are not located near the second generation producers. The Company is the only integrated first and second generation petrochemical company in Brazil.
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Third Generation Producers
Third generation producers, known as transformers, purchase the intermediate petrochemicals from second generation producers and transform them into final products. These final products include plastics (produced from polyethylene, polypropylene and PVC), acrylic fibers (produced from acrylonitrile), nylon (produced from caprolactam), elastomers (produced from butadiene) and disposable containers (produced from polystyrene). Third generation producers produce a variety of consumer and industrial goods, including containers and packaging materials, such as bags, film and bottles, textiles, detergents, paints, automobile parts, toys and consumer electronic goods. There are over 6,000 third generation producers operating in Brazil.
Petrochemical Complexes
The production of first and second generation petrochemicals in Brazil centers around three major complexes. These are the Northeastern Complex located in Camaçari in the State of Bahia, the São Paulo complex located in Capuava in the State of São Paulo (the São Paulo Complex), and the Southern Complex. Each complex has a single first generation producer, also known as the raw materials center operated by the Company, PQU and Copesul, respectively, and several second generation producers that purchase feedstock from the raw materials center.
The Northeastern Complex began operations in 1978. The Northeastern Complex consists of 28 second generation producers situated around the Company, as the raw materials center for this Complex. As of December 31, 2002, the Company had an annual ethylene production capacity of 1,200,000 tons and in 2002 accounted for approximately 42% of Brazils installed ethylene production capacity.
The São Paulo Complex began operations in 1968 and is the oldest petrochemical complex in Brazil. PQU, the operator of its raw materials center, supplies first generation petrochemicals to 11 second generation producers, including the Company. As of December 31, 2002, PQU had an annual ethylene production capacity of 500,000 tons.
The Southern Complex began operations in 1982. Copesul, the operator of this Complexs raw materials center, supplies first generation petrochemicals to six second generation producers, including the Company. As of December 31, 2002, Copesul had an annual ethylene production capacity of 1,135,000 tons.
A fourth petrochemical complex is being constructed in the State of Rio de Janeiro. Rio Polímeros, a Brazilian petrochemical company, will serve as the cracker for the new complex and is constructing a petrochemical plant in Duque de Caxias, Rio de Janeiro, with an annual capacity to produce 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of linear low density polyethylene and high density polyethylene. This plant will use natural gas as a feedstock and has announced that it expects to commence operations in June 2004.
Role of the Brazilian Government
The current structure of the petrochemical industry reflects the Brazilian governments plan, developed during the 1970s, to establish a domestic petrochemical industry to serve Brazilian markets. First and second generation producers, such as Braskem, are located within close proximity of each other to allow the common use of facilities, such as utilities, and to facilitate feedstock delivery. Prior to their respective privatization, production capacity expansions at the crackers and the second generation producers were coordinated to ensure that the supply of petrochemicals met demand. During this period, the infrastructure that developed around or near the complexes further fostered the interdependence of first and second generation producers, as limited facilities were constructed to facilitate the transportation and storage of feedstocks for import or export.
The Brazilian government developed the Brazilian petrochemical industry by promoting the formation of tripartite joint ventures among the Brazilian government, foreign petrochemical companies and private Brazilian investors. Petrobrass majority-owned subsidiary, Petroquisa, participated in each joint venture as the representative of the Brazilian Government; a foreign petrochemical company provided technology and a Brazilian private sector company provided management.
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In 1992, the Brazilian government began a privatization program to reduce significantly its interests in, and influence over, the petrochemical industry, particularly with respect to first and second generation producers. This program was designed to increase private investment in the petrochemical industry and to spur its consolidation and rationalization. As a result of privatization auctions, the Brazilian Governments ownership of the voting stock of Braskem, Copesul and PQU was significantly reduced, and the private ownership of the second generation producers, through the private groups that participate in the voting stock of the crackers, increased. These privatizations also fostered the development of the Company and the vertical integration of its operations.
The following table sets forth the percentage of the indirect interests
held in the crackers voting stock before the privatization of each of them and
as at December 31, 2002.
Before privatization
As at December 31, 2002
Date of
Private
Private
privatization
Government
Groups
Others(1)
Government
Groups
Others (1)
May 15, 1992
67.2
2.1
30.7
15.6
52.9
31.5
Jan. 24, 1994
67.8
31.9
0.3
17.5
62.3
20.2
Aug. 15, 1995
48.2
50.4
1.4
8.1
79.0
12.9
(1) | Pension funds, banks and employees. | |
(2) | The decrease in government ownership of the Companys capital stock also reflects the merger of Copene (which was partially state-owned) with OPP, Nitrocarbono and Proppet (which were majority-owned by private groups). |
Role of Petrobras
Until recently, Brazils Constitution granted the Brazilian government a monopoly, exercised through Petrobras, over the research, exploration, production, refining, importing, and transporting of crude oil and refined petroleum products (excluding petrochemical products) in Brazil. The Brazilian Constitution also provided that by-products of the refining process, such as naphtha, could only be supplied in Brazil by or through Petrobras. Naphtha is the feedstock used in Brazil for the production of basic petrochemicals such as ethylene and propylene. Since 1995, the Brazilian government has taken several measures to deregulate the petrochemical industry in Brazil. With the creation of the Agência Nacional de Petróleo (the National Petroleum Agency, or ANP), in 1997, new rules and regulations have been implemented, aimed at gradually liberalizing Petrobrass monopoly. Since 2000, several first generation producers, including Braskem, have imported naphtha from trading companies and oil and gas producers abroad.
Petrobras produced and sold approximately 80% of the naphtha consumed in Brazil in 2002. Braskem and Copesul collectively imported the remaining 20% of naphtha consumed in Brazil in 2002.
Tariffs
The Company sets prices for ethylene, its principal first generation petrochemical product, using a margin sharing system. Prices paid for imported first generation products are based on international market prices, taking into account transportation and tariff costs. The prices charged by first generation producers are based on similar factors. Tariff rates imposed by the Brazilian Government on petrochemical imports have varied over time. See Overview of the Companys OperationsThe Basic Petrochemicals UnitSales and Marketing of Basic Petrochemical Products. The price of ethylene by-products, such as butadiene, is set by reference to several market factors, including the prices paid by second generation producers for imported products.
Second generation producers, including the Company, generally set prices for their products by reference to several market factors, including the prices paid by third generation producers for imported products. Prices paid for such imports are based in part on transportation and tariff costs. Consequently, the prices charged by the second generation producers are affected by tariff rates imposed by the Brazilian government on petrochemical imports. In the past, the Brazilian government has frequently used import and export tariffs to effect economic policies, with the consequence that tariffs generally, and those imposed on petrochemical products in particular, have varied significantly. In November 1997, for example, the import tariffs for polyethylene, polypropylene and PVC were increased from 14% to 17%, but were subsequently reduced to 15.5% on January 1, 2002. On January 1, 2002, the import tariff for caustic soda was reduced from 10.5% to 9.5%. As of December 31, 2002, the import tariffs for basic petrochemical products ranged between 3.5% and 5.5% (except for caustic soda) and the import tariffs for second generation petrochemical products ranged between 3.5% and 15.5%. Imports and exports within the Mercosul countries have not been subject to tariffs since December 2001.
22
The following table shows the fluctuation of the tariffs on basic
petrochemicals and second generation petrochemicals after 1993. The tariff
rates shown are those applicable at the end of the respective years.
2002
(1)
2001
(2)
2000
1999
1998
1997
(3)
1996
1995
1994
1993
(%)
3.5
4.5
5
5
5
5
2
2
0
0
3.5
4.5
5
5
5
5
2
2
0
0
3.5
4.5
5
5
5
5
2
2
0
0
5.5
6.5
7
7
7
7
4
4
0
0
5.5
6.5
7
7
7
7
4
4
0
0
5.5
6.5
7
7
7
7
4
4
0
0
5.5
6.5
7
7
7
7
4
4
0
0
9.5
10.5
11
11
11
11
8
1
0
(5)
5
15.5
16.5
17
17
17
17
14
14
14
(6)
15
11.5
12.5
13
13
13
13
10
10
10
(7)
15
13.5
14.5
15
15
15
15
12
12
14
(8)
15
(12)
3.5
4.5
5
5
5
5
2
2
0
0
3.5
4.5
5
5
5
5
2
2
0
0
15.5
16.5
17
17
17
17
14
2
2
(9)
15
15.5
16.5
17
17
17
17
14
2
2
(9)
15
15.5
16.5
17
17
17
17
14
2
2
(9)
15
15.5
16.5
17
17
17
17
14
2
2
(9)
15
15.5
16.5
17
17
17
17
14
2
2
(9)
15
15.5
16.5
17
17
17
17
14
2
2
(9)
15
11.5
12.5
13
13
13
13
10
10
2
(10)
10
13.5
14.5
15
15
15
15
12
8
(4)
2
(11)
15
13.5
14.5
15
15
15
15
12
8
(4)
2
(11)
15
13.5
14.5
15
15
15
15
12
8
(4)
2
(11)
15
(1) | In 2002, the official tariff was 1.5% less than the rate stated above. An additional surcharge of 1.5% was assessed, which is included in the rate shown. | |
(2) | In 2001, the official tariff was 2.5% less than the rate stated above. An additional surcharge of 2.5% was assessed, which included in the rate shown. | |
(3) | An additional tariff of 3% was assessed commencing on November 13, 1997, which included in the rate shown. | |
(4) | 4% until April 27, 1995; 8% after that date. | |
(5) | 5% applied until March 1, 1994; 8% applied from March 1, 1994 through October 1, 1994; 0% from October 4, 1994. | |
(6) | 15% applied until September 22, 1994; 14% after that date. | |
(7) | 15% applied until September 22, 1994; 10% after that date. | |
(8) | 15% applied until September 25, 1994; 14% after that date. | |
(9) | 15% applied until September 25, 1994; 14% after that date; 2% from November 24, 1994. | |
(10) | 10% applied until November 11, 1994; 2% after that date. | |
(11) | 15% applied until September 22, 1994; 14% after that date; 2% from November 24, 1994. | |
(12) | 20% applied until July 1, 1993; 15% after that date. |
Source: ABIQUIM Associação Brasileira da Indústria Química (the Brazilian Chemical Industry Association, or ABIQUIM).
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Operating Environment
The Brazilian markets in which the Company competes are cyclical that are sensitive to relative changes in supply and demand, which in turn, are affected by general economic conditions in Brazil and other countries in the Mercosul free trade area, particularly Argentina. The Brazilian markets are also affected by the cyclical nature of international markets because prices in Brazil are determined in part by reference to world petrochemical prices and prices paid by importers of petrochemicals products. Reductions in tariffs and other trade barriers have increasingly exposed the Brazilian petrochemical industry to the cyclicality of the international markets.
Traditionally, the second and third quarters have been the periods of the year with the highest sales for the petrochemical industry in the Brazilian market. The increase during this six-month period is tied in part to production of consumer goods to be sold during the end of the year holiday season.
With the growth of Brazilian GDP of approximately 1.5% in 2002 compared to 1.4% in 2001, the domestic demand in the three principal petrochemical markets thermoplastics, elastomers and synthetic fibers increased by approximately 2.6% compared to 2001. During 2002, imports of thermoplastics registered moderate growth of 1.7%. Although imports represent a small percentage of overall Brazilian petrochemical consumption, polyolefins and PVC imports grew by 11.0% and 9.8%, respectively, during 2002, while imports of PET and polystyrene decreased by 18.9% and 35.2%, respectively. The increase in polyolefins and PVC imports was in part linked to the economic crisis in Argentina, where producers of these products attempted to sell their excess capacity to Brazil in light of depressed demand for polyolefins and PVC in Argentina. PET and polystyrene imports decreased in line with cyclical patterns in those markets.
The Company anticipates that demand for its products in Brazil will continue to grow due to increasing consumption of plastic-based products, population growth, improvements in per capita income and general economic growth in Brazil. In addition, despite the high growth rates for domestic consumption, Brazilian per capita consumption of second generation petrochemicals has been modest compared to per capita consumption in other countries, which the Company believes suggests a potential for future growth in Brazil.
The following table sets forth information relating to the Companys
production, the estimated production of other Brazilian companies and exports
of olefins and aromatics for the years indicated.
Production
Estimated
of Other
Total
Total
Company
Brazilian
Domestic
Production
Production
Companies
Imports
Exports
Consumption
(in thousands of tons)
3,847.8
1,591.8
2,256.0
N.A.
(5)
N.A
N.A.
4,077.8
1,705.4
2,372.4
29.1
108.6
3,998.2
4,309.2
1,790.3
2,519.0
2.4
93.0
4,218.6
1,541.2
666.6
874.6
N.A
N.A.
N.A.
1,282.9
698.1
584.8
110.5
283.3
1,110.1
1,349.3
712.6
636.7
78.7
372.1
1,055.9
2,623.0
1,064.7
1,558.3
335.6
492.0
2,466.6
2,557.1
1,031.0
1,526.1
302.3
487.8
2,371.6
2,719.3
1,160.7
1,558.6
256.9
605.3
2,370.9
24
Production
Estimated
of Other
Total
Total
Company
Brazilian
Domestic
Production
Production
Companies
Imports
Exports
Consumption
(in thousands of tons)
602.4
401.8
200.6
141.8
55.5
688.8
538.1
363.4
174.7
129.2
46.7
620.5
648.2
448.8
199.4
117.8
34.9
731.1
332.0
59.0
273.0
147.2
55.8
423.5
329.0
56.5
272.5
181.6
28.3
482.4
333.7
55.2
278.4
133.0
47.8
418.9
57.5
57.5
4.4
9.4
52.5
48.2
48.2
3.3
4.2
47.3
56.0
56.0
4.2
5.8
54.3
(1) | Includes ethylene, propylene and butadiene. | |
(2) | Includes benzene, toluene, xylenes and C9 solvent. | |
(3) | Includes polyethylene, high density polyethylene, low density polyethylene, linear low density polyethylene and polypropylene. | |
(4) | Suspension and emulsion PVC. | |
(5) | N.A. means not available. | |
Source: Olefins and Aromatics:
Associación de Petroquímicos de Latino América
(Latin American Petrochemical Association) and Braskem; Polyolefins,
Vinyls, PET and Caprolactam: ABIQUIM and Braskem.
|
The above estimates of total domestic consumption assume that all domestic production is immediately sold in the market and that there has been no change in total domestic inventory. Basic petrochemical producers are designed to operate with low inventories of products and low inventory storage capacities (the Companys average storage time is approximately 20 days for finished goods and six days for naphtha).
Overview of the Companys Operations
The Company is the largest petrochemical company in Latin America and one of the five largest Brazilian industrial companies, based on net revenues. The Company has a diversified portfolio of chemical products, large competitive scale and a strategic focus on thermoplastics. The Company is the only Brazilian company with integrated first and second generation petrochemical production facilities. The Company also sells electricity and other utilities and services to unaffiliated customers.
The Company is the result of a corporate restructuring process that integrated the operations of six Brazilian petrochemical companies: Copene; OPP Química; Polialden; Trikem; Proppet; and Nitrocarbono. The Companys business operations are organized into four business units, corresponding to its principal products, production processes and markets:
| Basic Petrochemicals (reflecting the operations of Copene, the Companys predecessor); | ||
| Polyolefins (reflecting the operations of OPP Química and Polialden); | ||
| Vinyls (reflecting the operations of Trikem); and | ||
| Business Development (reflecting the operations of Nitrocarbono and Proppet and management of certain of the Companys other minority investments). |
25
The integration of the operations of the six Brazilian petrochemical companies that formed the Company has resulted in and, the Company believes will continue to yield substantial savings and synergies, including, without limitation, in respect of taxes, procurement and logistics expenses, selling, general and administrative expenses and other operating expenses.
Business Strategy
The Companys strategy is to continue to (1) increase and strengthen the leading market positions of its second generation businesses in Brazil and Latin America and (2) improve its cost competitiveness through vertical integration ( e.g. , by producing ethylene and propylene, the principal raw materials for its second generation polyolefins products). The key elements of this strategy are as follows:
Increase Focus on Customer Relationships
The Company is focusing on further improving customer service and developing closer, longer-term relationships with its customers. Recognizing the cyclical nature of the markets for its petrochemical products, the Company believes that by focusing on customer relationships it can strengthen customer loyalty during periods of lower demand for its products. The Companys sales growth strategy is based on:
| increasing the consumption of its current clients, including through the development of new applications focused on replacing non-plastic materials and other thermoplastics with plastics. To assist the Company in this effort, Braskem maintains technology, innovation and application facilities that seek to (1) optimize the ease with which its clients process its products, (2) identify new product market opportunities, (3) increase existing capacity, (4) reduce operating costs and (5) upgrade and optimize product technology in order to develop new products in response to its customers requirements. The Company also maintains pilot plants to accelerate the time-to-market of its new products; | ||
| increasing the volume of exports; and | ||
| entering into additional long-term supply contracts with existing and new clients. |
Pursue Selected Growth Opportunities
The Company is constantly in search of growth opportunities in the markets in which it competes or in related markets. For instance, the development of UTEC, the Companys ultra-light molecular weight polyethylene, has given the Company a new product line with market potential and profitability. Developed from one of the Companys high density polyethylene units in Bahia, UTEC is a polymer for technical applications due to its superior mechanical properties. UTEC has been mainly sold in the United States. The Companys production and sale of automotive gasoline is another example of a selected growth opportunity that the Company has pursued. The automotive gasoline produced by its Basic Petrochemicals Unit is of extremely high quality, which has allowed the Company to compete to a limited extent in the Northeast of Brazil and to export its gasoline to the United States.
Expand the Companys Production Capacity
The Company plans to expand progressively the production capacity of its business units over the next three to five years based on expected demand growth for its products. Expansion will be primarily achieved through efficiency enhancements at its plants and through modernizing production technology. The Company believes that this additional production capacity will help it to maintain its leadership position in the Brazilian markets in which it competes, as well as support its expansion into strategic export markets.
Continue to Reduce Operating Costs and Increase Operating Efficiencies
In part as a result of its vertical integration, the Company is a low-cost producer of first and second generation petrochemicals. The Company has an ongoing program to increase operating efficiencies and to reduce operating costs, while capturing all potential synergies from the mergers that resulted in the formation of the Company. Since its consolidation in August 2002 through the mergers described in History and Development of the Company, the Company has decreased the overall number of its employees by approximately 13%, while at the same time increasing its production. In order to capture potential synergies from the mergers, the Company has assigned a team to monitor the development of all of its post-merger initiatives and to report frequently to its management to assure that adequate resources are promptly made available and efficiently used.
26
The Company believes that securing its feedstock at competitive prices is an important part of its cost control and reduction program. Although its basic petrochemicals plants are capable of using naphtha, natural gas condensates or, to a limited extent, natural gas, as feedstocks, the Company uses naphtha almost exclusively. Naphtha is the most significant direct cost associated with the Companys production of basic petrochemicals. Naphtha, including naphtha purchased by the Companys Basic Petrochemicals Unit and naphtha used to produce the ethylene purchased by the Companys Polyolefins Unit from Copesul, accounted for approximately 66% of its total cost of sales in 2002. Since the deregulation of the monopoly of Petrobras over the supply of naphtha and other petroleum refined products, the Company began to import naphtha, and during the year ended December 31, 2002, the Company purchased approximately 30% of its feedstock requirements through imported naphtha and natural gas condensate, primarily from suppliers located in Africa.
The Basic Petrochemicals Unit
The Companys Basic Petrochemicals Unit is comprised of the historical operations of Copene, the Companys predecessor. Prior to the Nova Camaçari Acquisition on July 25, 2001, the operations of the Basic Petrochemicals Unit comprised all of the Companys operations. Financial information with respect to the Basic Petrochemicals Unit that is contained in this section is based on the historical results of the Company prepared in accordance with Brazilian Corporate Law. See History and Development of the Company and Item 5. Operating and Financial Review and ProspectsThe Auction, the Nova Camaçari Acquisition and the Related Party Mergers.
The Companys basic petrochemicals operations are conducted in five major units (Olefins 1, Olefins 2, Aromatics 1, Aromatics 2 and Energy and Services) and various plants located at the Northeastern Complex. The Northeastern Complex is located:
| 36 kilometers from the Madre de Deus Port Terminal, a port terminal which is owned and operated by Petrobras; | ||
| 27 kilometers from Refinaria Landulfo Alves Mataripe (RLAM), one of the largest refineries in Brazil, which is owned and operated by Petrobras; and | ||
| 22 kilometers from the port terminal of Aratu, which is operated by Terminal Químico de Aratu S.A. TEQUIMAR, a subsidiary of Ultrapar Participações S.A. |
The Company uses the Madre de Deus Port Terminal to unload naphtha imported by Petrobras or that comes from other Petrobras refineries located outside the State of Bahia. A pipeline owned by Petrobras transports naphtha from the Madre de Deus Terminal toward RLAM where it interconnects with RLAMs naphtha pipeline system. RLAMs naphtha pipeline system interconnects with the pipeline system of the port of Aratu, through which naphtha and natural gas condensate, a stream from natural gas fields that is similar to a naphtha-diesel blend, are transported to the Companys basic petrochemicals plants.
A 477 kilometer ethylene pipeline connects the Companys basic petrochemicals units and plants to its chlorochemical complex in the State of Alagoas at which Braskems Vinyls Unit uses ethylene as a raw material in producing PVC and other products. See Overview of the Companys OperationsVinyls Unit. In addition, the Northeastern Complex is serviced by a well-developed road and rail network, facilitating the transportation of petrochemicals to other regions of Brazil.
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The Companys basic petrochemicals plants produce two principal types of petrochemicals: olefins and aromatics. During the year ended December 31, 2002, approximately 30.2% of Braskems olefin production and 12.6% of the Companys aromatics production were consumed by the Company or sold to related parties, some of which have since merged with and into Braskem, for use in the production of second generation petrochemical products. See Item 7. Major Shareholders and Related Party TransactionsRelated Party Transactions.
The Companys Basic Petrochemicals Unit also:
| produces automotive gasoline, LPG and Solvent C9; | ||
| supplies steam, water, compressed air and electric power to other plants in the Northeastern Complex; and | ||
| renders services to the operators of other plants in the Northeastern Complex. |
Products of the Basic Petrochemicals Unit
The following chart shows the major products produced by the Basic Petrochemicals Unit, their derivative intermediate products and their most common end uses.
Braskems products | Intermediate products | Most common end uses | ||
|
|
|
||
Olefins | ||||
Ethylene |
Low density/linear low density
polyethylene (2) |
Garbage bags, packaging film, toys,
housewares, electrical insulation, paper coatings |
||
High-density polyethylene (2) |
Blow-molded plastic bottles (such
as milk bottles) |
|||
Ethylene oxide, used to produce ethylene glycol | Polyester fibers and PET resin | |||
Ethylene dichloride, used to produce polyvinyl chloride (1) |
Pipes, home siding, upholstery,
floor coverings |
|||
Ethylbenzene, used to produce SM and then PS | Disposable cups and containers, high-impact plastics | |||
Propylene (polymer and chemical grade) | Polypropylene (2) |
Carpet-backing, luggage, bottles,
diapers, raffia bags |
||
Acrylonitrile | Clothing, plastics | |||
Propylene oxide | Polyurethane foams for furniture and insulation, cleaning compounds and coatings | |||
Oxo alcohol | Plasticizers | |||
Butadiene | Synthetic rubber, elastomers, resins | Tires, shoes, hoses, surgical gloves | ||
Butene-1 | Linear low density polyethylene (2) |
Garbage bags, packaging film, toys,
housewares, electrical insulation, paper coatings |
||
Aromatics | ||||
Benzene | Ethylbenzene (used to make styrene monomer/polysterene) |
Disposable cups, containers,
high-impact plastics |
||
Cumene | Epoxies | |||
Cyclohexane (3) | Nylon |
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Braskems products
Intermediate products
Most common end uses
Linear Alkyle Benzene
Detergents
Isoprene
Styrene-isoprene-styrene (SIS)
Adhesive
Toluene
Toluenediisocianate (TDI)
Urethane foams
Solvents
Para-xylene
Purified terephtahlic acid and
Dimethyl terephthalate (DMT) (3)
Polyester film and fibers, PET
resin (3)
Ortho-xylene
Phthalic anhydride and plasticizers
Flexible products from PVC
Others
MTBE
Octane booster for gasoline
Solvent C9
Solvents and thinners
Pyrolysis C9
Octane booster for gasoline
Fuels
Automotive Gasoline
Fuel for internal-combustion engines
LPG
Cooking gas
(1) | Produced by the Vinyls Unit. See Overview of the Companys OperationsThe Vinyls Unit. | |
(2) | Produced by the Polyolefins Unit. See Overview of the Companys OperationsThe Polyolefins Unit. | |
(3) | Produced by the Business Development Unit. See Overview of the Companys OperationsThe Business Development Unit. |
Olefins. Polymer grade ethylene and propylene, known as monomers, are the Companys primary olefins products and are building blocks for many types of plastics and resins. Ethylene and propylene serve as the chemical backbone for many consumer products. Different combinations of monomers are polymerized or linked together to form polymers or plastic resins, with varying properties and characteristics.
The production of olefins involves the heating, compression, cooling and separation of the streams that are generated from naphtha, natural gas or gasoil under controlled temperature and pressure conditions. The Companys Basic Petrochemicals Unit uses naphtha as its primary basic petrochemical feedstock. The Companys production of olefins begins with cracking, a conversion process by which naphtha is heated in furnaces causing long-chain naphtha molecules to split into short chain molecules or to transform into other molecules in gaseous form. The gases produced are cooled, and then, a distillation process separates the heaviest materials (pyrolysis residue, pyrolysis gas oil and pyrolysis gasoline) from the lighter gases. The pyrolysis gasoline, after a hydrogenation process, is sent to the aromatics extraction unit where it is used as feedstock in the production of aromatics. The remaining gases are further cooled and compressed. The resulting products are then sent to the Companys fractionation and purification unit where they are distilled for the recovery of high purity ethylene and propylene. High purity butadiene is obtained following cryogenic fractionation in the butadiene recovery unit. MTBE is produced by processing the remaining material from the butadiene recovery unit with methanol.
Aromatics. Naphtha is also used as feedstock for the production of aromatics. The production of aromatics, known as catalytic reformation, involves inducing a chemical reaction by pumping the naphtha through reactors under controlled temperature and pressure conditions in the presence of chemical catalysts. The catalytic reformation unit produces two aromatic streams: light aromatic stream and heavy aromatic stream. The light aromatic stream moves to the aromatics extraction unit where, together with the pyrolysis gasoline produced during the olefin production process and in the presence of special solvents, an aromatic mixture called BTX extract is produced. BTX extract is then separated in the aromatics fractionation unit to yield high purity benzene, toluene and xylenes. The xylenes stream is subjected to separation and isomerization together with the heavy aromatic stream from the catalytic reformation unit to produce para-xylene, ortho-xylene, mixed xylenes and Solvent C9. Processing of the toluene stream in the toluene transalkylation unit can vary the amount of benzene, toluene and xylenes.
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Fuels. As by-products of its production of basic petrochemicals, the Basic Petrochemicals Unit also produces gasoline and LPG. The Company has been authorized by the ANP to produce and sell automotive gasoline and LPG in the domestic and international markets since August 15, 2000 and October 2, 2001, respectively. The Company expects to be authorized by ANP to produce and sell diesel fuel.
Utilities. As by-products of its production of basic petrochemicals, the Company also produces electric power, steam, compressed air and drinking and demineralized water (together, Utilities), which are used in the Companys own production process, including those of the Polyolefins Unit and the Vinyls Unit, and are also sold to approximately 40 companies in the Northeastern Complex. The Companys Utilities facilities consist of units for thermoelectric power generation, water trapping and adduction, water treatment, and the production of steam and compressed air.
Braskem generates an average of approximately 50% of the Northeastern
Complexs electricity consumption requirements, and CHESF-Companhia
Hidroelétrica do São Francisco (CHESF), an electric power generation company
located in the State of Bahia and serving the States of Alagoas and Bahia,
furnishes the remainder.
Production Capacity of the Basic Petrochemicals Unit
The table below sets forth the location, main products, production
capacity and tons produced for the periods presented for the Companys basic
petrochemicals units and plants.
Production
Main
Production
Year Ended December 31,
Name
Products
Capacity
2002
2001
(in tons)
(in tons)
Olefins Units 1 and 2
Ethylene
1,200,000
989,276
1,069,724
Propylene
548,000
464,521
491,957
Plants of Aromatics Units 1 and
2 (1):
Butadiene Plants 1 and 2
Butadiene
170,000
137,976
143,700
MTBE Plants 1 and 2
MTBE
156,000
106,449
108,251
1-Butene Plant
1-Butene
31,000
20,530
Isoprene Plant
Isoprene
18,000
16,380
Dicyclopentadiene (2)
19,000
19,799
18,897
Sulfolane Plants 1, 2 and 3
Coperaf-1 (3)
120,000
116,575
102,848
BTX Fractionation Plants 1 and 2
Benzene
370,000
318,373
317,223
Toluene (2)
75,000
129,200
173,960
C8+ Fractionation Plant
Mixed Xylenes (2)
40,000
62,679
50,137
Ortho-Xylene
60,000
48,135
46,001
Solvent C9 (3)
24,000
6,803
3,455
Parex Plant
Para-Xylene
150,000
101,426
107,321
Blending Plant
Motor Gasoline (4)
600,000
326,493
351,806
Liquified Petroleum Gas (4)
60,000
30,780
4,553
(1) | The Companys Basic Petrochemical Unit defines the term unit to mean several plants that are linked together in order to produce other olefins or aromatics. Accordingly, the production capacity of Aromatics Units 1 and 2 is the sum of the production capacities of the various plants that form part of the units. | |
(2) | Actual production may exceed production capacity of certain plants when excess capacity is available in and borrowed from other plants in the Aromatics Units. | |
(3) | Solvents. | |
(4) | Motor gasoline and liquified petroleum gas production in cubic meters per year. |
The Company has two olefins units that produce ethylene and propylene. An olefins unit is divided into three sections: the hot section; the compression section; and the cold section. The hot section comprises the pyrolysis heaters, which are the thermo-reactors in which the liquid naphtha is evaporated in the convection section and is cracked in the radiation section. The effluent from the heaters goes to the hot section fractionation plant where the gases are separated from the pyrolysis gasoline and pyrolysis residue. The gases from the hot section go to the charge gas compressor, where they are compressed and sent to the cold section. In the cold section, the compressed gas is fractionated into many components, such as methane, hydrogen, ethylene, propylene, C-4 stream and pyrolysis gasoline. The cold section also contains propylene and ethylene compressors, used as the main equipment for two auxiliary systems to refrigerate other equipment.
30
The first olefin plant commenced operations in 1978. This plant uses ABB Lummus Global technology and had an original annual capacity of 388,000 tons and 200,000 tons of ethylene and propylene, respectively. The Company is in the process of its third debottlenecking process at this plant, which will result in nominal annual capacity of 545,000 tons of ethylene and 258,000 tons of propylene, by the end of 2003. The second olefin plant commenced operation in 1992. This plant uses technology developed jointly by CENPES (Petrobras Research Center) and ABB Lummus Global for the hot section and technology developed by TECHNIP (a major French ethylene technology licensor) for the compression and cold sections of the plant. This plant had an original annual capacity of 450,000 tons and 290,000 tons of ethylene and polypropylene, respectively. However, the Company has increased its capacity to 655,000 tons of ethylene.
The Company is completing an improvement of the Olefins 1 unit in 2002 that will increase the installed capacity of the unit and modernize and upgrade the technology of the unit. The Company shut down the pyrolysis plant that is part of the Olefins 1 unit for 92 days in 2002 for regular maintenance and expansion, resulting in reduced overall ethylene and propylene production during that year. The cost of these improvements in 2002 was approximately U.S.$61 million.
The Company has two butadiene plants that receive the C4 stream from its olefins plants and separate butadiene as a main stream through an extraction process, using DMF as a solvent. The secondary stream is called raffinate 1 and serves as feedstock for the MTBE unit. The Companys first butadiene unit commenced operation in 1978 and uses Nippon Zeon technology. The Companys second butadiene unit commenced operation in 1992 and uses technology developed by the Companys predecessor, Copene.
The Company has two MTBE plants. The iso-butene from the raffinate 1 stream produced by the Companys butadiene plants and from methanol, purchased from third parties, react to produce MTBE as a main stream and raffinate 2 as a secondary stream. The Companys first MTBE plant commenced operations in 1987, and its second MTBE plant commenced operations in 1992. Both plants use Petroflex technology.
The Company has one 1-butene plant that receives the raffinate 2 stream from the Companys MTBE plants and subjects it to a super-fractionation process in which 1-butene is the main stream and raffinate 3 is the secondary stream that can be used in the production of liquified petroleum gas. The Companys 1-butene plant commenced operation in 1992 and uses technology developed by Braskems predecessor, Copene.
The Company has two DPG plants that receive the pyrolysis gasoline from the Companys olefins plants and separate the C5 stream from the pyrolysis gasoline before it goes to the hydrogenation reactors and the Companys isoprene unit or sulfolane plant. In the DPG plants, the pyrolysis gasoline stream goes to the first hydrogenation reactor where C5 (if any) is fractionated from mono-hydrogenated gasoline, which goes to the second hydrogenation reactor. The product of the second reactor is a stream rich in BTX (benzene, toluene and xylenes).
The Companys first DPG plant commenced operations in 1978 and uses ABB Global Lummus technology. The Companys second DPG plant commenced operations in 1992 and uses technology developed jointly by Copene and the French Institute of Petroleum.
The Companys has one isoprene plant that receives the dehydrogenated C5 stream from the Companys DPG units and performs a fractionation process that produces isoprene as the main product and a secondary stream of C5 raffinate, which can be used as feedstock for the pyrolysis heaters of the Companys olefins plants or used in the production of automotive gasoline. The Companys isoprene plant commenced operations in 1991 and uses technology developed by Japan Synthetic Rubber Company.
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The Company has three sulfolane plants that process the BTX stream from the DPG plants or from the catalytic reformation plant. Two of Braskems sulfolane plants are used to extract BTX from gasoline produced in the second hydrogenation reactor of the DPG plants. Their main product is the BTX aromatic stream, and their secondary product is PGH raffinate, which is used in gasoline production or sold in the solvent markets. The Companys third sulfolane plant processes the BTX aromatic stream from the catalytic reformation plant. Its main product is the BTX aromatic stream and its secondary product is raffinate. The Companys first two sulfolane plants commenced operations in 1978 and use technology developed by Universal Oil Products (UOP). The Companys third sulfolane plant commenced operations in 1988 and uses technology developed by Braskems predecessor, Copene.
The Company has two BTX fractionation plants that receive BTX from the sulfolane plants and fractionate it into benzene, toluene and C8+. The first BTX fractionation plant commenced operations in 1978 and uses UOP technology. The second BTX fractionation plant commenced operations in 1988 and uses technology developed by the Companys predecessor, Copene.
The Company has one catalytic reformation plant that receives medium naphtha from the naphtha fractionation plant. The catalytic reformation plant uses five reactor systems, loaded with platinum (Pt) catalyst, that convert non-aromatic products into aromatic products. Its main products are light aromatic stream (BTX rich stream) and heavy aromatic stream (C8+ stream), which are sent to the Companys sulfolane plants and the C8+ fractionation plant, respectively.
The Company has one naphtha fractionation plant that receives (1) full range naphtha and produces medium naphtha that is sent to the Companys catalytic reformation plant and (2) light and heavy naphtha that may be used as feedstock for the Companys olefins plants or used in the blending plant for gasoline production. This plant commenced operations in 1998 and uses technology developed by the Companys predecessor, Copene.
The Company has one C8+ fractionation plant that receives C8+ from the catalytic reformation plant and the BTX fractionation plants, fractionates it into xylenes and C9 stream, and sends the xylenes to the parex plant. It commenced operations in 1998 and uses technology developed by the Companys predecessor, Copene.
The Company has one parex plant that separates para-xylene from the blend of ortho-xylene, metha-xylene and para-xylene contained in the streams from the C8+ fractionation unit by using molecular sieves. Braskems parex plant commenced operations in 1978 and uses UOP technology.
The Company has one isomar plant that converts ortho- and metha-xylenes into para-xylene through an isomarization process that uses special catalysts. The Companys isomar unit commenced operations in 1978 and uses UOP technology. Together with the parex plant and the C8+ fractionation plant, the isomar plant forms the C8 loop system, a process cycle that yields para-xylene and other xylenes.
Braskem also has a plant that uses a disproportionation process with special catalysts to convert toluene into benzene and xylenes with a high content of para-xylene. This plant commenced operations in 1998 and uses technology licensed by Mobil.
Maintenance of Basic Petrochemicals Unit Plants
Until April 1998, maintenance services for the Companys basic petrochemicals plants were carried out exclusively by CEMAN - Central de Manutenção Ltda. (Ceman), a wholly owned subsidiary of the Company specialized in industrial maintenance. Ceman also supplied personnel to the Basic Petrochemicals Unit for day-to-day activities and for periodic maintenance. However, in April 1998, the Companys predecessor, Copene, decided to administer and perform part of its own maintenance services. Accordingly, Copene hired 163 employees, formed its own maintenance team and limited the scope of the maintenance contract with Ceman.
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Copene sold the assets of Ceman to Asea Brown Boveri Ltd. ABB in April 1999. Although the assets of Ceman were sold, the Company (as successor of Copene) remains responsible for Cemans liabilities for the period before 1999. The Company has since entered into a new maintenance contract with ABB and has entered into maintenance contracts with other service providers.
Because the Company has two independent olefins plants, uninterrupted production of ethylene and propylene may continue, even while maintenance services are being performed. In addition, other brief stoppages of operations that do not materially affect production output may take place, primarily for maintenance purposes, catalyst regeneration and equipment cleaning. Regular plant maintenance requires complete plant shutdowns from time to time, which usually take approximately 30 days to complete. Since commencing operations in July 1978, the Companys largest Basic Petrochemicals plant has undergone seven scheduled major maintenance shutdowns as part of the Companys regular maintenance policy. The last general shutdown, in July and August 2001, was carried out in the Companys first ethylene production unit and lasted 25 days. This shutdown permitted inspection and maintenance of this unit, which had been operational for almost five years, and was intended to return the plant to its optimum efficiency and capacity. The cost of servicing the unit was approximately U.S.$15 million (not including the value of lost production during this shutdown). In 2002, the Company also shut down the pryolysis plant that is part of its Olefins 1 Unit for 92 days for scheduled maintenance and in order to increase the installed capacity of the unit and to modernize and upgrade the unit technologically. This shutdown resulted in reduced ethylene and propylene by the Basic Petrochemicals Unit in 2002. The cost of these improvements to the unit was approximately U.S.$61.0 million. The next general shutdown has been scheduled for the pyrolysis plant that is part of the Olefins 2 Unit, the smaller of the Companys two ethylene plants, in November 2003, with an estimated duration of 25 days and an estimated total cost of U.S.$14 million.
Raw Materials of the Basic Petrochemicals Unit
Naphtha, a crude oil-based product, represents the principal production and operating cost of the Basic Petrochemicals Unit. The price of naphtha varies primarily based on changes in the U.S. dollar-based international price of crude oil.
Until recently, Petrobras exercised a monopoly over the research, exploration, production, refining, importation and transportation of crude oil and refined petroleum products in Brazil, including naphtha. In November 1995, the Brazilian Congress approved an amendment to the Brazilian Constitution to allow, among other activities, private sector entities in Brazil to conduct certain activities that had been performed solely by Petrobras. On August 6, 1997, the Brazilian Congress approved Law No. 9,478, aimed at liberalizing Petrobrass monopoly and fostering competition in the oil and gas business in Brazil. This law created the ANP, which regulates oil-related activities in Brazil. The ANP has implemented rules and regulations that are intended to encourage the gradual liberalization of the Brazilian petroleum market.
On August 9, 2000, the ANP ended Petrobrass monopoly over the supply of naphtha in Brazil and implemented a policy of free naphtha price negotiation. After two months of negotiations, the Brazilian basic petrochemicals producers and Petrobras entered into a pricing agreement, and a pricing formula for naphtha was established. According to this formula, the price of naphtha supplied by Petrobras is linked to ARA quotations of naphthas price and to the U.S. dollar- real exchange rate. The price of naphtha in Brazil was U.S.$179.37 per ton in December 2001. The price increased significantly in 2002, reaching a high of U.S.$268.95 per ton in November 2002, due primarily to the threat of war between the United States and Iraq.
Both of Braskems olefins plants currently use naphtha almost exclusively as a feedstock, although both plants are capable of using natural gas, to a limited extent, as a feedstock. Until the early 1980s, approximately 60% of feedstock used by first generation producers in Brazil was gas oil and 40% was naphtha, but the increased use of diesel fuel by trucks and buses in Brazil in the 1980s reduced the supply of gasoil available to the first generation producers. Currently, Braskem uses naphtha as its primary feedstock, and in 2002, naphtha accounted for approximately (1) 90% of the Basic Petrochemical Units total variable cost of sales and (2) 66% of its total cost of sales, including naphtha purchased by the Companys Basic Petrochemicals Unit and naphtha used to produce the ethylene that the Companys Polyolefins Unit purchases from Copesul. However, due to the high price of naphtha, the Company is preparing to process alternate raw materials such as petroleum condensate, liquified petroleum gas and extra-light crude oil.
33
The following table shows the ARA price of naphtha for the periods
indicated.
Price of Naphtha
2002
2001
2000
(in U.S. dollars per ton)
228.00
215.92
263.25
173.00
267.50
252.00
205.00
255.50
277.00
225.00
240.00
241.00
225.00
275.00
215.00
210.00
268.00
267.50
218.50
221.00
277.50
232.00
191.00
252.00
247.50
215.00
276.00
255.00
183.00
286.00
230.00
162.50
286.50
228.00
145.00
303.00
287.00
167.50
225.50
As a result of the deregulation of Petrobrass monopoly over the supply of naphtha, Braskem made investments in an aggregate amount of approximately U.S.$37 million in its transportation infrastructure to enable the Port of Aratu to receive shipments of imported naphtha. On December 31, 2001, the Basic Petrochemicals Unit received its first shipment of imported naphtha.
During the years ended December 31, 2002 and 2001, the Basic Petrochemicals Unit purchased:
| 2,778 thousand tons of naphtha, representing 72.4% of its naphtha requirements, and 4,087 thousand tons representing 99.1% of its naphtha requirements, respectively, from Petrobras; and | ||
| 1,059 thousand tons of naphtha, representing 27.6% of its naphtha requirements, and 35 thousand tons, representing 0.9% of its naphtha requirements, respectively, through imports of naphtha from suppliers located principally in Africa and elsewhere in South America. |
The current supply contract with Petrobras was initially entered into in 1978, had an initial duration of 10 years and is automatically renewable thereafter for further 10 year periods. The current term expires in 2008. The Company intends to import approximately 30% of its annual naphtha requirements in the future.
Sales and Marketing of Basic Petrochemical Products
The following table sets forth, for the years ended December 31, 2002, 2001, and 2000, certain information regarding net sales of the Companys Basic Petrochemicals Unit.
34
Year ended December 31,
2002
2001
2000
Quantities
Quantities
Quantities
sold
Net Sales
sold
Net Sales
sold
Net Sales
(thousands of
(millions of
(thousands
(millions of
(thousands of
(millions of
tons)
U.S. dollars)
(%)
of tons)
U.S. dollars)
(%)
tons)
U.S. dollars)
(%)
994.8
412.7
42.6
1064.8
514.4
42.4
1103.8
636.3
44.5
994.8
412.7
42.6
1064.8
514.4
42.4
1103.8
636.3
44.5
415.2
147.2
15.2
421.1
148.4
12.2
487.7
228.3
16.0
99.4
38.3
5.7
114.8
55.7
4.6
128.4
61.2
4.3
223.5
67.3
3.9
223.2
66.3
5.5
233.8
85.8
6.0
147.3
55.6
6.9
134.5
65.0
5.4
153.1
68.7
4.8
52.9
17.2
2.6
50.6
19.0
1.6
51.2
19.6
1.4
48.9
20.3
2.1
41.9
17.7
1.5
36.9
16.1
1.1
78.7
24.9
1.8
108.0
34.9
2.9
55.7
18.9
1.3
85.4
8.8
84.9
7.0
128.4
9.0
868.8
89.7
1006.4
89.3
1263.3
88.3
99.8
10.3
121.0
10.7
167.7
11.7
968.6
100.0
1127.4
100.0
1431.0
100
(1) | Includes 471.9 thousand tons and 378.9 thousand tons of ethylene transferred to other business units of the Company during 2002 and 2001, respectively. | |
(2) | Includes 27.0 thousand tons and 19.6 thousand tons of propylene transferred to other business units of the Company during 2002 and 2001, respectively. | |
(3) | Includes 45.2 thousand tons and 39.2 thousand tons of para-xylene transferred to other business units of the Company during 2002 and 2001, respectively. | |
(4) | Includes 65.4 thousand tons and 49.0 thousand tons of benzene transferred to other business units of the Company during 2002 and 2001, respectively. |
Net sales of basic petrochemicals accounted for 38.8% and 42.2% of the Companys net revenues on a combined basis for the years ended December 31, 2002 and 2001, respectively, giving effect to the Nova Camaçari Acquisition and the Related Party Mergers as if they had occurred on January 1, 2001. During the year ended December 31, 2000, net sales of basic petrochemicals accounted for 91.8% of Copenes net revenues.
During the year ended December 31, 2002, net sales of basic petrochemicals in Brazil accounted for U.S.$868.8 million, representing 77.1% of the Basic Petrochemicals Units total net sales. In 2002, net sales of gasoline in the domestic market (not included in the table above) were U.S.$ 24.0 million. In the same year, exports sales by the Basic Petrochemicals Unit (including gasoline sales of U.S.$27.7 million) accounted for approximately U.S.$127.6 million representing 11.3% of the Basic Petrochemicals Units net sales.
The Company sells its basic petrochemicals products in Brazil mainly to second generation producers located in the Northeastern Complex as well as to customers in the United States and Europe. As is common with other first generation petrochemical producers in Brazil, the Companys Basic Petrochemicals Unit has a high concentration of sales of basic petrochemicals to a limited number of customers.
As part of the Companys strategy following its formation in August 2002, its Basic Petrochemicals Unit has focused on developing longer-term relationships with its customers. The Company has entered into long-term supply contracts with several second generation producers located in the Northeastern Complex. These supply contracts generally have an initial 10-year term that is automatically renewable for five-year periods, unless one party notifies the other of its intention not to renew. The contracts provide for minimum and maximum quantities and monthly deliveries. The Company also sells liquified petroleum gasoline and automotive gasoline to Petrobras pursuant to a long-term contract.
35
The Company determines the prices for its olefins and aromatics products with reference to several market factors. The price of ethylene that the Company charges is based on a margin sharing system. Under this system, the benefit or burden of higher or lower prices for ethylene derivatives, such as polyethylene, is shared between the Company and its customers. Conversely, the benefit or burden of higher or lower prices of naphtha will also be shared with the Companys customers. The margin to be shared by first and second generation producers is calculated for each second generation product based on the market price charged by the second generation producer for its polyolefin resins. The market price for ethylene is based on benchmark costs imputed to, and actual costs incurred by, both first and second generation producers for the production of second generation products. The benchmark cost factors considered in determining the cost margin are the fixed costs, including depreciation, of leading first and second generation producers located in Europe. European producers are included in the calculation because, like Brazilian producers, they use naphtha as their primary feedstock (whereas first generation producers in the United States use natural gas as a feedstock for ethylene). Actual variable costs incurred by first and second generation producers are also used in calculating the price of ethylene. The margin for each product is determined by subtracting the production cost of each product from the average market price charged by the second generation producers for such product. This margin is then divided between the relevant first and second generation producers on a pro rata basis to reflect the relative capital investments made by the first and second generation producers in the production process for each product. The actual margins realized by the first and second generation producers depend on the degree to which their actual costs compare with the benchmark costs used in the pricing formula to calculate the margin.
The Company calculates the monthly price of propylene by multiplying the monthly ethylene price it charges (including Brazilian taxes) by the ratio of the European contract price for propylene to the European contract price for ethylene. The Company determines the price of butadiene by using the European contract price for butadiene and its prices, unlike prices for the other basic petrochemical products, include freight costs. The Company sets the prices of solvents, fuels and Utilities with reference to domestic Brazilian prices for these items.
The Basic Petrochemical Units volume of export sales has, in large part, traditionally been a function of domestic demand for the Companys products. Export sales represented 11.3% of the Basic Petrochemicals Units net sales in 2002 and 9.1% in 2001. These sales were made mainly to customers in Europe and the United States. The Companys management believes that the Companys natural market for basic petrochemicals is Brazil, although it intends to increase export sales of automotive gasoline to the United States. The Companys main focus is to maintain its leading position in the Brazilian market, while continuing to use its export operations to manage the relationship between installed capacity and domestic demand. The Company believes that its continued presence in the export markets is essential to manage overcapacity relating to the Brazilian market.
The Company sets export prices for: (1) benzene, toluene, MTBE and gasoline with reference to prices prevailing in the U.S. Gulf market; (2) propylene, para-xylene, ortho-xylene and butene-1 with reference to prices prevailing in the European market; and (3) ethylene and butadiene on the basis of a derivative pricing formula.
In addition to petrochemicals, Braskem produces Utilities for its own use
and for sale to other second generation producers in the Northeastern Complex.
The following table sets forth, for the years ended December 31, 2002, 2001 and
2000, certain information regarding the Basic Petrochemicals Units sales of
Utilities.
Year ended December 31,
2002
2001
2000
Quantities
Quantities
Quantities
sold
Net Sales
sold
Net Sales
sold
Net Sales
(millions
(millions
(millions
of U.S.
of U.S.
of U.S.
dollars)
(%)
dollars)
(%)
dollars)
(%)
1,264.4
38.1
35.
7
1,437.5
50.8
42.6
1,368.9
46.4
37.4
4,044.0
59.8
56.0
3,944.0
59.0
49.6
3,903.7
68.7
55.4
15,742.0
5.4
5.1
16,309,2
5.6
4.7
16,211.0
5.9
4.8
205,515.0
3.5
3.3
202,602.9
3.6
3.1
199,158.0
3.0
2.4
106.8
100.0
119.0
100.0
124.0
100.0
36
Net sales of Utilities accounted for 4.3% and 4.5% of the Companys net revenues on a combined basis for the year ended December 31, 2002 and 2001, respectively. During the year ended December 31, 2002, net sales of Utilities accounted for U.S.$106.8 million, representing 9.5% of the Basic Petrochemicals Units net sales.
Since August 15, 2000, Braskem has been authorized by the ANP to produce and sell automotive gasoline. In October 2001, in addition to gasoline, the Company was authorized to produce and sell LPG. Net sales of fuels amounted to U.S.$51.7 million in 2002, as compared to U.S.$84.5 million in 2001, corresponding to 6.4% and 4.6% of the Basic Petrochemicals Unit net revenue for these years, respectively.
Sales of type A gasoline reached 324,000 cubic meters in 2002, compared to 349,000 cubic meters in 2001, representing a decrease of 7%. Over the last two years, the Company has been consolidating its position as a reliable gasoline supplier in the Northeastern States of Pernambuco, Bahia, Paraiba and Alagoas. The Companys participation in the gasoline market in the Northeastern region of Brazil reached 6% in 2002.
Braskems services business involves the storage of gaseous petrochemical products for companies located in the Northeastern Complex and is undertaken by Braskems controlled subsidiary, Tegal. Tegal is located in the port terminal of Aratu in the State of Bahia.
Competition
Although there are currently three major petrochemical complexes in Brazil, Braskems basic petrochemicals customers, which are mostly second generation petrochemical producers with plants located in the Northeastern Complex, are unlikely to be able to obtain their feedstocks elsewhere at lower prices due to high transportation costs and logistical difficulties. Because ethylene requires cryogenic storage and transportation, at temperatures below -100º Celsius, exporting and importing ethylene is extremely costly. Because propylene may be compressed, it is generally less costly to import or export than ethylene. In addition, because Brazil is self-sufficient in the production of olefins, imports of these products are sporadic and generally associated with scheduled plant maintenance shutdowns. In 2002, a very small amount of ethylene was imported into Brazil.
The Polyolefins Unit
The Companys Polyolefins Unit is comprised of the operations of Polialden and the operations conducted by OPP Química prior to its merger with and into the Company. Prior to the OPP Merger on August 16, 2002, the only operations of the Polyolefins Unit were those conducted by Polialden. Prior to the Nova Camaçari Acquisition on July 25, 2001, the Company did not conduct any polyolefins operations. The results of Polialden are included in the Consolidated Financial Statements for periods after July 25, 2001, the date of the Nova Camaçari Acquisition. Although the Company acquired OPP Química on August 16, 2002, the results of OPP Química are included in the Consolidated Financial Statements in a manner similar to a pooling-of-interests for periods after July 25, 2001 as a result of the common control exercised by the Odebrecht Group over the Company and OPP Produtos after July 25, 2001, the date of the Nova Camaçari Acquisition and the date on which such common control had commenced. See History and Development of the Company and Item 5. Operating and Financial Review and ProspectsThe Auction, the Nova Camaçari Acquisition and the Related Party Mergers. Historical financial information with respect to the Polyolefins Unit is set forth in Note 18 to the Consolidated Financial Statements. The financial information with respect to the Polyolefins Unit that is contained in this section is based on the combined historical results of Polialden and OPP Química prepared in accordance with the Brazilian Corporate Law and may not be indicative of the results that the Companys Polyolefins Unit will achieve in the future.
The Companys polyolefins operations are conducted at seven plants located at two of Brazils petrochemical complexes. Four plants are dedicated to the production of polyethylene (two at the Southern Complex and two at the Northeastern Complex), and three plants at the Southern Complex are dedicated to the production of polypropylene.
37
Products of the Polyolefins Unit
The following chart shows the major products produced by the Polyolefins
Unit and their most common end uses.
Companys Products
Most common end uses
Low density/linear low density Polyethylene
Garbage bags, packaging film, toys, housewares,
electrical insulation, paper coatings
High density polyethylene
Blow-molded and injection-molded plastic bottles
(such as milk bottles), crates, automotive fuel tanks
Polypropylene
Carpet-backing, luggage, bottles, diapers, raffia bags
Ultra High Molecular Weight Polyethylene
Compression-molded sheets, porous parts, ram-extruded
sheets, profiles, filters, rods
The manufacturing process of polyethylene and polypropylene generally consists of compressing ethylene and propylene, respectively, in a high pressure reactor. Catalysts are then added to the polymerization process, producing polyethylene and polypropylene. After the polymerization process, the polymers enter the decompression phase, during which additives are inserted to provide the final characteristics of the polyethylene and polypropylene resins.
Polyethylene has the simplest chemical structure of all commercial polymers and is a very versatile material. World production volume of polyethylene is the highest among all commercial plastics. Polyethylene is used to manufacture a wide variety of products.
While each form of polyethylene is preferred for certain applications, there is some overlap in the uses of these resins, and with certain modifications, polyethylene resins may be substituted for each other in certain end product manufacturing processes. For example, demand for linear low density polyethylene has grown since first introduced in 1989 and reduced demand for low density polyethylene as manufacturers of certain containers and film applications have switched their processes and technology to use linear low density polyethylene in a blend with low density polyethylene.
The Company produces a variety of polyethylene resins, including low
density polyethylene, linear low density polyethylene, high density
polyethylene and ethylene vinyl acetate copolymer. The manufacturing process
employed by its customers and the desired physical characteristics of the end
product determine the polyethylene resin used. Low density polyethylene is the
most flexible of polyethylene products and is used in a variety of film
applications and in food packaging, trash bags and shopping bags. Linear low
density polyethylene is used in applications requiring greater sealing capacity
and better mechanical resistance, including films and flexible food packaging.
For those applications that require rigidity, polyethylene offers the necessary
strength.
Production Capacity and Technology of the Polyolefins Unit
The table below sets forth the location, main products, production
capacity and tons produced for the years presented for each plant currently in
the Companys Polyolefins Unit.
Production (in tons)
Year Ended December 31,
Production
Location (Complex)
Main Products
Capacity (1)
2002
2001
(in tons)
Low density polyethylene
210,000
203,354
194,060
Polypropylene (2)
100,000
Polypropylene
215,000
189,226
184,371
Polypropylene
235,000
215,120
192,316
High density
polyethylene/
linear low density
polyethylene (3)
300,000
216,171
197,319
38
Production (in tons)
Year Ended December 31,
Production
Location (Complex)
Main Products
Capacity (1)
2002
2001
High density polyethylene/
linear low density(3)
200,000
141,089
165,8
High density polyethylene /
Ultra High Molecular Weight
Polyethylene
130,000
103,892
125,441
(1) | Represents annual effective capacity in 2002. | |
(2) | This slurry plant is currently inactive. | |
(3) | Plant with swing line, capable of producing two types of resins. Capacity varies depending on actual production. |
The Companys polyethylene is produced at four plants, two located at the Southern Complex and two located at the Northeastern Complex. The Companys first polyethylene plant, located at the Southern Complex, commenced operations in 1982 and produces all of the Companys low density polyethylene. This plant uses high-pressure Equistar technology on its autoclave line and tubular technology on its second line. This plant had an original annual capacity of 120,000 tons, but it has since been debottlenecked to 210,000 tons.
The second polyethylene plant located at the Southern Complex, which commenced operations in 1999, is a 300,000 ton high density polyethylene/linear low density polyethylene swing plant that uses low-pressure Spherilene® technology licensed from Basell (formerly known as Montell). The Company entered into a license agreement for the Spherilene® technology that requires the payment of certain fees and annual royalties based on the amounts of linear low density polyethylene produced at this plant.
One of the polyethylene plants located at the Northeastern Complex is capable of producing both high density polyethylene and linear low density polyethylene on its two production lines. This plant uses Unipol® low-pressure, gas-phase technology, developed by Union Carbide Corporation. The Company was granted a license in 1988, effective in 1992, to use Unipol® catalyst technology. The license expires in 2007 and includes provisions for purchase of catalysts by the Company during the term of the license. The Company made a lump sum royalty payment at the time of execution of the license and has no continuing royalty obligations. The Company pays for catalysts as they are supplied. The other polyethylene plant in the Northeastern Complex uses Mitsubishi® slurry technology and is capable of producing high density polyethylene and ultra-high molecular weight polyethylene.
The Company produces polypropylene at three plants located at the Southern Complex. Both the first bulk plant, which commenced operations in 1991, and the second bulk plant, which commenced operations in 1997, use Spheripol® technology developed by Basell. The Company entered into a license in 1987 to use the Basell Spheripol® technology at its polypropylene plants, effective upon the commencement of operations in 1991. Pursuant to this license, the Company is allowed to use the technology for its current and future plants, without paying any additional royalties ( e.g. , the Company has satisfied its royalties obligations under the agreement). The Companys first bulk plant had an original annual capacity of 130,000 tons, but the Company has debottlenecked to 215,000 tons. Similarly, the Companys second bulk plant had an original annual capacity of 160,000 tons, but it has been debottlenecked to over 235,000 tons.
The Companys third polypropylene plant, which commenced operations in 1983, uses slurry technology developed by Hercules Inc. This plant had an original annual capacity of 50,000 tons, but the Company has debottlenecked it to over 100,000 tons. Although this plant uses older technology and is now inactive, the Companys management believes that the quality of the products produced by this plant is comparable to the quality of products produced by plants with newer technology. Management intends to introduce new Spherizone® technology in each of its polypropylene plants beginning in 2005 and 2006.
39
Maintenance of Polyolefins Unit Plants
The Company has a regular maintenance program for each of its polyolefins plants. Production at each polyolefins plant generally is shut down for 15 to 30 days every two years to allow for regular inspection and maintenance. Other brief stoppages that do not materially affect production occasionally take place for maintenance purposes. The Company coordinates the maintenance cycles of its Polyolefins plants with those of its Basic Petrochemicals plants. While its Basic Petrochemicals facilities must be shut down for up to 30 days for scheduled maintenance, the Companys Polyolefins facilities are shut down for shorter periods because the Company maintains feedstock storage facilities that enable its polyolefin plants to operate for up to two weeks.
Research and Development
The Polyolefins Unit maintains technology, innovation and application facilities at the Southern Complex. The Polyolefins Units staff of 132 employees seeks to (1) optimize the ease with which clients process the products of the Polyolefins Unit, (2) identify new product market opportunities, (3) increase existing capacity, (4) reduce operating costs and (5) upgrade and optimize product technology in order to develop new products in response to customer requirements.
The Polyolefins Unit maintains Spheripol®, Spherilene® and Unipol® pilot plants in the Southern Complex and the Northeastern Complex. Two of the Polyolefins Units three pilot plants operate at l/100 the scale of its full-scale plants, and the other pilot plant operates at 1/200 the scale of its full-scale plants. The Polyolefins Unit uses its pilot plants to test potential efficiency-enhancing modifications to various stages of the production process and new product formulations. Management believes that these pilot plants give the Company a competitive advantage, as the Companys competitors in Brazil do not maintain pilot plants.
The Polyolefins Unit maintains catalysis, polymerization and polymer sciences laboratories in the Southern Complex and the Northeastern Complex. These laboratories assist the Company to develop new and improve existing (licensed or otherwise) catalysts and grades of portfolio resins. The Company has developed or improved upon the majority of the polyethylene and polypropylene products that it sells based on technology developed by the Company.
The Polyolefins Unit maintains processing engineering and automation centers in the Southern Complex and the Northeastern Complex. These centers assist the Company in developing advanced process control technology that the Company makes available for licensing through a partnership with Pavilion Technology Inc. in the United States. These centers also assist the Company to (1) reduce its variable costs, (2) achieve operational stability and (3) increase its polyolefins production to optimal levels.
While the Polyolefins Unit does not engage in new process technology research and development, it remains in regular contact with process technology licensors to keep abreast of new technologies and improvements. The Company tests new processes on a regular basis for potential licensing and follows advances and trends in the petrochemical industry through its relationships with Brazilian and international research universities and consortia, such as the University of Wisconsin Polymerization Reaction Engineering Laboratory at the University of Wisconsin-Madison. In addition, the Company maintains ongoing contracts with licensors in order to receive and install improvements developed for its existing processes.
As part of the Companys technology licensing arrangements, it has entered into technology sharing agreements with its licensors, whereby it is required to share with its licensors, and its licensors are required to share with it, any improvements made in the Unipol®, Spheripol® and Spherilene® technologies.
The Company believes that the technology of the Polyolefins Unit allows the Company to produce, and to compete with other producers of, very high quality polyolefins products.
40
Raw Materials of Polyolefins Unit
Ethylene and Propylene. The most significant direct costs associated with the production of polyethylene and polypropylene are the cost of ethylene and propylene, which together accounted for approximately 74% of the Companys Polyolefins Units total cost of sales during the year ended December 31, 2002. In 2002, approximately 33% and 64% of these raw materials were supplied by the Basic Petrochemicals Unit and Copesul, respectively. Because the cost of storing and transporting ethylene and propylene is substantial and there is inadequate infrastructure in Brazil for importing large quantities of ethylene or propylene, the Polyolefins Unit is highly dependent on the supply of ethylene and propylene supplied by the Basic Petrochemicals Unit and Copesul.
As of December 31, 2002, Copesul had an annual ethylene capacity of 1,350,000 tons and an annual propylene production capacity of 567,000 tons.
The Company has entered into a long-term ethylene and propylene supply contract with Copesul that extends through 2007 and is automatically renewable for additional five-year terms. The Company owns 29.5% of the total capital stock of Copesul. The Companys ethylene purchases from Copesul are subject to an annual minimum of 268,200 tons and an annual maximum of 451,000 tons, while the Companys propylene purchases are subject to an annual minimum of 262,200 tons and an annual maximum of 439,500 tons, in each case subject to daily and monthly limits. In 2002, the Company purchased approximately 388,000 tons of ethylene and all of its requirements of propylene (approximately 390,000 tons) from Copesul for the Companys polyolefins operation in the Southern Complex.
The Company negotiates the prices for the feedstocks for the Companys polyolefins products with Copesul, based upon a pricing formula developed by the Brazilian petrochemical industry. The pricing formula provides for a method of cost margin sharing between the first generation and second generation producers located at the respective petrochemical complexes. For a description of the pricing of ethylene purchased by the Polyolefins Unit from the Basic Petrochemicals Unit, see The Basic Petrochemicals UnitSales and Marketing of Basic Petrochemical Products. The prices charged by Copesul for ethylene that it supplies to the Polyolefins Unit are based on a similar formula.
The following table sets forth the average prices per ton paid by OPP
Química and Polialden for ethylene and propylene for the years indicated:
Year Ended December 31,
2002
2001
(U.S.$ per ton)
415
483
453
528
354
352
378
400
(1) | Ethylene and propylene supplied by Braskems Basic Petrochemicals Unit. | |
(2) | Ethylene and propylene supplied by Copesul. |
In the production of linear low density polyethylene, the Company also uses butene and hexene as raw materials. Butene is supplied by Copesul and by the Basic Petrochemicals Unit, and the Company imports hexene from suppliers located in South Africa.
Other Materials. In addition to overhead costs such as labor and maintenance, other costs associated with the production of polyethylene and polypropylene are for chemical catalysts, solvents and utilities, such as electricity, water, steam and nitrogen.
The Unipol® plant in the Northeastern Complex uses catalysts, primarily Philips and Ziegler-Natta, supplied to Braskem by Union Carbide under a 15-year license. The high density polyethylene slurry plant produces its own catalysts. Akzo Chemicals Inc., which produces catalysts under a license from Basell, supplies the Polyolefins Unit with catalysts for polypropylene production on the bulk line in the Southern Complex. The Company imports some catalysts from the United States and Europe. In addition, the Company has invested in the production of its own catalysts for use in most of its existing production processes, as it believes that increasing Braskems production of its own catalysts will decrease production costs and reduce the Companys dependency on imported catalysts. The Company purchases other catalytic agents, together with the inputs that the Company needs to produce its own catalysts for its slurry plant in the Northeastern Complex (to produce high density and ultra high molecular weight polyethylene) from various suppliers at market prices.
41
The Companys Basic Petrochemicals Unit supplies the Polyolefins Units
facilities in the Northeastern Complex with steam and water. Electricity is
supplied at both complexes by third parties pursuant to long-term contracts,
and in the Northeastern Complex by the Basic Petrochemicals Unit. Nitrogen is
supplied at the Northeastern Complex by independent third parties. Copesul and
a third party distributor supply the Southern Complex with nitrogen. The
Companys polyolefins plants in the Northeastern Complex are able to receive
electricity from alternate sources if the Company is unable to meet its demand
for electricity from its Basic Petrochemical Unit. The Company believes that
there are sufficient alternative sources available at reasonable prices for
these other inputs used in its polyolefins production process such that the
loss of any single supplier would not have a material adverse effect on the
Companys operations.
Sales and Marketing of Polyolefins Products
The following table sets forth, for the years ended December 31, 2002 and
2001, certain information regarding the combined net sales of Polialden and OPP
Química.
Year ended December 31,
2002
2001
Quantities
Quantities
sold
Net Sales
sold
Net Sales
(thousands of
(millions of
(thousands
(millions of
tons)
U.S. dollars)
(%)
of tons)
U.S. dollars)
(%)
395.1
266.7
30.5
338.5
266.5
31.5
133.0
94.2
10.8
116.5
101.0
11.9
130.1
92.5
10.6
124.7
103.2
12.2
227.7
158.3
18.2
250.7
204.0
24.1
0.9
1.3
0.1
0.8
1.2
0.1
2.2
2.6
0.3
886.8
613.0
70.2
833.4
678.4
80.1
260.7
29.8
168.8
19.9
873.7
100.0
847.3
100.0
Net sales of the Polyolefins Unit accounted for 35.1% and 31.7% of the Companys net revenues on a combined basis for the year ended December 31, 2002 and 2001, respectively.
As a result of the Companys acquisition in January 2002 of the ultra high molecular weight polyethylene business of Basell in the United States and Basells Brazilian subsidiary, the Company became the worlds second largest producer of UHMWP, a high technical performance engineering plastic. Exports of UHMWP increased by 186% in 2002, from 5,000 tons in 2001 to 14,300 tons in 2002, allowing the Company to occupy an important strategic position in the markets for this product in the United States and in Europe.
42
As part of the Companys efforts to integrate the operations of OPP Química into the Company, the Companys Polyolefins Unit has focused on developing longer-term relationships with its customers. Recognizing the cyclical nature of the markets for its commodity products, the Company believes that it can strengthen customer loyalty during periods of low demand for polyethylene or polypropylene by providing a reliable source of supply to these customers during periods of high demand. Each account manager in the Polyolefins Unit is assigned numerous customers within a particular geographic area and works closely with these customers to determine their needs, to provide technical assistance and to coordinate the production and delivery of products with characteristics responsive to those needs. Customers submit annual proposals giving their estimated monthly requirements for the upcoming year for each of the Companys polyolefins products, including technical specifications, delivery terms and proposed payment conditions. Account managers evaluate these proposals monthly to make any required adjustments and to monitor and ensure availability of supply for each customer.
In addition to direct sales to the Companys customers, the Polyolefins Unit sells the Companys products through eight exclusive independent distributors. These distributors sell polyethylene and polypropylene products to manufacturers with lower volume requirements and can aggregate multiple orders for production and delivery such that the Company and its ultimate customers can share the cost savings. Furthermore, by serving smaller customers through a network of distributors, account managers in the Polyolefins Unit have been able to focus their efforts on delivering high quality service to a smaller number of direct customers. The Polyolefins Unit intends to continue to establish relationships with distributors that can consolidate sales to smaller customers and to increase sales through these distributors.
The Company determines the prices for its polyethylene and polypropylene products with reference to several market factors that include the prices paid by third generation producers for imports of these products and prevailing market prices in Brazil.
The Companys volume of export sales traditionally has, in large part, been a function of domestic demand for its products. Export sales represented 29.8% of the Polyolefins Units net sales in 2002 and 19.9% in 2001. These sales were made mainly to customers in South America and, to a lesser extent, in Asia, Africa, the Middle East and Europe.
The Companys main focus is to maintain its leading position in the Brazilian market, while continuing to use the Companys export operations to manage the relationship between its installed capacity and domestic demand for its products. Currently, the Polyolefins Unit targets an annual average production in excess of expected Brazilian market demand by approximately 20% in order to meet variations in local demand and to respond to production fluctuations, seasonality and export product sales. The Company believes that its continued presence in the export markets is essential to manage overcapacity in the Brazilian market.
The Companys principal export market for polyolefins is South America, particularly the Mercosul countries, and the Company intends to increase its focus on sales of polyolefins in the Mercosul countries as well as in Chile. The Company has established a strategic position in the Southern Cone countries through regular sales to local distributors and agents who are knowledgeable in their respective markets. The Companys strategy to increase its presence in the Southern Cone is intended, among other benefits, to reduce its exposure to the cyclicality of the international spot market through the development of long-term relationships with customers in neighboring countries. Export prices for sales in the Southern Cone countries of South America are based on regional prices, and these sales are made either with letters of credit or through bank collections.
Export sales to buyers in countries outside the Southern Cone are based on international prices. The Companys customer base consists primarily of trading houses, most of which have operations in the United States or in Hong Kong. All sales of this type are made with letters of credit.
43
Competition
In 2002, imports of polyethylene into Brazil represented less than 17% (11% in 2001) of Brazils total consumption of polyethylene and less than 10% (less than 10% in 2001) of Brazils total consumption of polypropylene. The Company anticipates that competition from international producers may increase substantially, both in Brazil and in selected foreign markets in which the Company plans to attempt to increase sales of its polyolefins products. For example, Dow Chemical recently built a linear low density polyethylene facility in Bahía Blanca, Argentina, which facility became operational in 2001 with an annual capacity of 210,000 tons.
The Company competes with a small number of Brazilian polyolefins producers and, to a lesser extent, with importers of these products. In the Brazilian polyethylene market, the Company competes with a number of companies that produce one or two of the products in its production line. Politeno, in which the Company owns 35.0% of the voting captial stock, representing 34.7% of the total capital stock, produces the same range of polyolefins products as the Company. Low density polyethylene is produced by Union Carbide do Brasil S.A., Petroquímica Triunfo S.A. (Triunfo) and Politeno, which in 2002 had installed capacities of 144,000 tons, 150,000 tons and 145,000 tons, respectively, compared to the Companys installed capacity of 210,000 tons. However, the Companys management believes that over the next few years, production of low density polyethylene will be phased out and replaced by linear low density polyethylene in the packaging segment. Accordingly, growth of the low density polyethylene market should be limited, although reduced supply of low density polyethylene may cause its price to exceed the price of linear low density polyethylene in the short term.
Politeno and Ipiranga are the only other Brazilian producers of linear low density polyethylene, and in 2002, they had installed annual capacity of 180,000 tons and 150,000 tons, respectively, at swing plants that are also capable of producing high density polyethylene, compared to the Companys installed annual capacity of 300,000 tons. Rio Polímeros, a Brazilian petrochemical company, is constructing a petrochemical plant in Duque de Caxias, Rio de Janeiro, with a capacity to produce annually 520,000 tons of ethylene, 75,000 tons of propylene and 540,000 tons of linear low density polyethylene and high density polyethylene, which will increase annual aggregate Brazilian production capacity of polyethylene by 35%. The plant will use natural gas as a feedstock, and Rio Polímeros has announced that it will commence operations in July 2004.
Politeno, Ipiranga and Solvay also produce high density polyethylene. In 2002, these companies had installed high density polyethylene capacity of 180,000 tons, 500,000 tons and 82,000 tons, respectively.
In the Brazilian polypropylene market, the Company competes with Ipiranga, Polibrasil (controlled by Basell, the largest polypropylene manufacturer in the world and a leader in polypropylene technology, and Suzano) and Braspol Polímeros S.A. These companies have combined installed annual capacity of 775,000 tons. In addition, Polibrasil is building a 300,000 ton polypropylene plant in Mauá, São Paulo, which is expected to commence operations in the second half of 2003.
The Company does not have any competitors in the Brazilian ultra high molecular weight polyethylene market. Internationally, the Companys primary competition in this market is Tacona (a business of German company, Celanese AG), which has 52% of the world wide production capacity of ultra high molecular weight polyethylene (twice the Companys production capacity).
The Vinyls Unit
The Companys Vinyls Unit is comprised of the operations of Trikem. Prior to the OPP Produtos Merger on August 16, 2002, the Company did not conduct any vinyls operations. Although the Company acquired Trikem on August 16, 2002, the results of Trikem are included in the Consolidated Financial Statements in a manner similar to a pooling-of-interests for periods after July 25, 2001 as a result of the common control exercised by the Odebrecht Group over the Company and Trikem after July 25, 2001, the date of the Nova Camaçari Acquisition and the date on which such common control had commenced. See History and Development of the Company and Item 5. Operating and Financial Review and ProspectsThe Auction, the Nova Camaçari Acquisition and the Related Party Mergers. Historical financial information with respect to the Vinyls Unit is set forth in Note 18 to the Consolidated Financial Statements. The financial information with respect to the Vinyls Unit contained in this section is based on the historical results of Trikem prepared in accordance with Brazilian Corporate Law and may not be indicative of the results that the Companys Vinyls Unit will achieve in the future.
44
The Companys vinyls operations are conducted at five plants located in
the Brazilian States of Bahia, Alagoas and São Paulo. Three plants are
dedicated to the production of PVC, and two plants are dedicated to the
production of caustic soda and chlorine (with the latter also producing
ethylene dichloride).
Products of the Vinyls Unit
The following chart shows the major products produced by the Vinyls Unit
and their typical end uses.
Products
Typical end uses
Polyvinylchloride (PVC)
Pipes, sheeting, flooring, cable insulation,
electrical conduit, packaging, laminated products,
medical applications, toys, synthetic leather,
flooring materials, bottle caps and seals,
automobile corrosion prevention treatments and
wallpaper coatings
Caustic Soda
Aluminum, pulp and paper, petrochemicals and other
chemicals, soaps and detergents, waste treatment,
textiles, dyes, food processing and electroplating
Ethylene Dichloride
Polyvinylchloride (PVC)
Chlorine
Ethylene Dichloride
PVC. The Companys Vinyls Unit produces suspension and emulsion PVC in various grades, as well as PVC copolymers. PVC is sold in bags and transported to third generation producers by truck. Approximately 95% of the Companys PVC production is in the form of suspension PVC. The grades of PVC produced by the suspension process are the most widely used, including for use in the manufacture of pipes, sheeting, flooring, cable insulation, electrical conduit, packaging, laminated products and medical applications. PVC copolymers and grades of PVC produced by the emulsion process are more specialized products and are used in the manufacture of toys, synthetic leather, flooring materials, bottle caps and seals, automobile corrosion prevention treatments and wallpaper coatings. The Companys Vinyls Unit also produces ethylene dichloride, the principal feedstock used in the production of PVC. The Company used approximately 75% of its ethylene dichloride production in 2002 for further processing into PVC and exported the remainder.
Caustic Soda and Chlorine. The Companys Vinyls Unit also produces caustic soda and chlorine. Caustic soda is a basic commodity chemical that is sold to producers of aluminum, pulp and paper, petrochemicals and other chemicals, soaps and detergents and to waste treatment plants. Caustic soda is also used in the textile industry to make fabrics more absorbent and improve the strength of dyes and in food processing and electroplating. The Companys other business units consume approximately 3% of the caustic soda produced by the Vinyls Unit, and the remainder is sold to third parties.
Chlorine is a basic commodity chemical that is used in a large variety of industries, with applications in water treatment and chemical and pharmaceutical production. The Company consumes approximately 81% of the Vinyl Units chlorine production in its production of ethylene dichloride. The Company sells most of its remaining chlorine to a Brazilian company located near the Northeastern Complex that is connected to the Company via a specialized pipeline.
The manufacturing process of chlorine and caustic soda consists of the electrolysis of sodium chloride brine, which produces free hydrogen, chlorine and caustic soda in solution. The Company burns the hydrogen for power, and separates and concentrates the chlorine and caustic soda. The Company combines chlorine with ethylene to produce ethylene dichloride. Ethylene dichloride is then cracked to produce vinylchloride monomer, which is polymerized to produce PVC. Suspension and emulsion are two of the commercial methods for polymerizing PVC resin. In the suspension process, a solution of vinylchloride monomer, catalysts, additives, dispersing agents and water are agitated and heated for approximately 10 hours, producing a PVC-water clay that is then dried into porous PVC particles. In the emulsion process, different catalysts, additives and dispersing agents are used, creating a more homogenous PVC-water clay that is similar to latex. The resulting PVC particles are thinner and more compact than in the suspension process.
45
Production Capacity and Technology of the Vinyls Unit
The following table sets forth the location, main products, production
capacity and tons produced for the years presented for each plant currently in
the Companys vinyls unit.
Production
Production
Capacity (1)
Year Ended December 31,
Location (Complex)
Main Products
2002
2002
2001
(in tons)
Camaçari (Northeastern)
PVC
246,000
200,056
173,921
Camaçari (Northeastern)
Caustic Soda
73,000
68,964
70,420
Chlorine
64,000
61,206
62,497
Maceio (Alagoas)
Caustic Soda
460,000
370,600
331,198
Chlorine
400,000
342,700
314,091
EDC
520,000
443,955
393,803
Marechal Deodoro (Alagoas)
PVC
204,000
180,870
166,882
Vila Prudente (São Paulo)
PVC
25,000
20,654
20,932
(1) | Represents annual capacity effective in 2002. |
The Company originally licensed its vinylchloride monomer manufacturing technology from B.F. Goodrich Company and its PVC technology from Mitsubishi Chemical Corporation. The Company also has three chlorine manufacturing technology agreements with Denora (used in Bahia), Eltec (used in Alagoas) and EVC (to produce ethylene dichloride in Alagoas). The Company no longer pays license fees under any of the technology licenses used by the Vinyls Unit, and there is no expiration date for any of the existing licenses used by the Vinyls Unit. The production processes of the Vinyls Unit are not dependent on any other licenses or patents from third parties. The Vinyls Unit also owns 11 patents and six trademarks in Brazil related to the Companys production of PVC.
The Camaçari Plants. The Companys original PVC plant and one of its chlorine and caustic soda plants are located at the Northeastern Complex. The PVC plant produces a full range of grades of suspension PVC. It commenced operations in August 1979, with an installed annual production capacity of 150,000 tons of suspension PVC, which the Company has since upgraded to 246,000 tons. The production technology for the Companys PVC manufacturing process was supplied by Mitsubishi Chemical Corporation.
The Companys chlorine and caustic soda plant in the Northeastern Complex commenced operations in March 1979. This plant had an original installed annual production capacity of 35,700 tons of caustic soda, which the Company has since expanded to 73,000 tons. The plants original installed annual chlorine production capacity of 31,700 tons has been increased to 64,000 tons. The plant produces caustic soda and chlorine by electrolysis of sodium chloride using mercury cells. The facility also has annual production of 78,000 tons of sodium hypochlorite, 10,500 tons of hydrochloric acid and 1,300 tons of hydrogen, each of which are feedstocks for second generation producers.
The Alagoas Plants. The Alagoas chemical complex was established in 1977 to increase industrial use of caustic soda and chlorine produced from salt mined in the region by the Company. The Companys chlorine and caustic soda plant in Alagoas commenced operations in February 1977, and its PVC plant in Alagoas commenced operations in January 1989. Current annual effective production capacity at the Alagoas plants is 204,000 tons of PVC. The Companys PVC plant in Alagoas produces a full range of grades of suspension PVC and annually produces 600,000 tons of ethylene dichloride, 460,000 tons of caustic soda and 410,000 tons of chlorine. The PVC plant uses Mitsubishi technology, and the caustic soda and chlorine plants use diaphragm electrolysis.
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The São Paulo Plant. The São Paulo plant was purchased in 1982 from the first Brazilian manufacturer of PVC. The plant began operations in 1960 and has an annual effective production capacity of 25,000 tons of PVC. It produces small batches of special types of dispersion PVC, including emulsion and micro-suspension PVC and copolymers. The technology for the production of dispersion PVC was originally licensed by the Geon Company, but has since been updated and improved by the Company.
Maintenance of Vinyls Unit Plants
The Company has a regular maintenance program for each of its vinyls plants. The Camaçari and Alagoas PVC plants are generally shut down for 20 days every two years to allow for regular inspection and maintenance. The São Paulo plant is generally shut down annually for five days of maintenance. The Companys caustic soda and chlorine plants are generally shut down for 15 days of maintenance every two years. This program of regularly scheduled maintenance is standard in the petrochemical industry and does not materially affect the Companys ability to produce and deliver its vinyls products on a timely basis.
Center for Technology and Innovation
The Vinyls Unit maintains a center for technology and innovation in São Paulo. This center employs five product engineers and five technicians specializing in plastics and modern equipment that render support services to customers, develop applications for PVC and train personnel of the Vinyls Units customers. This center has developed new applications for PVC, including vertical blinds, coatings for industrial PVC pipes, resins used in automotive parts and in the manufacture of doors, windows and other building components.
Raw Materials of the Vinyls Unit
Ethylene. The most significant direct cost associated with the production of PVC and ethylene dichloride is the cost of ethylene, which accounted in 2002 for approximately 58.7% of the Companys variable cost of PVC sales (60% in 2001) and 77.1% of ethylene dichloride sales (80% in 2001). Braskems Basic Petrochemical Unit supplies all of the ethylene required by the Vinyls Unit. Ethylene is delivered to the Alagoas plant via a 477-kilometer pipeline that the Company owns, and the São Paulo plant receives vinylchloride monomer by ship from the plant in the Northeastern Complex. Because the cost of storing and transporting ethylene and propylene is substantial and there is inadequate infrastructure in Brazil to permit the importation of infrastructure for large quantities of ethylene or propylene, the Companys Vinyls Unit is highly dependent on ethylene that is supplied by the Basic Petrochemicals Unit. For a description of the pricing of ethylene, see The Basic Petrochemicals UnitSales and Marketing of Basic Petrochemical Products.
Electric Power. Electric power is a significant cost component in the production of chlorine and caustic soda. In 2002, electric power accounted for approximately 45% of the Vinyls Units cost of caustic soda sales and approximately 18.8% of the Vinyls Units cost of sales (16% in 2001). In 2002, the Companys Vinyls Unit used a total of approximately 1,707 GWh of electricity (1,306 GWh in 2001).
The Vinyls Unit obtains some of its electric power requirements from the Basic Petrochemicals Unit and purchases the remainder of its requirements from various generators under power purchase agreements. The Vinyls Units caustic soda plants at Camaçari and Alagoas and the PVC plant at Camaçari purchase their electricity requirements from CHESF. CHESF and CEAL-Companhia Energética de Alagoas S.A. distribute electricity to the PVC plant in Alagoas. The Vinyls Units São Paulo plant obtains its electricity from Eletropaulo Metropolitana-Eletricidade de São Paulo S.A. The underlying power purchase agreements are long-term renewable contracts with automatic rolling three-year extensions. The agreements provide Braskem with the option to purchase its total electricity requirements, based on an annual estimate. The price terms of the contracts are based upon tariffs regulated by Agência Nacional de Energia Elétrica (the Brazilian federal energy regulatory agency, or ANEEL).
47
Salt. The Company used approximately 625,900 tons of salt in 2002 in its production of chlorine and caustic soda. In 2002, salt accounted for 3.4% of the Companys variable costs of caustic soda sales and approximately 1.1% of the Vinyls Units total cost of sales. The Company pays a small monthly royalty to the Brazilian government for exclusive salt exploration rights at a salt mine located near the Alagoas plant. The Company estimates that the mine has sufficient reserves of salt to last approximately 40 to 50 years at current rates of production. The Company enjoys significant cost advantages when compared to certain of its competitors due to low extraction costs of rock salt (particularly as compared to sea salt), low transportation costs due to the proximity of the salt mine to the Companys production facility and the higher purity of rock salt as compared to sea salt.
Other
Utilities.
All of the Vinyls Units facilities in the Northeastern
Complex are supplied with other required basic utilities, including steam,
purified and demineralized water, compressed air and nitrogen by the Basic
Petrochemicals Unit. Basic utilities are supplied to the Alagoas PVC plant by
Trikems subsidiary, Companhia Alagoas Industrial Cinal (Cinal), which is
owned by the companies operating in the Alagoas complex, including the Company.
Basic utilities not supplied to the Companys Alagoas PVC plant by Cinal, such
as compressed air and nitrogen, are supplied by the Company itself. The
Alagoas chlorine and caustic soda plants supply their own utilities
requirements. The São Paulo plant supplies its own utility requirements.
Sales and Marketing of Vinyls Products
The following table sets forth, for the years ended December 31, 2002 and
2001, certain information regarding Trikems net sales.
Year ended December 31,
2002
2001
Quantities
Quantities
sold
Net Sales
sold
Net Sales
(millions
(millions
(thousands
of U.S.
(thousands
of U.S.
of tons)
dollars)
(%)
of tons)
dollars)
(%)
332.5
225.4
55.8
309.3
221.6
51.7
17.6
16.4
4.1
18.2
18.9
4.4
400.9
76.5
18.9
358.7
132.3
30.9
122.4
26.1
6.5
137.2
14.5
3.4
873.4
344.4
85.3
823.4
387.3
90.4
59.5
14.7
41.3
9.6
403.9
100
428.6
100.0
(1) | Other products include caustic soda flakes, chlorine, sodium hypochlorite, and chloridric acid, among others. |
The Companys Vinyls Unit sells PVC, caustic soda, chlorine, ethylene dichloride and other products to a concentrated customer base located principally in southern and southeastern Brazil, which sales accounted for 16.2% and 16% of the Companys combined net sales revenue for 2002 and 2001, respectively. The Vinyls Units principal domestic sales and marketing group is located in the city of São Paulo, which enables it to best serve the largest part of its domestic customer base. The Companys customers generally are third generation companies that produce a wide variety of plastic-based consumer and industrial goods.
Most domestic sales of PVC and caustic soda are made directly to customers, without the use of third-party distributors.
The Vinyls Unit maintains contractual relationships with three distribution centers located in Paulínea and Itapevi, both in the State of São Paulo, and Joinville in the State of Santa Catarina. These distribution centers provide the Vinyls Unit with logistical support. In addition, the Company operates three warehouse facilities for PVC and six terminal tank facilities for caustic soda strategically located along the Brazilian coast to enable the Company to deliver its products to its customers on a just-in-time basis.
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The Companys Vinyls Unit develops its business through close collaboration with its customers, working together with them to improve existing products as well as to develop new applications for PVC. For these purposes, as well as to assist its customers in their research and development projects, the Company operates a center for technology and innovation at its São Paulo plant. The Companys marketing and technical assistance groups also advise customers and potential customers that are considering the installation of manufacturing equipment for PVC end-products.
The Company determines the domestic prices for its PVC resins with reference principally to the prices paid by third generation producers for imports of PVC plus estimated service charges. The Companys export price for PVC is generally equal to the international market price but also takes freight costs into account. In addition to price, significant factors in the marketing of PVC resins are delivery, quality and technical service. The Company establishes its domestic price for caustic soda based upon the international market price and domestic market prices charged by its three domestic competitors, taking into account any import duties and freight costs. Approximately 65% of the Companys caustic soda sales are effected pursuant to agreements that are generally for terms of one to three year terms and may include floor and ceiling prices. As with PVC, the Companys export prices for caustic soda and ethylene dichloride are generally determined according to international market prices, but also take import duties and freight costs into account.
Prices obtained by the Company in the Brazilian market traditionally are higher than the prices obtained for its exports. The difference in prices between the Brazilian and export markets results from:
| transportation costs; | ||
| tariffs, duties and other trade barriers; | ||
| a premium reflecting the tighter demand/supply relationship in Brazil; and | ||
| the reliability of supply and technical support that the Company provides. |
In 2002, the Vinyls Unit had export net sales of U.S.$59.5 million, which accounted for 14.7% of the Vinyls Unit net sales. In 2002, 50.7% of export net sales were of PVC, and 49.3% were of ethylene dichloride. The Company does not export chlorine and did not export caustic soda in 2002. The Companys vinyls export sales vary from year to year, influenced principally by domestic market conditions. The Company has a continuing export obligation related to an export prepayment facility backed by its export receivables generated under a supply agreement with Nissho Iwai of Japan (the Nissho Iwai Supply Agreement). Exports under the Nissho Iwai Supply Agreement accounted for 52% and 84% of the Companys export net sales of PVC and ethylene dichloride, respectively, during 2002 (37% and 90% during 2001). Under this supply agreement, the Company has agreed to supply, and Nissho Iwai has agreed to purchase, minimum annual volumes of PVC and ethylene dichloride ranging between 21,000 and 24,000 tons of PVC and between 100,000 and 160,000 tons of ethylene dichloride. Any PVC, ethylene dichloride or caustic soda made available by the Vinyls Unit for export in excess of these contractual minimums must first be offered to Nissho Iwai. The Companys supply agreement with Nissho Iwai expires on April 30, 2004.
The Company uses a variety of methods of distribution for its exports, depending on the size of the market in question, including direct sales, independent distributors, negotiations conducted through trading companies and sales in the spot market.
The Company focuses its export sales of PVC principally on the Mercosul and Southeast Asian markets and to a lesser extent on the United States and Europe. The Company also sells directly, as well as through local distributors, to over 20 clients in Mercosul countries. In Asia, the Company distributes its vinyls products exclusively through Nissho Iwai. The remaining PVC is sold through third party distributors and on the spot market.
49
Competition
Polyvinylchloride. The Company and Solvay are the only two producers of PVC in Brazil. Solvays total Brazilian installed annual production capacity is estimated to be 250,000 tons as compared to the Companys annual production capacity of 475,000 tons. Solvays two production facilities are located in São Paulo and therefore are closer in proximity than the Companys facilities to the primary PVC market in Brazil. However, the Company believes that its internal ethylene, ethylene dichloride and vinylchloride monomer production capabilities, its modern suspension plants, its strong customer service and its technical assistance programs enable the Company to compete effectively with Solvay.
The Company also competes with importers of PVC. Approximately 20% of Brazils total PVC consumption in 2002 was imported (21% in 2001). Domestically produced PVC is currently competitively priced with imported PVC after taking into account transportation costs and import duties. In the rest of South America, the Companys principal competitor in the PVC market is also Solvay, which has one plant in Argentina.
The Company also competes with other producers of thermoplastics that manufacture the same line of vinyls products or products that compete with the Companys vinyls product line. Thermoplastics principally consist of polyethylene and polypropylene, and are used in certain applications as substitutes for PVC. Wood, glass and metals also are used in some cases as substitutes for PVC.
Other Products. The four largest Brazilian producers of caustic soda account for approximately 92% of Brazilian production. The Companys production share of caustic soda was approximately 38% in 2002 and 2001. The Company and Dow Chemical operate in this market throughout Brazil, while the other domestic producers of caustic soda generally operate on a local or regional basis. In 2002, approximately 30% (25% in 2001) of Brazils total caustic soda consumption was imported. The Company believes that imports of caustic soda will not increase substantially because of the high cost of transporting caustic soda, which is usually sold in suspension form. In the caustic soda market, the Company competes mainly on the basis of price and timeliness of delivery.
In the rest of South America, the Companys principal competitors in the caustic soda market are Dow Chemical, Solvay and producers located on the U.S. Gulf Coast.
Only one other Brazilian company produces ethylene dichloride for third parties. In the ethylene dichloride market, the Company competes mainly on the basis of price and timeliness of delivery.
The Business Development Unit
The Companys Business Development Unit is comprised principally of the operations conducted by Proppet and Nitrocarbono prior to their mergers with the Company. Prior to the 52114 Merger on August 16, 2002, the only operations of the Business Development Unit were those formerly conducted by Proppet. Prior to the Nova Camaçari Acquisition on July 25, 2001, the Companys Business Development Unit did not conduct any operations. The results of Proppet are included in the Consolidated Financial Statements for the periods after July 25, 2001, the date of the Nova Camaçari Acquisition. The results of Nitrocarbono are included in the Consolidated Financial Statements for the periods after August 16, 2002, the date of the 52114 Merger. See History and Development of the Company and Item 5. Operating and Financial Review and ProspectsThe Auction, the Nova Camaçari Acquisition and the Related Party Mergers. Historical financial information with respect to the Polyolefins Unit is set forth in Note 18 to the Consolidated Financial Statements. The financial information with respect to the Business Development Unit contained in this section is derived from the financial records of Nitrocarbono for the period September to December 2002 and financial records of the Company with respect to its PET business. This financial information and may not be indicative of the results that the Companys Business Development Unit will achieve in the future.
50
The Companys Business Development Units operations are conducted at two
plants located in the Northeastern Complex. One plant produces PET resin and
DMT, and the other plant produces intermediary products including caprolactam,
cyclohexane, cyclohexanone and ammonium sulfate. In addition, the Business
Development Unit manages certain of the Companys minority equity investments,
principally its investments in Petroflex and Cetrel, and manages its business
development ventures in the energy and environmental areas. Approximately 66%
and 34% of the Business Development Units net sales in 2002 were derived from
the sale of PET and of caprolactam, respectively.
Products of the Business Development Unit
The following chart shows the major products produced by the Business
Development Unit of the Company and their typical end uses.
Products
Typical end uses
PET
Packaging for soft drinks, medications and textile fibers
DMT
Used to produce PET and to insulate cables.
Caprolactam
Textile thread (Nylon-6)
Ammonium sulfate
Fertilizer
Cyclohexanone
Paint solvent, pesticides, natural resins, oils and rubber
Cyclohexane
Paint solvent, pesticides, natural resins, oils and rubber
The production of PET involves two main steps: (1) transesterification of DMT in the presence of ethylene glycol, generating dihydroxiethyl-terephthalate (DHET) and methanol, which is sent to the DMT plant; and (2) polycondensation of DHET, which involves the addition of additives and catalysts to accelerate the polycondensation process. The finished polymer produced by polycondensation is extruded into strands, which are immersed in water, transported and fed into a pelletizer. Amorphous chips are fed to the solid-state polymerization unit to produce bottle-grade polyester chips. The solid state polymerization process involves hot dedusting and crystallization to reach the desired intrinsic viscosity for bottle grade application. The hot PET is discharged from the reactor to the fluidized bed cooler and deduster to be stored.
The production of caprolactam involves four main steps: (1) production of cyclohexane through benzene hydrogenation; (2) production of cyclohexanone through oxidation of cyclohexane; (3) oxidation of cyclohexanone; and (4) preparation, purification and flaking of caprolactam. Ammonium sulfate is produced as a by-product. The production of cyclohexanone-oxime involves the preparation of hydroxylamine phosphate through the reduction of nitrate with hydrogen.
The production of ammonium sulfate involves the concentration through evaporation of the ammonium sulfate solution from 40% to 48%. The ammonium sulfate solution is a by-product of the caprolactam plant. The solution at 48% feeds a second evaporation unit to obtain a super saturated solution, which feeds a crystallizer to form ammonium sulfate crystals.
Production Facilities of Business Development Unit Plants
The Business Development Unit operates two plants, which are owned by the Company. At December 31, 2002, the Business Development Units plants had a total annual effective capacity to produce 65,000 tons of PET and 62,000 tons of caprolactam.
The table below sets forth the location, main products, production capacity and tons produced for the years presented for each of the plants currently in the Companys Business Development Unit.
51
Production (in tons)
Year Ended December 31,
Production
Location (Complex)
Main Products
Capacity
2002
2001
Camaçari (Northeastern)
PET
65,000
59,031
56,517
DMT
80,000
76,899
70,378
Camaçari (Northeastern)
CPL
62,000
57,522
48,221
Cyclohenane
72,000
69,144
63,410
Cyclehexanone
55,000
52,942
46,900
Ammonium sulfate
114,000
108,052
94,151
The Companys PET and DMT are produced at one plant located at the Northeastern Complex that commenced operations in 1999 with an annual installed capacity of 65,000 tons of PET and 80,000 tons of DMT. The first plant uses Dupont-Sinco technology for the production of PET and Dynamit Nobel technology for the production of DMT. The Companys caprolactam, cyclohexane, cyclohexanone and ammonium sulfate are produced at another Business Development Unit plant located at the Northeastern Complex. This plant commenced operations in 1977 and uses DSM-Stamicarbon technologies in the production of each of these products.
In addition, the Business Development Unit maintains high-tech research and development laboratories, which laboratories are staffed with highly qualified personnel that are trained to assist Braskems customers in identifying ways to develop or improve their production processes or final products. The Business Development Unit also works in partnership with top research centers and universities to develop higher-value added products.
Maintenance of Business Development Unit Plants
As with the plants of the Basic Petrochemicals Unit, the plants of the Business Development Unit are maintained in part by CEMAN. See Basic Petrochemicals Unit Maintenance of Basic Petrochemicals Unit Plants.
Regular plant maintenance usually requires plant shutdowns every two years and takes approximately 20 days to complete. The last general maintenance shutdown of the caprolactam plant was carried out in April 2003 and lasted 20 days. The cost was approximately U.S.$2.0 million. The last general maintenance shutdown of the Business Development Units DMT and PET plant was carried out in June 2003. The cost of this maintenance was approximately U.S.$2.0 million.
Raw Materials of the Business Development Unit
The most significant direct cost associated with the production of caprolactam is the cost of benzene, which accounted for approximately 46% of the Business Development Units variable production costs during 2002. All of the benzene consumed in the production of caprolactam is supplied by the Basic Petrochemicals Unit.
The most significant direct cost associated with the production of PET is the cost of para-xylene, which accounted for approximately 47% of the Business Development Units variable production costs during 2002 (12% for 2001). All of the para-xylene consumed in the production of PET is supplied by the Basic Petrochemicals Unit.
Sales and Marketing of Business Development Unit Products
The following table sets forth, for the years ended December 31, 2002, and 2001, certain information regarding sales by the Companys Business Development Unit for the years indicated.
52
Year ended December 31,
2002
2001
Quantities
Quantities
sold
Net Sales
sold
Net Sales
(thousands of
(millions of
(thousands
(millions of
tons)
U.S. dollars)
(%)
of tons)
U.S. dollars)
(%)
13.8
6.8
7.4
10.9
6.2
9.7
59.8
54.3
58.7
53.0
57.7
90.3
46.1
20.1
21.7
0.0
0.0
0.0
112.0
3.2
3.4
93.8
0.0
0.0
6.8
1.4
1.5
8.2
0.0
0.0
2.3
0.7
0.8
0.0
0.0
0.0
240.8
86.5
93.5
165.9
63.9
100.0
6.0
6.5
0.0
0.0
92.5
100.0
165.9
63.9
100.0
The Business Development Unit sells its products to a highly concentrated customer base. Five customers accounted for 80% of PET sales during 2002, and 10 customers accounted for 90% of PET sales during the same year. The Business Development Units caprolactam customer base is even more concentrated. Two customers accounted for 66% of its sales during 2002.
During 2002, consumption of PET in Brazil for mineral water, tea and fruit juice bottling increased by 20% and was particularly strong in the soft drink market. In addition, consumption of PET for packaging of cosmetics and other beauty products increased substantially during 2002. Similarly, the use of PET for packaging of cleaning products increased during 2002, as the three principal competitors in this market (Bombril, Química Amparo and Minuano) continued to use PET for producing packaging for liquid detergents.
The Business Development Unit is focused on maintaining a strong and close relationship with its customers, and offers technical support, services and other programs to its customers in order to provide them with the benefit of the most recent technological developments. The Business Development Unit also identifies new business opportunities for Braskem through research and market analysis in order to enhance product demand.
Equity Interests
The Business Development Unit also manages certain of the Companys minority equity investments, including its investments in Petroflex and Cetrel.
Petroflex. At December 31, 2002, the Company owned 20.1% of the total and voting capital stock of Petroflex, a producer of synthetic rubber. The Company obtained the following information with respect to Petroflex, which is publicly traded on the BOVESPA, from publicly available materials. The Company has relied on the accuracy and completeness of such information for purposes of the following description of Petroflex but is not responsible in any manner whatsoever for any such information and has no liability therefor.
Petroflex is the leading producer of synthetic rubber in Latin America and produces approximately 370 thousand tons of more than 50 types of elastomers per year. Petroflex operates three plants located in: Duque de Caxias, Rio de Janeiro; Cabo, Pernambuco; and Triunfo, Rio Grande do Sul. It sells its products to clients in approximately 60 countries throughout the world. Petroflex purchases butadiene from the Company from which it produces styrene-butadiene, polybutadiene, liquid hidroxylated polybutadiene and other elastomers.
Petroflex was formed in 1976 with Petroquisa as its majority shareholder. In 1992, as part of the Brazilian governments efforts to privatize the Brazilian petrochemical industry, Petroquisa auctioned a portion of its interest in Petroflex to private investors. At December 31, 2002, each of the Company and Suzano Química Ltda. owned 20.1% of the voting and total capital stock of Petroflex, Resitec Indústria Química Ltda. owned 12.8% of Petroflexs voting stock, and Unipar União de Indústrias Petroquímicas S.A. owned 10.1% of Petroflexs voting capital stock.
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The major raw materials used in Petroflexs production process are butadiene and styrene. Petroflex purchases part of its raw materials requirements from the Company. Due to high naphtha prices in 2002, the prices of butadiene and styrene increased by 51% and 71%, respectively, in the international market. However, the recovery of rubber prices in reais , due to increases in international prices and the devaluation of the real against the U.S. dollar, allowed Petroflex to pass on these increased costs to its customers.
The main customers of Petroflex are manufacturers of tires, shoes, adhesives and sealants.
In 1993, the three industrial plants operated by Petroflex were awarded ISO 9002 certification. In 1996, Petroflex was awarded ISO 14001 certification for environmental quality, and in 1999, Petroflex was awarded BS 8800 certification for occupational health and safety.
Cetrel. At December 31, 2002, the Company owned 21.1% of the total and voting capital stock of Cetrel, which provides treatment services for the wastewater and organic residues generated by the Company in the Northeastern Complex. The Company obtained the following information with respect to Cetrel, which is a private company, from publicly available materials. The Company has relied on the accuracy and completeness of such information for purposes of the following description of Cetrel but is not responsible in any manner whatsoever for any such information and has no liability therefor.
Cetrel was formed in 1978 as the company responsible for the treatment and disposal of effluents and industrial residue, as well as for environmental monitoring of the entire Northeastern Complex. Cetrel has since expanded its activities to include disposal of solid hazardous waste in special industrial landfills, incineration of organo-chloric liquid residues and solid hazardous waste, and environmental monitoring of the air, underground water, soil, rivers, sea and fauna in and around the Northeastern Complex. Cetrel also provides environmental engineering services for companies located throughout Brazil.
Cetrels main customers are the petrochemical producers in the Northeastern Complex. Cetrel has entered into strategic alliances with DHV (in respect of recycling and reuse of water), Lakes Environmental Softwares, Inc. (in respect of management of residues through the use of specialized software) and Bolland (in respect of incineration of residues with a low chlorine content).
Competition
Braskem is the only manufacturer of caprolactam in the Mercosul market. Imports of caprolactam represented only 8% of domestic consumption in 2002. Although there is a caprolactam plant in Colombia that is focused on the fertilizers market, it does not pose a significant competitive threat to the Company.
There are two producers of PET in Brazil the Company and Rhodia. Rhodias total annual installed production capacity is estimated at 290,000 tons, as compared to the Companys annual production capacity of 65,000 tons. The Company also competes with importers of PET. Approximately 35% of Brazils total PET consumption in 2002 was imported (38% in 2001). Although international producers of PET have greater economies of scales than the Company, the Company is able to compete with these producers due to the high transportation costs and import duties applicable to PET imports. The Companys PET production is aimed at the bottled water segment of the PET market.
Other Equity Investments
Copesul . At December 31, 2002, the Company owned 29.5% of the capital stock of Copesul, the cracker based in the Southern Complex, as a result of the OPP Produtos Merger. The Company accounts for its interest in Copesul using the equity method of accounting as an unconsolidated investment in the Consolidated Financial Statements.
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The Company has obtained the following information with respect to Copesul, which is publicly traded on the BOVESPA, from publicly available materials. The Company has relied on the accuracy and completeness of such information for purposes of the following description of Copesul but is not responsible in any manner whatsoever for any such information and has no liability therefor.
Copesul is the second largest petrochemical cracker in Brazil based on production capacity and produces approximately 40% of the national supply of ethylene. It provides petrochemical feedstocks to second generation producers located in the Southern Complex, including certain of the Polyolefins Units plants. Copesuls manufacturing facility transforms naphtha into basic petrochemicals, including olefins, such as ethylene, propylene (both polymer grade and chemical grade) and butadiene, as well as aromatics, such as benzene, toluene and xylene. These petrochemical products serve as the raw materials processed by the second generation companies located in the Southern Complex to produce intermediate petrochemicals including polyethylene, polypropylene and other resins.
Copesuls ethylene annual production capacity is 1,135,000 tons per year, and its annual propylene production capacity is approximately 567,000. In 2002, Copesul produced 1,017,000 tons of ethylene and 515,000 tons of propylene.
Copesul was formed in 1976 with Petroquisa as its majority shareholder and commenced operations in 1982. In May 1992, as part of the Brazilian governments efforts to privatize the Brazilian petrochemical industry, Petroquisa auctioned a portion of its interest in Copesul to private investors. At December 31, 2002, a consortium, including the Odebrecht Group and Ipiranga, owned approximately 58.9% of the capital stock of Copesul, and Petroquisa owned 15.6% of the capital stock of Copesul.
The principal raw material used in Copesuls production process is naphtha, which is currently supplied by Petrobras to Copesul principally through an underground pipeline connected to the Southern Complex. Although the price of naphtha increased in 2002, Copesuls gross margin increased from 14.6% in 2001 to 19.1% in 2002. For a discussion of the impact of naphtha prices on the petrochemical sector in Brazil, see The Brazilian Petrochemical Industry - Role of the Brazilian Government - Role of Petrobras .
The main customers of Copesul are the second generation companies located in the Southern Complex. Copesul has long-term supply contracts with its major customers, including the Companys Polyolefins Unit. The prices for Copesuls products are determined in accordance with a cost margin sharing method. See The Basic Petrochemicals UnitSales and Marketing of the Basic Petrochemical Unit.
In 2002, net sales and net income were U.S.$967.3 million and U.S.$55.5 million, respectively.
Copesul is subject to the same federal, state and local environmental laws and regulations applicable to the Companys operations at the Southern Complex. Pursuant to federal, state, and local environmental laws and regulations, Copesul is required to obtain operating permits for its facilities. Fundação Estadual de Proteção Ambiental , the Rio Grande do Sul State environmental authority, regulates Copesuls operations by prescribing specific environmental standards for Copesul in its operating permit, which is renewed annually. In addition, an on-site governmental officer monitors environmental compliance at Copesuls facility.
Since December 1999, Copesul has been NBR-ISO 9001, 9002 and 14001 certified. Copesul is also a member of the Responsible Care program. The programs objective is to combine economic development with the best practices of environmental protection, occupational health and industrial safety.
Politeno. At December 31, 2002, the Company owned 35% of the voting capital stock, representing 31% of the total capital stock, of Politeno, a second-generation company operating in the Northeastern Complex. The Company accounts for its interest in Politeno using the equity method of accounting as an unconsolidated investment in the Consolidated Financial Statements. The Company has obtained the following information with respect to Politeno, which is publicly traded on the BOVESPA, from publicly available materials. The Company has relied on the accuracy and completeness of such information for purposes of the following description of Politeno but is not responsible in any manner whatsoever for any such information and has no liability therefor.
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Politeno is the second largest second generation petrochemical company in Latin America, producing thermoplastic resins polyethylenes widely used in the flexible and rigid packaging industries. Politeno produces low, medium and high density polyethylene, linear low density polyethylene, linear medium density polyethylene, ethyl vinyl acetate copolymer EVA, and other special resins.
The production facility of Politeno is comprised of two industrial plants, an LDPE facility and an LPE facility. The LDPE facility is the conventional low-polyethylene and EVA production facility, with a production capacity of 150,000 tons per year. The LPE facility produces linear polyethylene and has an annual production capacity of 210,000 tons.
The principal raw materials used in Politenos production process are ethylene and propylene, which are primarily supplied by Braskem. Politeno also uses butadiene, benzene, toluene and xylene.
Politenos principal customers are third generation producers.
Politeno is subject to the same federal, state and local environmental laws and regulations applicable to the Companys operations at the Northeastern Complex. Pursuant to federal, state and local environmental laws and regulations, Politeno is required to obtain operating permits for its facilities. The Bahia State environmental authority regulates Politenos operations by prescribing specific environmental standards for Politeno in its operating permit, which is renewed annually. In addition, an on-site governmental inspector monitors environmental compliance at Politenos facility.
Quality Control
Braskems quality management uses the following norms and regulations as its base:
| ISO 9001/00 and 14,000; | ||
| OHSAS 18,000; | ||
| OSHA; and | ||
| Responsible Care as implemented by the American Chemistry Council. |
The Company has instituted systematic improvement processes in its operational areas, with focus on integration of production, maintenance, inventory management, client satisfaction and profitability.
ISO Certifications
The Companys extensive quality control procedures have enabled it to
obtain ISO 9002 certifications, an internationally recognized quality control
standard, for the following products:
benzene
butadiene 1, 2
butadiene 1, 3
butene-1
caprolactam
chemical grade propilenem
coperaf-1
cyclohexane
cyclohexanone
D1-hydrogenated CP
DCPD
dimethyl terephthalate (DMT)
ethylene
hydrogen
isoprene
methane
mixed xylenes
MTBE
56
ortho-xylene
para-xylene
PGH Stream
piperlyne
polyethylene terephthalate (PET)
polymer grade propylene
Solvent C9
toluene
Utilities
The Company also has obtained ISO 14001 certifications for the following products:
caustic soda
chlorine
ethylene dichloride
flake caustic soda
high density polyethylene
hydrochloric acid
hydrogen
linear low density polyethylene
liquid caustic soda (rayon grade)
polypropylene
propylene/ethylene copolymers
PVC
sodium hypochlorite
These certifications take into account both the quality of the final product and the quality of operating procedures. The Company is currently seeking ISO 14002 certification in respect of the environmental management systems implemented at its Basic Petrochemicals plants.
Insurance
As of December 31, 2002, the Companys plants were insured against material damages and consequent business interruption through All Risks policies in an aggregate amount equal to approximately U.S.$3.7 billion (combined material damages and business interruption coverage, subject to deductibles). Approximately 87% of the Companys insurance coverage is written in the London insurance market. The Companys remaining insurance coverage is written in the Brazilian insurance market. The Companys All Risks policies are in force until November 30, 2003 and are renewed annually.
The material damages coverage provides insurance for losses due to material damages such as fire and machinery breakdown. This coverage has a maximum indemnification limit of U.S.$1.5 billion and has a deductible of U.S.$5.0 million. The business interruption coverage provides insurance for interruptions resulting from stoppages due to any material damage covered by the policy. This coverage insures against losses of up to U.S.$309.8 million due to stoppages extending beyond 60 days. The losses are covered until the plant and production are re-established, with a maximum indemnity period ranging from 12 to 24 months.
The Company also has a third party liability policy, which covers losses for damages caused to third parties by the Companys operations, including sudden environmental pollution, up to a limit of U.S.$60.0 million per loss or occurrence.
In addition to these policies, the Company has other insurance policies for specific situations, like directors and officers (D&O) liability, marine and transport insurance, vehicle insurance and other kinds of coverages that are not included in the All Risks policies.
The Company does not anticipate having any difficulties in renewing any of its insurance policies and believes that its insurance coverage is reasonable in amount and consistent with industry standards in Brazil.
Property, Plant and Equipment
The property, plant and equipment of the Company consist primarily of petrochemical production facilities in Camaçari, State of Bahia, in Triunfo, State of Rio Grande do Sul, in São Paulo, State of São Paulo and in Maceió and Marechal Deodoro, State of Alagoas, Brazil. The Company also has equity interests in companies located in other parts of the country as well as an administrative support office in Rio de Janeiro, State of Rio de Janeiro, Brazil. In addition, the Company maintains its corporate headquarters in São Paulo.
The following table sets forth the properties of the Company and its main affiliates by location of facilities and type of business.
57
Name of Company
Type of Business
Location of Facilities
Braskem
(1)
Petrochemical and Utilities
Producer
Camaçari, Triunfo, Capuava,
Itatiba, Marechal Deodoro and
Vila Prudente
Copene Monômeros
Petrochemical
Camaçari
Petroflex
Producer
Duque de Caxias
Tegal
Petrochemical Products Storage
Candeias
Cetrel
Industrial Residues Treatment
Camaçari
Codeverde
Land Development
Irecê
Norcell
Forestry Management
Alagoinhas
(1) | Includes Trikem, Polialden, Nitrocarbono, Copene, Proppet and OPP Química. |
The Company believes that all of its facilities are in good condition and are used according to their intended purposes. The Company leases its headquarters in São Paulo and certain other assets that are not material to its operations. For a description of the capacity of each of the Companys industrial facilities, see Business Overview.
As of December 31, 2002, the consolidated net book value of the Companys property, plant and equipment was U.S.$1,183.7 million.
Certain real estate located in the Northeastern Complex (including the DMT and PET plants and all of the equipment located in these plants) and two of the Companys polyolefins plants in the Southern Complex are subject to liens (in the form of mortgages or pledges) that guarantee certain of the Companys financial transactions intended to generate working capital and funds for capital investments.
Environmental Matters
The Company is subject to Brazilian federal, state and local laws and regulations governing the discharge of effluents and emissions into the environment and the handling and disposal of industrial waste or otherwise relating to the protection of the environment. The Company has obtained all environmental and other licenses and permits that are required in connection with the operation of its plants, and all such licenses and permits are current. The Company believes that its operations are, and will continue to be, in compliance in all material respects with applicable environmental laws and regulations currently in effect.
Under federal and state environmental laws and regulations, the Company is required to obtain operating permits for its manufacturing facilities. Authorities in the State of Rio Grande do Sul, where the Southern Complex is located, regulate the Companys operations by prescribing specific environmental standards in the Companys operating permits, which must be renewed annually. State authorities in the State of Bahia issued operating permits for the Companys plants in the Northeastern Complex in 2000, which must be renewed every five years. State authorities in the States of Alagoas and São Paulo have issued permits for the Companys plants in those respective complexes, which must be renewed every four years. Environmental standards for the Companys plants located in the States of Bahia, Alagoas, Rio Grande do Sul and São Paulo are prescribed and updated by regulation.
All projects for the installation and operation of industrial facilities in the Northeastern Complex are subject to approval by the Council for Environmental Protection of the State of Bahia (CEPRAM). CEPRAMs technical office, the Environmental Resources Center (CRA), conducts an analysis of each project and enforces the State of Bahias laws on environmental protection. The States Research and Development Center and other outside consultants act as technical advisors to the CRA. CEPRAM must approve installed projects to commence operations and must renew its consent every five years thereafter. The Companys environmental license was renewed by CEPRAM in 2000 and is valid until 2005. The Companys operating permit obligates it to engage in systematic measures for the treatment of wastewater and hazardous solid waste.
58
In 2000, CEPRAM issued an authorization for the construction of new pipelines between the Port of Aratu and the Companys plant for the transportation of raw materials. This project contemplates the prevention and control of environmental risks through the adoption of measures to prevent and detect leaks and spillages, as well as their timely detection.
The Brazilian government recently enacted an Environmental Crimes Law that imposes criminal penalties on corporations and individuals causing environmental damage. Corporations found to be polluting can be fined up to U.S.$50 million, have their operations suspended, be barred from entering into certain types of government contracts, be required to repair damage they cause, and lose tax benefits and incentives. Individuals (including corporate officers and directors) may be imprisoned for up to five years for environmental violations.
The Company has obtained all environmental and other licenses and permits that are required in connection with the operation of its plants, and all such licenses and permits are up to date.
In September 2002, the Company created a Health, Safety and Environment Committee, composed of leaders of each of the Companys business units and of the Companys management. This Committee supports and monitors the Companys environmental, health and safety efforts. In February 2003, the Companys Board of Directors approved the Companys health, safety and environment policy.
The Company treats wastewater at Cetrel, a liquid effluents treatment station collectively owned by all of the companies in the Northeastern Complex, including the Company, and the State of Bahia. The treatment station also includes a system for the collection and disposal of wastewater contaminated with inorganic waste.
In addition, the Company has a contract with Cetrel for the storage and incineration, treatment and disposal of hazardous solid waste. For other kinds of solid waste, Cetrel maintains a landfill. The Company also has a contract with Holdercim Brasil S.A., a company that is part of a Holdersbank, a Swiss group, to co-process hazardous solid waste in a cement kiln located in the city of Pedro Leopoldo, State of Minas Gerais.
In January 1996, Cetrel obtained its BS 7750 certification (British Standard), and in September 1996 became one of the first companies in the world to receive the ISO 14001 certification, an international standard for environmental control. In 1998, Cetrel obtained certification of its laboratory by the ISO Guide 25 standards system from the Brazilian Institute of Metrology and Industrial Quality (Inmetro).
In 2000, the Company adopted the Clean Technologies Program, carried out in partnership with the Polytechnical School of the Federal University of Bahia, the State of Bahia Industrial Federation and the Environmental Resources Center. This program contributes to the development of actions for the application of clean technologies in industry, such as post-graduate courses in environmental technologies and the establishment of the regional nucleus for clean production, a project coordinated by the Brazilian Business Council for Sustained Development CEBDS. Braskem is also a signatory to the Charter of Sustainable Development of the International Chamber of Commerce.
The Company also signed an agreement for the formulation and implementation of a system for the prevention of global warming through reduced atmospheric emissions of pollutants in Brazil, in partnership with Petrobras, Companhia Vale do Rio Doce and the CEBDS. The Company reduced the atmospheric emissions of pollutants, including sulphur dioxide and particulate matter, generated by the Basic Petrochemicals Unit during 2002, as a result of the better quality fuel that the Company burned in its manufacturing process.
Although the Companys environmental compliance costs have not been substantial to date, these costs may increase as a result of the projected increase in its production capacity. In addition, it is possible that as a result of future regulatory and other developments, the amount and timing of future expenditures required to remain in compliance with environmental regulations could increase substantially from their current levels.
59
Safety
The Company participates in the Responsible Care program, which establishes international standards for environmental, occupational health and safety practices for chemical manufacturers. Participants in this program adopt policies and procedures that require them to follow detailed instructions in matters of health, safety and the environment. The Company seeks to maintain these environmental standards and has qualified its plants for NBR-ISO 9001, 9002 and 14001 certification, which includes internationally prescribed environmental management practices. The Company is currently seeking NBR-ISO 18000 certification for environmental, health and safety compliance for all of its plants.
The Company has adopted practices that it believes are consistent with the
best international practices relating to health, safety and the environment.
As a result of its implementation of these practices, the Company has
successfully decreased the aggregate number of workplace accidents involving
its employees and third party service providers working at its facilities. The
following table illustrates the Companys progress in terms of its safety
record:
For the Year Ended
December 31,
Safety Indicator
2002
2001
2001 (1)
1.1
1.3
3.9
17.0
21.0
71.0
(1) | ABIQUIM average for 2001 |
As shown in the above table, the Companys safety record ranks above average for companies in the Brazilian chemical industry. The Companys safety policy makes all officers, directors and employees responsible for the safety of its workers, which has increased levels of awareness throughout the Company.
The Companys safety improvements in 2002 include:
| no significant environmental accidents in 2002; | ||
| a 41% reduction in the Companys rate of accidents causing injuries requiring a worker to be absent from work, and a 19% reduction in the Companys rate of severe accidents, compared to 2001; | ||
| the Companys caprolactam plant in the Northeastern Complex surpassed three million work-hours without accidents causing injuries requiring any of the Companys workers to be absent from work (a total of 355 days); | ||
| the Companys caustic soda plant in the Northeastern Complex achieved 1,740 days without accidents causing injuries that required any of the Companys workers to be absent from work; and | ||
| during the annual scheduled maintenance period, the Companys PVC plant in Marechal Deodoro, the Companys caustic soda plant in Maceió, the Companys PVC plant in the Northeastern Complex and the Companys caprolactam plant in the Northeastern Complex were completely free of employee accidents. |
The Northeastern Complex is equipped with a fire-fighting safety system. A 200,000 cubic meter artificial lake, connected to the companies in the Northeastern Complex by a pumping station and a distribution network and built in accordance with international safety standards, provides water for firefighting. Each company in the Northeastern Complex, including the Company, has emergency equipment and trained safety crews. A safety plan for the Northeastern Complex provides for firefighting brigades of all companies to assist in the event of major accidents. The Northeastern Complex has rigorous safety standards concerning construction density and the design of pipelines and highways.
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Antitrust Matters
Pursuant to Law No. 8,884/94, any transaction that results in a concentration of market share equal to or greater than 20% of any relevant market or that involves any company with annual gross sales of R$400.0 million or more must be submitted to and approved by the Brazilian antitrust authorities, which consist of three entities: the Conselho Administrativo de Defesa Econômica (the Administrative Council for Economic Defense, or CADE), an independent body consisting of a president and six members; the Secretaria de Defesa Econômica (the Economic Law Office of the Ministry of Justice, or SDE); and the Secretaria de Acompanhamento Econômico (the Economic Policy Bureau of the Ministry of Finance, or SEAE). CADE is the antitrust authority ultimately responsible for reviewing and authorizing transactions that may lead to economic concentration. SEAE analyzes the economic implications of mergers and acquisitions, and SDE conducts the principal investigation and analysis, focusing on the legal aspects of the transaction. As part of the merger review process, SDE, SEAE and the attorney general of CADE each render preliminary opinions, which are delivered to the members of CADE. The members of CADE then render a final decision.
During the year ended December 31, 2001, the Companys predecessor, Copene, had annual gross sales in excess of U.S.$1.8 billion. Accordingly, Copene submitted the terms and conditions of the transactions effected in the Auction to the Brazilian antitrust authorities on September 18, 2001, which will determine whether the transactions effected in the Auction and the other steps in the Companys corporate restructuring process adversely impact competitive conditions in the relevant markets in which the Company competes or whether they would negatively affect consumers. Brazilian antitrust law does not prevent parties from closing a transaction on a provisional basis until the Brazilian antitrust authorities render a final decision. However, if approved, the effectiveness of the transaction is retroactive to the date on which the transaction closed. Although SDE and SEAE have issued non-binding opinions in July 2002 and May 2003, respectively, recommending the unconditional approval of these transactions, CADE is still reviewing the matter and may not agree with those opinions and may not approve these transactions unconditionally. CADE could impose conditions or performance commitments on the Company. Any such action could result in a material adverse effect on the results of operations, financial condition and prospects of the Company.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of the Companys financial condition and results of operations should be read in conjunction with the Companys audited consolidated financial statements as of December 31, 2002 and 2001 and for the three years ended December 31, 2002 and the accompanying notes appearing elsewhere in this annual report, and in conjunction with the financial information included under Item 3. Key InformationSelected Financial Data.
This section contains forward-looking statements that involve risks and uncertainties. The Companys actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in Cautionary Statement with Respect to Forward Looking Statements, those set forth in Item 3. Key InformationRisk Factors and the matters set forth in this annual report generally.
Overview
The Company is the largest petrochemical company in Latin America and one of the five largest Brazilian industrial companies based on net revenues, with a diversified portfolio of chemical products, large competitive scale and a strategic focus on thermoplastics, including polyethylene, polypropylene and PVC. The Company is the only Brazilian company with integrated first and second generation petrochemical production facilities, producing 41.4% of the total volume of olefins, 40.6% of the total volume of polyethylene and polypropylene, and 66.7% of the PVC, respectively, produced in Brazil during the year ended December 31, 2002. The Company also sells caustic soda and various other petrochemicals, chlorine and industrial utilities and services, and holds 29.5% of the capital stock of Copesul, a first generation petrochemical producer operating in the Southern Complex, and 35% of the voting capital stock, representing 34.7% of the total capital stock, of Politeno, a second generation producer of polyethylene and ethylene vinyl acetate.
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U.S. GAAP Presentation and Reporting Currency
The Companys Consolidated Financial Statements have been prepared in accordance with U.S. GAAP under Statement of Financial Accounting Standards No. 52, Foreign Currency Translation (SFAS 52). Except as otherwise specifically indicated, all financial information in this annual report has been prepared in accordance with U.S. GAAP and presented in U.S. dollars. For certain purposes, such as filing financial statements with the CVM and determining dividend payments and other distributions and tax liabilities in Brazil, the Company has been and will continue to be subject to the requirements of the Brazilian Corporate Law, and the Company will continue to prepare its financial statements in Brazil in accordance with the Brazilian Corporate Law.
The Company has elected to present its financial statements in U.S. dollars. For this purpose, amounts in Brazilian currency for all periods presented have been translated into U.S. dollars in accordance with the methodology set forth in SFAS 52.
Although the Company presents its financial statements in U.S. dollars, the Companys functional currency is the Brazilian real . Before 1998, the Company was required under SFAS 52 to use the U.S. dollar as its functional currency because of the highly inflationary conditions that had been present in the Brazilian economy. Based on guidelines accepted by the U.S. Securities and Exchange Commission (the Commission), the Company concluded that, as of January 1, 1998, the Brazilian economy no longer had highly inflationary conditions because the increase in the general price index had been less than 100% over the previous three years. Accordingly, beginning on January 1, 1998, the Company changed its functional currency to the real because, in accordance with SFAS 52, a company operating in an environment that is not highly inflationary is obligated to use the currency of its operating environment as its functional currency.
Although the Company adopted the real as its functional currency, the Company continued to use the U.S. dollar as its reporting currency, which requires the Company to translate amounts from reais to U.S. dollars in accordance with SFAS 52. Accordingly, as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002:
| all assets and liabilities have been translated into U.S. dollars using the applicable year-end rate as published by the Central Bank of Brazil (2002 - R$3.5333 to U.S.$1.00, 2001 R$2.3204 to U.S.$1.00); | ||
| statement of operations and cash flow accounts (including amounts relative to local currency indexation and exchange variances on assets and liabilities denominated in foreign currency, which were not translated prior to 1998) have been translated into U.S. dollars using the average rate prevailing in the month of the charge or credit to income; and | ||
| capital accounts have been translated at historical rates. |
Gains and losses resulting from the translation of the financial statements are included as a component of other comprehensive income in shareholders equity, and transaction gains or losses (related to foreign currency asset or liability) are included in the statement of operations in the financial income and financial expense accounts. See Brazilian Economic EnvironmentInflation and Exchange Rate VariationEffects of Exchange Rate Variation.
Critical Accounting Policies
Discussion of Critical Accounting Policies
The presentation of the Companys financial condition and results of operation often requires the Companys management to make judgments regarding the effects of matters that are inherently uncertain on the carrying value of the Companys assets and liabilities. Actual results may differ from those estimated under different variables, assumptions or conditions. In order to provide an understanding about how management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, the Company has included comments related to each of the following critical accounting policies:
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| revenue recognition and accounts receivable; | ||
| costs and inventory valuation; | ||
| impairment and amortization of permanent assets; | ||
| valuation of long-term investments; | ||
| valuation of derivative instruments; | ||
| pension plans; | ||
| tax incentives; | ||
| deferred taxes; and | ||
| contingencies. |
Revenue Recognition and Accounts Receivable
Revenue for product sales is recognized when risk and title to the product transfer to the customer, which usually occurs at the time goods are delivered.
The allowance for doubtful accounts is recorded in an amount the Company considers sufficient to cover any probable losses on realization of its accounts receivable from the Companys customers and is included as selling expenses; no adjustment is made to net sales revenue. In order to establish the allowance for doubtful accounts, the Companys management constantly evaluates the amount and characteristics of the Companys accounts receivables. When significant delays occur and the likelihood of receiving these payments decreases, a provision is made. In case receivables in arrears are guaranteed or there are reasonable grounds to believe they will be paid, no provision is made.
Costs and inventory valuation
Inventories are comprised of finished goods, work in process, raw materials, and materials for consumption. Inventories are recorded at the lower of average cost or realizable value. Inventories of consumption materials are classified as current and long-term assets based on the Companys estimates of when they will be consumed.
Impairment and amortization of permanent assets
Goodwill and those intangible assets with indefinite lives are subject to annual impairment tests based on the estimated market values of the related reporting units and the intangible assets. These assets are not subject to amortization beginning in January 2002, as a result of the implementation of Statement of Financial Accounting Standards no. 142.
The Company performs cash flow studies to determine if the accounting value of its assets, namely its fixed assets 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, the asset will be subject to a provision for impairment.
Fixed assets and certain intangible assets are regularly recognized as expenses through depreciation, depletion or amortization. The rates of depreciation, depletion or amortization are based on management or third-party estimates of the periods over which these assets can be expected to provide benefits to the Company.
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Valuation of long-term investments
Investments of a permanent nature are recorded at cost or under the equity method, depending on the degree of influence over their operations. These investments are not required to be reduced to their market value, unless the loss in value is believed to be other than temporary, which the Company currently believes not to be the case.
Valuation of derivative instruments
The Company utilizes swaps, forwards, options and other derivative instruments to manage the Companys risks relating to variations in foreign exchange rates and interest rates. These instruments are recorded at their estimated fair value, based on market quotations for similar instruments and assumptions as to future foreign exchange and interest rates.
Pension plans
With respect to the Companys obligations as sponsor of defined benefit pension plans, the Company relies on calculations performed by independent actuaries, based on assumptions provided by the Company. The primary assumptions include interest rates, investment returns, levels of inflation, mortality rates and future employment levels. These assumptions affect the Companys liability for accrued pension costs and the amounts the Company is required to provide each year as the Companys pension cost.
Deferred taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, as well as tax loss carry forwards. The Company regularly reviews the deferred tax assets for recoverability and establishes a valuation allowance, as required, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. In the event the Company or one of its subsidiaries operate 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 time period within which the underlying temporary differences become taxable or deductible, the Company evaluates the need to adjust the balance of the valuation allowance for the Companys deferred tax assets.
Contingencies
The Company is currently involved in certain legal and administrative proceedings that arise from the Companys normal course of business, as described in Note 13(b) to the Companys consolidated financial statements. Some of these proceedings involve amounts that are material to the financial statements. The Company believes that the extent to which these contingencies are recognized in the Companys financial statements is adequate.
It is the Companys policy to record accrued liabilities for contingencies that are deemed probable of creating a material adverse impact on the result of its operations or its financial condition.
The Company is also involved in several legal and administrative proceedings, which are aimed at obtaining or defending its legal rights with respect to tax legislation, which the Company believes to be unjust or unconstitutional. The Company considers these issues to be contingent gains, which the Company does not recognize in the financial statements until the contingency has been resolved. When the Company has been granted the temporary right not to pay the disputed amounts or to offset disputed amounts that have already been paid against current tax obligations, the Company continues to maintain a liability for the disputed amounts until the contingency has been resolved. The Company also accrues arrears interest on the liability, using the applicable interest rate defined in the tax law.
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The Auction, the Nova Camaçari Acquisition and the Related Party Mergers
On July 25, 2001, Nova Camaçari acquired ESAE in an auction conducted by the Central Bank. ESAEs principal asset consisted of 56.3% of the capital stock, representing 63.8% of the voting stock, of Conepar, a Brazilian holding company, the principal assets of which were 42.6% of the capital stock, representing 66.7% of the voting stock, of Polialden and 31% of capital stock, representing 35% of the voting stock, of Politeno. In connection with the auction, Nova Camaçari also acquired:
| all of the capital stock of Intercapital, the principal asset of which was 31.9% of the capital stock, representing 36.2% of the voting stock, of Conepar; and | ||
| 100% of the capital stock of Proppet. |
To finance these acquisitions, Nova Camaçari incurred U.S.$573.5 million in indebtedness. On July 25, 2001, the Companys predecessor, Copene, acquired Nova Camaçari for U.S.$40 (forty dollars). As a result, Copene held indirectly all of the capital stock of Proppet, 66.7% of the voting capital of Polialden and 35% of the voting capital of Politeno. In September 2001:
| Nova Camaçari acquired the capital stock of Conepar that it did not already own from BNDESPAR for U.S.$62.0 million; and | ||
| Copene merged with Nova Camaçari, Intercapital and Proppet. |
On August 16, 2002, OPP Produtos and 52114 Participações merged with and into the Company. As a result, the Company, directly and indirectly, acquired all of the voting capital stock of OPP Química, 64.4% of the voting capital stock of Trikem, 92.3% of the voting capital stock of Nitrocarbono and 29.5% of the voting capital stock of Copesul. Prior to the Related Party Mergers, ODB owned all of the voting capital stock of OPP Produtos, and Pronor owned all of the voting capital stock of 52114 Participações. In connection with the Related Party Mergers, the Company issued shares representing 43.7% of its voting capital stock to ODB, a member of the Odebrecht Group, and shares representing 3.6% of its voting capital stock to Pronor, a member of the Mariani Group.
Following the Related Party Mergers:
| the Odebrecht Group owned 44.6% of the voting capital stock of the Company and owned 39.8% of the voting capital stock of Norquisa, the principal asset of which is 30.8% of the voting capital stock of the Company; and | ||
| the Mariani Group owned 3.6% of the voting capital stock of the Company and owned 16.1% of the voting capital stock of Norquisa. |
In February 2003, the Company completed a public tender offer in Brazil for the shares of Nitrocarbono not owned by the Company. As a result of this tender offer, the Company owned more than 99.9% of the voting capital stock of Nitrocarbono. On March 31, 2003, Nitrocarbono, OPP Química and ESAE merged with and into the Company.
Accounting Aspects
For purposes of financial statements prepared in accordance with the Brazilian Corporate Law, the Company accounted for the acquisition of each of Nova Camaçari, OPP Produtos and 52114 Participações under the purchase method of accounting as of the respective date of each acquisition. Under this accounting method, the recorded assets and liabilities of Nova Camaçari, OPP Produtos and 52114 Participações were transferred to the Companys consolidated financial statements at their historical amounts, and goodwill was recognized for the difference between the purchase price and the net acquired assets. For purposes of U.S. GAAP, the Company also accounted for the Nova Camaçari Acquisition and the 52114 Merger under the purchase method of accounting as of the respective date of each acquisition. However, as a result of the common control exercised by the Odebrecht Group over the Company and OPP Produtos prior to the OPP Produtos Merger, in accordance with U.S. GAAP, the Company accounted for the acquisition of OPP Produtos in a manner similar to a pooling-of-interests as if this acquisition had occurred on July 25, 2001, the date of the Nova Camaçari Acquisition and the date on which such common control had commenced. As a result:
65
| the consolidated balance sheets of the Company as of December 31, 2001 included in the Consolidated Financial Statements reflect the inclusion of the assets and liabilities acquired and assumed by the Company in the Nova Camaçari Acquisition and the OPP Produtos Merger; | ||
| the consolidated balance sheets of the Company as of December 31, 2002 included in the Consolidated Financial Statements reflect the inclusion of the assets and liabilities acquired and assumed by the Company in the Nova Camaçari Acquisition, the OPP Produtos Merger and the 52114 Merger; | ||
| the consolidated statement of operations and cash flow accounts of the Company for the year ended December 31, 2000 included in the Consolidated Financial Statements reflect solely the operations and cash flows of Copene and its consolidated subsidiaries for such year; | ||
| the consolidated statement of operations and cash flow accounts of the Company for the year ended December 31, 2001 included in the Consolidated Financial Statements reflect the operations and cash flows of the entities acquired in the Nova Camaçari Acquisition and the OPP Produtos Merger for the period on and after July 25, 2001; and | ||
| the consolidated statement of operations and cash flow accounts of the Company for the year ended December 31, 2002 included in the Consolidated Financial Statements reflect the operations and cash flows of the entities acquired in the Nova Camaçari Acquisition and the OPP Produtos Merger for such year and the operations and cash flows of the entities acquired in the 52114 Merger for the period on and after August 16, 2002. |
Business Segments and Presentation of Segment Financial Data
In 2002, the Company created an organizational structure that it believes best reflects its business activities and corresponds to its principal products and production processes. The Company reports its results by market segment to reflect this organizational structure:
| Basic Petrochemicals This segment includes the Companys basic petrochemical production activities and its supply of electricity, steam and compressed air to second generation producers, including certain producers owned or controlled by the Company, in the Northeastern Complex, and consists of operations historically conducted by Copene, the Companys predecessor; | ||
| Polyolefins This segment includes the Companys activities related to the production of polyethylene and polypropylene and ancillary petrochemical derivatives and consists of the operations historically conducted by OPP Química and by Polialden; | ||
| Vinyls This segment includes the Companys activities related to the production of PVC, caustic soda and chlorine and consists of the operations historically conducted by Trikem; and | ||
| Business Development This segment includes the Companys activities related to the production of other second generation petrochemical products, principally the operations historically conducted by Nitrocarbono and Proppet, and the management of certain of its minority equity interests, principally its investments in Petroflex and Cetrel. |
The Company reports its business segment data in its U.S. GAAP financial statements in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). SFAS 131 requires that segment data be presented on the basis of the internal information that is used by management for assessing performance and making operating decisions, including decisions regarding the allocation of resources among segments. Because the Company evaluates and manages segment performance based on information generated from its statutory accounting records which are maintained in accordance with the Brazilian Corporate Law, the segment data included in the Companys U.S. GAAP financial statements is presented under the Brazilian Corporate Law accounting principles, with certain exceptions related to the dates when the acquired companies are included in the consolidation.
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The segment financial information presented in this section has been translated from reais into U.S. dollars at the average rate for each period presented. Intersegment net revenues related to transfers of basic petrochemicals and other products were recorded at market prices.
Demand for the Companys Products
Because of the Companys large market share in many of the markets in which its petrochemical products are sold, fluctuations in Brazilian consumer demand affect the Companys production levels and net sales revenues. Brazilian gross domestic product grew at a compound average annual rate of 2.1% from 1990 through 2002. During the corresponding period, Brazilian consumption of polyethylene, polypropylene and PVC grew at an average compound rate of 7.7%, with (1) average consumption growth of polyethylene increasing at a compound average annual rate of 6.5%, (2) average consumption growth of polypropylene increasing at a compound average annual rate of 11.7% and (3) average consumption growth of PVC increasing at a compound average annual rate of 6.1%. Demand for the Companys petrochemical products has historically demonstrated a high degree of elasticity, generally growing at three to four times the rate of growth of Brazils gross domestic product.
The Company anticipates that growth in demand for its petrochemical products will continue due to (1) increasing consumption of plastic-based consumer products, (2) the trend towards substitution of traditional packaging materials, such as glass and paper, with plastics, (3) general economic growth in Brazil and (4) broader income distribution in Brazil. However, the Companys estimates about market trends and economic growth may turn out to be incorrect.
Cyclicality Affecting the Petrochemical Industry
Consumption of the petrochemical products manufactured by the Company has increased significantly over the past 30 years. Due to this growth in consumption, producers have experienced alternating periods of insufficient capacity for these products. Periods of insufficient capacity, including some due to raw material shortages, have usually resulted in increased selling prices and operating margins. These periods have often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates, selling prices and operating margins.
The Company expects that these cyclical trends in selling prices and operating margins relating to 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; | ||
| when demand is falling, the high fixed cost structure of the capital intensive petrochemicals industry 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 come on-stream and are therefore necessarily based upon estimates of future demand; and | ||
| as competition in these products is focused on price, being a low-cost producer is critical to profitability. This favors the construction of larger plants that maximize economies of scale but also leads to major increases in capacity that can outstrip current growth in demand. |
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Sales of the Companys Products
In 2002, sales of by the Basic Petrochemicals Unit, the Vinyls Unit, the Polyolefins Unit and Business Development Unit represented 45.3%, 15.8%, 35.1% and 3.8%, respectively, of the Companys net revenue on a combined basis. In 2002, the Company sold approximately 77% of its petrochemical products in Brazil and 23% to foreign customers. Exports to other countries in the Americas accounted for 69% of the Companys export sales, with the remainder of the Companys exports being sold in Europe (12%), in Asia (15%) and in Africa (4%).
In 2002, sales of the Companys petrochemical products increased as compared to 2001, despite the economic difficulties faced by Brazil and other Latin American countries caused by, among other factors, the uncertainty prior to and immediately following Brazils October 2002 presidential elections, and the stoppage for 92 days in 2002 of the pyrolysis plant that is part of the Olefins 1 Unit operated by the Basic Petrochemicals Unit for scheduled maintenance and expansion of this facility. As a result, the Companys shipments of petrochemical products increased in 2002 by 1.9% as compared to 2001.
The utilities business within the Basic Petrochemicals Unit consists of the production of electricity, steam, compressed air and treated water for sale to second generation petrochemical producers in the Northeastern Complex, including those owned by the Company, and represented 9.5% of the Basic Petrochemicals Units net sales in 2002.
Pricing of the Companys Products
Historically, pricing of the Companys products has been influenced by, among other factors, the following:
| international prices for petrochemical products, which are significantly influenced by industry capacity utilization rates and by significant increases in capacity in the industry; | ||
| demand for petrochemical products as a result of the level of growth of the Brazilian economy and the economics of other South American countries; | ||
| fluctuations in the exchange rate between the real and the U.S. dollar; and | ||
| economic conditions in Brazil and other South American countries, including prevailing inflation rates. |
The Company negotiates the real prices for certain of its products, principally polyethylene, polypropylene and PVC, on a monthly basis with its customers. The Company attempts to revise its 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 either international market prices or the exchange rate, the Company is sometimes unable to reflect these changes fully in its prices.
Basic Petrochemical Products. Prices for ethylene produced by the Company are calculated based on a margin sharing system. SeeThe Basic Petrochemicals UnitSales and Marketing of Basic Petrochemical Products. The margin for the whole ethylene chain is calculated and split between the Company and its customers in proportion to the cost of investments of each company in the chain. Under this formula, the Company shares the benefit or burden of higher or lower prices for ethylene derivatives, such as polyethylene, with its customers. Conversely, the Company also shares the benefit or burden of lower or higher naphtha prices with its customers.
The Company calculates the monthly price of propylene by multiplying the monthly ethylene price that it charges (including Brazilian taxes) by the ratio of the European contract price for propylene to the European contract price for ethylene. The price of butadiene is determined by using the European contract price and, unlike prices for the Companys other products, includes freight costs.
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Other Products. The prices of the products of the Companys Polyolefins Unit, Vinyls Unit and Business Development Unit generally trade on the basis of prices determined in highly competitive markets. Nevertheless, the Company generally obtains higher prices in Brazil for these products than the prices it obtains when it export its products. The difference in prices between the Brazilian and export markets results principally from:
| higher transportation costs in Brazil; and | ||
| tariffs and duties. |
In addition, the Company is an integrated producer of caustic soda, chlorine and PVC, and the Vinyls Unit is able to benefit from gains achieved through countercyclical pricing of its vinyls products. When a strong international demand for PVC exists, thereby resulting in higher prices for PVC, the Company and other producers in the PVC production chain produce surplus volumes of EDC, resulting in lower prices for EDC. Conversely, when lower international demand for PVC exists, thereby depressing the price of PVC, less EDC is produced, permitting the Company to realize higher prices for EDC.
Prices for caprolactam produced by the Companys Business Development Unit generally fluctuate in accordance with international market prices, but because the Company sells approximately 80% of its caprolactam production to one customer, it has generally been unable to assess any material premium over the prevailing international market price on sales of caprolactam.
Cost of Sales and Services
Historically, the Companys costs for certain raw materials, principally naphtha, ethylene and propylene, and the costs of certain catalysts required in the Companys production processes, have been incurred in U.S. dollars or are U.S. dollar-linked. Other costs of production, consisting primarily of other raw materials, principally salt used in the vinyls segment, labor, energy and depreciation costs, are incurred in reais . Approximately 77% of the Companys costs and operating expenses are denominated in U.S. dollars or are U.S. dollar-linked, with the remaining 23% denominated in reais .
The Companys cost of naphtha, the primary raw material used in the production of the Companys basic petrochemical products, represented approximately 66% and 70% of the Companys cost of sales for 2002 and 2001 on a combined basis giving effect to the Nova Camaçari Acquisition and the Related Party Mergers as if they had occurred on January 1, 2000 and including naphtha purchased by the Companys Basic Petrochemicals Unit and naphtha used to produce the ethylene that the Companys Polyolefins Unit purchases from Copesul. 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. Prior to August 9, 2000, the Company was required under Brazilian law to purchase all of its naphtha requirements from Petrobras, and naphtha prices were established monthly by Petrobras. During this period, Petrobras established naphtha prices on a monthly basis based upon a pricing formula that took into account international oil prices and the costs to import naphtha into Brazil. The formula itself was memorialized in a federal government document prepared by the Finance and Energy Ministries and signed by the Brazilian President.
Beginning on August 9, 2000, the Brazilian government implemented a policy of free naphtha price negotiation and permitted the Company to purchase naphtha from suppliers other than Petrobras. The Company has entered into a 10-year renewable contract with Petrobras under which the prices it pays Petrobras for naphtha in any month are established based on the average ARA quotations 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. In addition, the Company imports naphtha through its terminal at Aratu under short-term contracts and spot market purchases. The prices for naphtha under these contracts are established based on ARA quotations as well.
Ethylene is the primary raw material used by the Polyolefins Unit in the production of polyethylene is produced by the Basic Petrochemicals Unit and by Copesul. The Companys cost of ethylene purchased from Copesul represented approximately 52% and 56% of the Companys cost of sales for 2002 and 2001 on a combined basis giving effect to the Nova Camaçari Acquisition and the Related Party Mergers as if they had occurred on January 1, 2000. The cost of ethylene is subject to the margin sharing system discussed above under Pricing of the Companys ProductsBasic Petrochemicals Products. As a result, the price for ethylene is significantly affected by international market prices for naphtha. The cost of propylene, the primary raw material used by the Polyolefins segment in the production of polypropylene, is also significantly affected by international market prices as discussed above under Pricing of the Companys ProductsBasic Petrochemical Products.
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The Company obtains salt, the primary raw material used by the Vinyls segment, from mines it operates in the State of Alagoas. The Company estimates that its salt reserves are sufficient to produce chlorine (with which it produces EDC) at expected rates of production for in excess of 50 years.
The Companys energy cost represented approximately 2.5% and 2.2% of the Companys cost of sales for 2002 and 2001, respectively, on a combined basis giving effect to the Nova Camaçari Acquisition and the Related Party Mergers as if they had occurred on January 1, 2001. In particular, the Companys vinyls segment has significant electricity requirements. CHESF supplies electricity to the Company under a long term contract expiring in 2007. Copel, an electricity distributor in southern Brazil serving the State of Rio Grande do Sul, supplies electricity to the Company under a contract expiring in December 2003. Tractabel, an electricity distributor in southern Brazil serving the State of Rio Grande do Sul, supplies electricity to the Company under a long-term contract expiring in 2007. Eletropaulo MetropolitanaEletricidade de São Paulo S.A. (Eletropaulo), the electricity distributor in the City of São Paulo, supplies electricity to the Company under a one-year renewable contract. Following the expiration of its power purchase agreement with Copel, the Company will purchase all of its electricity needs in southern Brazil from Tractabel under its existing contract. The Company generates all of its electricity requirements for its operations in the Northeastern Complex and sells the excess electricity that it generates to other second generation producers in the Northeastern Complex.
Capacity Utilization
The Companys operations are capital intensive. Accordingly, to obtain lower unit production costs and maintain adequate operating margins, the Company seeks to maximize the capacity utilization rate at all of its production facilities. On a pro forma basis, giving effect to the Nova Camaçari Acquisition and the Related Party Mergers as if they had occurred on January 1, 2001, the Companys average capacity utilization was approximately 86% in 2002 and 81% in 2001. Two recognized petrochemical industry consultants project that demand for thermoplastic products over the next few years will result in an increase of capacity utilization to approximately 90%.
The table below sets forth capacity utilization with respect to certain of
the Companys principal products for the years ended December 31, 2002 and 2001
on a combined basis, giving effect to the Nova Camaçari Acquisition and the
Related Party Mergers as if they had occurred on January 1, 2001.
Year ended December 31,
2002
2001
82
%
89
%
79
%
83
%
78
%
73
%
92
%
84
%
84
%
76
%
87
%
91
%
Equity Investments
The Company owns 29.5% of the capital stock of Copesul. The Company records its proportional interest in the net income (loss) of Copesul as equity in earnings of affiliates, net in its income statement. The Company accounts for its equity investment in Copesul in affiliated companies. In addition, certain of the plants in the Companys Polyolefins Unit purchase ethylene and propylene from Copesul under long-term contracts.
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The Company owns 35% of the voting capital stock, representing 34.7% of the total capital stock, of Politeno. The Company records its proportional interest in the net income (loss) of Politeno as equity in earnings of affiliates, net in its income statement. The Company accounts for its equity investment in Copesul in affiliated companies. In addition, the Companys Basic Petrochemicals Unit sells ethylene and propylene to Politeno under long-term contracts.
Brazilian Economic Environment
As a Brazilian company with substantially all of its operations in Brazil, the Company is significantly affected by economic and social conditions in the country. In particular, the Companys results of operations and financial condition are impacted by the growth rate of Brazils gross domestic product. See Gross Domestic Product. The Companys results of operations and financial condition are also affected by the rate of Brazilian inflation and the rate of depreciation of the real against the U.S. dollar. See Inflation and Exchange Rate Variation.
Gross Domestic Product
After several years of steady economic growth following the introduction of the Real Plan in 1994, the Brazilian economy entered into a downturn in late 1998 that was exacerbated by a significant currency devaluation beginning in mid-January 1999. As a result, gross domestic product, or GDP, grew in constant terms by 0.2% in 1998 and by 0.8% in 1999.
The recovery of the Brazilian economy in 1999, in the wake of the 32.4% devaluation of the real against the U.S. dollar and the strong fiscal adjustment produced by the public sector, led to enhanced consumer confidence. In 2000, GDP in Brazil grew by 4.4%. GDP in Brazil increased by 1.4% in 2001, principally as a result of an electric energy shortage in Brazil, decreased consumer confidence following the Argentine crisis and the aftermath of the September 2001 terrorist attacks in the United States.
Brazilian average consumption of the Companys second-generation products decreased by 1.5% in 2001 as compared to average consumption of such products in 2000 because many of the Companys customers were required to reduce the scope of their operations as a result of energy rationing in Brazil during 2001.
In 2002, GDP in Brazil increased by 1.5%. GDP growth in Brazil was inhibited in 2002 due to the economic uncertainties surrounding Brazils October 2002 presidential elections and other factors. However, in 2002, average consumption of the Companys products increased by 3.1% over the depressed 2001 levels and 1.6% over 2000 levels.
Inflation and Exchange Rate Variation
Prior to July 1994, Brazil had for many years experienced high and generally unpredictable rates of inflation and steady devaluation of its currency relative to the U.S. dollar. Since the introduction of the real as the new Brazilian currency in July 1994, inflation has remained relatively low compared to historical periods.
The following table sets forth, for the years shown, Brazilian inflation and the devaluation of the real against the U.S. dollar as measured by comparing the daily exchange rates published by the Central Bank on the last day of each year:
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Year ended December 31,
2002
2001
2000
1999
1998
25.3
%
10.4
%
9.9
%
20.1
%
1.8
%
9.9
%
7.1
%
4.4
%
8.6
%
(1.8
%)
34.3
%
15.7
%
8.5
%
32.4
%
7.6
%
(1) | Based on the Índice Geral de Preços - Mercado (the Brazilian General Price IndexMarket, or IGP-M) published by the Fundação Getúlio Vargas , or the Getúlio Vargas Foundation. | |
(2) | Based on the Índice de Preços ao Consumidor (the Brazilian Consumer Price Index, or IPC) published by Fundação Instituto de Pesquisas Econômicas , or the Economic Research Institute Foundation. |
Inflation and exchange rate variations have, and may continue to, substantially effect the Companys financial condition and results of operations as well as the reported value of the Companys assets and liabilities in U.S. dollars.
Effects of inflation
Before January 1, 1998, Brazil was considered to be a highly inflationary economy. For periods before January 1, 1998, the Company translated its financial statements into U.S. dollars from financial statements presented in reais, in accordance with the provisions of SFAS 52. Under the financial statement procedures adopted by the Company for these periods, the Company translated non-monetary items (inventories, property, plant and equipment and accumulated depreciation and depletion, as well as shareholders equity accounts) into U.S. dollars at historical exchange rates. The Company translated monetary assets and liabilities denominated in Brazilian currency at period-end exchange rates. The Company included the translation gain or loss resulting from this restatement process in the applicable statements of operations.
As of January 1, 1998, the Company concluded that the Brazilian economy had ceased to be highly inflationary for purposes of SFAS 52 and changed its functional currency from its reporting currency of U.S. dollars to the Brazilian reais . Therefore, on January 1, 1998, the Company translated the U.S. dollar amounts of non-monetary assets and liabilities into reais at the then-current exchange rate. These translated amounts became the new accounting bases for such assets and liabilities. At each period ended after January 1, 1998, the Company has translated all of its assets and liabilities into U.S. dollars at the then-current applicable exchange rate and all accounts in the statements of operations and cash flows at the average rates prevailing during the applicable period. The Company has included the translation gain or loss resulting from this translation process in the cumulative translation adjustments component of shareholders equity.
One significant effect of inflation and exchange rate variations on the Company relates to its costs and operating expenses. A significant percentage of the Companys costs and operating expenses are in reais and tend to increase with Brazilian inflation because the Companys suppliers and service providers generally increase prices to reflect Brazilian inflation. As expressed in U.S. dollars, however, these increases have been typically offset at least in part by the effect of the appreciation of the U.S. dollar against the real . If the rate of Brazilian inflation increases more rapidly than the rate of appreciation of the U.S. dollar against the real , then, as expressed in U.S. dollars, the Companys costs and operating expenses may increase and assuming constant U.S. dollar sales prices, the Companys profit margins may decrease. If the rate of appreciation of the U.S. dollar exceeds the rate of Brazilian inflation, then, as expressed in U.S. dollars, the Companys costs and operating expenses may decrease and, assuming constant U.S. dollar and sales prices, the Companys profit margins may increase.
Effects of exchange rate variation
Since the Company adopted the real as its functional currency on January 1, 1998, the depreciation and appreciation of the real against the U.S. dollar has impacted, and will continue to impact, the Companys results of operations in several ways. The Companys reporting currency for all periods is the U.S. dollar. The Company maintains its financial records in reais , and translates its statements of operations into U.S. dollars at the average rate published by the Central Bank of Brazil for the corresponding period. The amounts reported in the Companys statements of operations in any given period are reduced or increased at the same rate as the real has depreciated or appreciated in relation to the U.S. dollar during that period.
72
The Company has significant amounts of U.S. dollar denominated liabilities, as well as operating expenses denominated in or linked to U.S. dollars. In addition, a substantial portion of the Companys revenues are linked to U.S. dollars.
Virtually all of the Companys sales are of petrochemical products, which generally trade freely in the international markets at prices expressed in U.S. dollars. The Company generally attempts to set prices that take into account, and vary to reflect changes in, the international market prices for its petrochemical products and variations in the exchange rate. As a result, although substantially all of the Companys revenues are in reais , approximately 76% of the Companys sales in fiscal year 2002 were linked to U.S. dollar-based international market prices. When the real depreciates against the U.S. dollar, assuming international market prices remain constant in U.S. dollars, the Company increases the prices for its products in reais (to the extent possible in light of then-prevailing market conditions), and the Companys net revenues in reais increase. Conversely, when the real appreciates against the U.S. dollar, assuming international market prices remain constant in U.S. dollars, the Company generally decreases the price of its products in reais, and the Companys net revenues in reais tend to decrease as well. 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 the Company can effectively pass on such increased costs in reais to its customers in Brazil. Such pricing mismatches decrease when fluctuations in the U.S. dollar- real exchange rate are less volatile. These increases and decreases in the Companys reais net revenue, however, are not reflected in the Companys net revenue when reported in U.S. dollars.
During fiscal year 2002, approximately 66% of the Companys cost of sales was represented, directly and indirectly, by the cost of naphtha, which is U.S. dollar-denominated, and an additional 11% of the Companys cost of sales was U.S. dollar-denominated or U.S. dollar-linked. The devaluation of the real has an adverse effect on the cost of naphtha as well as other U.S. dollar-linked or imported raw materials. As a result, when the real depreciates against the U.S. dollar, assuming these costs remain constant in U.S. dollars, the cost for the Companys products in reais increases and the Companys net operating revenues in U.S. dollars decrease. Conversely, when the real appreciates against the U.S. dollar, assuming these costs remain constant in U.S. dollars, the cost for the Companys products in reais decreases and the Companys net operating revenues in U.S. dollars increase. These decreases and increases in the Companys reais net operating revenues, however, are not reflected in the Companys net operating income when reported in U.S. dollars.
Another effect of devaluation is that the Companys operating costs and expenses when expressed in U.S. dollars tend to decline. This happens primarily because a portion of the Companys costs and a substantial portion of the Companys operating expenses are denominated in reais . During the last several years, the Companys reais -denominated costs and expenses have been increasing at a rate slower than the devaluation of the real . Accordingly, the effect has been to decrease costs of locally supplied products and services when reported in U.S. dollars, and consequently to increase the Companys net operating income when reported in U.S. dollars.
In recent periods, devaluation of the real has had the following effects, among others, on the Companys balance sheet and results of operations:
| The translation effects of the Companys non- real- denominated assets and liabilities held in Brazil ( e.g. , cash, cash equivalents and short term investments and financial obligations) are recorded in the Companys statements of operations, which are offset, in part, with respect to monetary assets by monetary indexation of real -denominated financial instruments. Primarily because of the Companys substantial liabilities denominated in foreign currency, the Company recorded a U.S.$596.0 million net foreign exchange loss in its 2002 statement of income, compared to a U.S.$136.1 million net foreign exchange loss in 2001 and a U.S.$45.3 million net foreign exchange loss in 2000. To the extent these losses are not realized in a transaction (such as the repayment of the debt in the corresponding period in which a devaluation occurs), the foreign exchange loss is added back for purposes of determining the Companys cash flow. |
73
| The Companys real -denominated assets and liabilities in Brazil, primarily accounts receivable, inventories and property, plant and equipment, cash and cash equivalents and government securities, pension plan liabilities, health care benefits and deferred income taxes, are all translated into U.S. dollars at the official exchange rate applicable at each balance sheet date as reported by the Central Bank. Therefore, any depreciation of the real against the U.S. dollar has been reflected as a reduction in the U.S. dollar value of those assets and liabilities, charged directly to shareholders equity, included in the cumulative translation adjustment account. These currency translation effects are beyond the control of the Companys management. Accordingly, the Company recorded a U.S.$326.1 million credit (resulting from an excess of liabilities over assets) directly to shareholders equity in its statement of changes in shareholders equity for 2002, without affecting its net income, to reflect the nominal devaluation of the real against the U.S. dollar during 2002 of approximately 34.3%. This compared to a charge of U.S.$28.1 million in 2001 to reflect the nominal devaluation of 15.7% during 2001 and a charge of U.S.$112.9 million in 2000 to reflect the nominal devaluation of 8.5% during 2002. |
Foreign currency translation adjustments reflecting the devaluation of the real may have a significant impact on the balance sheet of the Company because its assets are primarily denominated in reais , but a material portion of its liabilities are denominated in foreign currencies or linked to foreign currencies. The reductions in the Companys asset values charged to shareholders equity, however, do not necessarily adversely affect the Companys cash flows, because the Companys revenues and cash earnings are linked in large part to the U.S. dollar, and a portion of its operating expenses are linked to the real .
The devaluation of the real also impacts the amount of retained earnings available for distribution by the Company as dividends when measured in U.S. dollars. Amounts reported as available for distribution in the Companys statutory accounting records prepared under the Brazilian Corporate Law decrease or increase, as the case may be, when measured in U.S. dollars as the real depreciates or appreciates, respectively, against the U.S. dollar. In addition, the devaluation of the real creates foreign exchange gains and losses that are included in the results of operations determined under accounting principles set forth under the Brazilian Corporate Law that indirectly affect the amount of unappropriated earnings available for distribution.
Risk management activities
Because the Company borrows in the international markets to support its operations and investments, it is exposed to market risks from changes in foreign exchange and interest rates. Export sales, which generate receivables payable in U.S. dollars, do not cover all of the Companys U.S. dollar liabilities.
Braskem developed a risk management policy as from December 31, 2001 with the following objectives: maintain coverage of principal and interest settlements (consolidated) maturing within 12 months for, at least (i) 60% of Braskems total U.S.-dollar indebtedness that is related to exports (trade finance), excluding Advances on Currency Contracts (ACCs) with a remaining maturity of up to 6 months and Advances on Export Contracts (ACEs) and (ii) 75% of the total debt in U.S. dollars unrelated to exports (non-trade finance). Compliance with this policy varies based upon applicable market conditions, credit availability and cash balances.
To further mitigate its exposure to exchange rate risk, the Company tries, when possible, to borrow for its working capital needs using trade finance loans, which funding is generally available at a lower cost because it is linked to the Companys U.S. dollar exports. The Company cannot assure, however, that, in the future, U.S. dollar revenues that it generates from exports will be in an amount sufficient to cover its U.S. dollar trade finance liabilities.
74
Effect of Taxes on the Companys Income
Income Tax and Social Contribution Tax
Income taxes in Brazil generally include federal income tax and social contribution. The composite tax rate is 34%, comprised of income tax (15%, plus a surtax of 10% on taxable income exceeding R$240,000 per year) and social contribution tax (9%). The rate of federal social and contribution tax has fluctuated between 9% and 12% in 2000, and has been 9% since 2001. This tax is not deductible for federal income tax purposes. The Company is contesting the constitutionality of this tax. See Note 11(e) to the Consolidated Financial Statements.
The Company has available certain federal tax exemptions based upon federal legislation that offers fiscal incentives to companies that locate their manufacturing operations in the northeastern region of Brazil. These exemptions entitle the Company to pay only 25% of the statutory income tax rate on the profit arising from the sale of basic petrochemical products and utilities until 2011. Trikem is exempt from corporate income tax until 2001 on the results of its industrial operations at its PVC plant in Bahia. Trikem is entitled to pay only 25% of the statutory income tax rate until 2008 on the results of its industrial operations at its PVC plant in Alagoas. See Note 11(d) to the Consolidated Financial Statements.
Trikems production of caustic soda and EDC in the States of Bahia and Alagoas, and the Companys production of DMT are not covered by these exemptions, but in accordance with Law No. 9,532/97, the Company is entitled to pay with respect to the profits arising from sales by these plants:
| 62.5% of the statutory income tax rate from January 1, 1998 to December 31, 2003; | ||
| 75% 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 the Company or any of its 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 the Company in the past, the Company and its subsidiaries had U.S.$535.0 million in tax loss carryforwards available at December 31, 2002, of which U.S.$3.1 million have been used as the basis for recognizing net deferred tax assets and the remainder of which have a full valuation allowance. Tax loss carryforwards available for offset in Brazil do not expire. However, the annual offset is limited to 30% of the adjusted net profit of the Company. This limit also affects the social contribution on net profits.
Other Taxes
The Company is subject to a number of Brazilian taxes in addition to the corporate income tax and the social contribution tax. Changes in Brazilian tax legislation can adversely impact the Companys results of operations. Some of the other Brazilian taxes applicable to the Company are described below.
Federal excise tax (IPI)
The Imposto sobre Produtos Industrializados (the Federal Excise Tax or IPI), is a federal excise tax, assessed at the time of sale of manufactured products either to another manufacturer or to the retailer of the ultimate customer. Importers also pay this tax at the time the products are imported. The IPI is charged on a non-cumulative basis, so that the tax assessed in previous transactions may be credited against the amounts due in subsequent transactions. Export sales are currently exempt from IPI. The Companys Polyolefins products are taxed at the rate of 5%.
The Company recorded revenues of U.S.$284.5 million in 2002 relating to a credit for IPI in respect of purchases of raw materials that are in a zero percent tax bracket, which amount includes approximately U.S.$75.0 million that had already been offset against taxes payable in prior years. The Company recognized a portion of these revenues in taxes recoverable, including U.S.$67.5 as current assets and U.S.$148.8 as non-current assets. This tax credit was granted based on a decision of the Brazilian Federal Supreme Court on December 19, 2002. Although the Federal government has filed an appeal of certain aspects of this decision, such appeal will not affect the validity of this tax credit, and for this reason, the Company decided to recognize this tax credit in its Consolidated Financial Statements for the year ended December 31, 2002. As the tax credit only applies to the Companys operations in the State of Rio Grande do Sul, the Company has also brought litigation against the federal government in respect of its purchases of raw materials in the States of São Paulo, Bahia and Alagoas, seeking to obtain a similar tax credit.
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State value added taxes (ICMS)
Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação (the State Value Added Tax or ICMS ) is a state value-added tax imposed on sales of goods and the rendering of telecommunication and transportation services at rates that may vary from 7% to 30%, depending on the product sold and the specific regulations of each state. The calculation basis of the tax is the price of the transaction, net of invoiced discounts and returns (in the case of sale of goods). ICMS is also charged on a non-cumulative basis, so that the tax assessed in previous transactions may be used as a credit to be offset against the amounts due in subsequent transactions. States impose specific rules on interstate transactions involving oil, natural gas and their byproducts, the revenues from which are taxable. Export sales are currently exempt from ICMS.
Other taxes on revenues (PIS and COFINS)
Other taxes on revenues include two federal contribution taxes, the Programa de Integração Social (the Social Integration Program or PIS), and the Contribuição para Financiamento da Seguridade Social (the Contribution for Social Security Financing or COFINS). The rate for COFINS is currently 3% and for PIS is currently 1.65%.
PIS finances special social programs through the collection of a federal tax on gross revenues. PIS may be charged on a cumulative or non-cumulative basis, depending on the type of activities performed by the Company. A company may be subject to both taxation regimes, in case it develops different kinds of activities. Cumulative PIS is charged at a rate of 0.65%, and non-cumulative PIS is charged at a rate of 1.65%. The Company pays PIS on its gross revenues (except in respect of automotive gasoline sales) on a non-cumulative basis at a rate of 1.65%. The Company pays PIS on its gross revenues in respect of automotive gasoline sales on a cumulative basis at a rate of 2.7%. COFINS finances special social programs through the collection of a federal tax on gross revenues of 3%. This tax is charged on a cumulative basis on each transaction in the supply chain. Export sales are currently exempt from both of these taxes as long as the proceeds of such sales are remitted back to Brazil.
Tax on bank account transactions (CPMF)
The Contribuição Provisória sobre Movimentação Financeira (the Provisional Contribution on Financial Movements or CPMF) is a provisional tax imposed on all transactions involving the debit or withdrawal of money from a bank account in Brazil. The CPMF rate has fluctuated between 0.20% to 0.38% since its adoption in 1997. Since March 18, 2001, the rate has been 0.38%, which will remain in effect through December 2003. From January through December 2004, the applicable rate will decrease to 0.08%, after which the tax is scheduled to expire.
Tax Disputes
The Company is currently involved in several tax proceedings as discussed in Note 13 to the Companys Consolidated Financial Statements. The Company has established reserves based on its estimated costs of resolving those claims in which the Company believes it has a probable loss. The tax contingencies relate primarily to the PIS and COFINS taxes, the IPI tax, the corporate income tax and social security contributions. The Company does not believe these tax proceedings will have a material adverse effect on its financial position. It is possible, however, that future results of operations could be materially affected by changes in the Companys assumptions and the effectiveness of the Companys strategies with respect to these tax proceedings. For more information on the Companys tax proceedings, see Item 8. Financial InformationConsolidated Financial Statements and Other Financial InformationLegal Proceedings.
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Results of Operations
The discussion of results of operations, comparing 2002 to 2001 and 2001
to 2000, is provided on a historical basis and is followed by a supplemental
discussion on an unaudited pro forma basis, which gives effect to the Nova
Camaçari Acquisition and the Related Party Mergers as if they had occurred on
January 1, 2001. The 52114 Merger was structured as a stock-for-stock exchange
and was accounted for by Braskem as an acquisition of 52114 Participações using
the purchase method of accounting. As a result of the Nova Camaçari
Acquisition, OPP Produtos and Copene were under the common control of the
Odebrecht Group after July 25, 2001. As a result of the merger of OPP Produtos
with Copene to form Braskem, Braskem was required to represent its financial
results as if the OPP Produtos Merger had occurred on July 25, 2001, the date
on which OPP Produtos and Copene came under the common control of the Odebrecht
Group.
The acquisitions of Nova Camaçari, OPP Produtos and 52114 Participações
significantly affected the results of Braskem due to the significant size of
their operations in relation to the operations of Copene, Braskems
predecessor. Therefore, the financial results of Braskem for periods
subsequent to July 25, 2001, the date of the Nova Camaçari Acquisition, are not
comparable to periods prior to the Nova Camaçari Acquisition. In order to
enhance comparability and make an analysis of the results of 2002 and 2001 more
meaningful, after the following discussion on a historical basis, the Companys
management has provided a supplemental discussion based upon unaudited proforma
financial information for 2002 and 2001 as if the Nova Camaçari Acquisition and
the Related Party Mergers had occurred on January 1, 2001.
Although the Consolidated Financial Statements have been prepared in
accordance with U.S. GAAP, pursuant to SFAS 131, the segment information
presented in this section has been prepared in accordance with accounting
principles determined by the Brazilian Corporate Law, which differ in certain
significant respects from U.S. GAAP, and translated into U.S. dollars using the
average rate prevailing in the month of the charge or credit to income. The
Companys discussion and analysis of the results of operations of its business
segments is based upon such segment financial information. As a result, the
financial information presented in this section with respect to the Companys
business segments are not directly comparable to the consolidated results of
the Company presented in this section.
Because the results of operations of Companys business segments, other
than the Basic Petrochemical segment, are not comparable in any of the periods
presented due to the effects of the Nova Camaçari Acquisition and the Related
Party Mergers, the Company has also presented an analysis of the historical
results of operations or the historical combined results of the principal
business unit that comprise each of its business segments, other than the Basic
Petrochemical segment.
The financial information of the Basic Petrochemicals segment is derived
from the financial statements of the Company for the years ended December 31,
2002, 2001 and 2000 prepared in accordance with accounting principles
determined by the Brazilian Corporate Law. Because the results of operations
of the Basic Petrochemcals segment are included in the Companys results of
operation for the years ended December 31, 2002, 2001 and 2000, no separate
analysis of the combined results of operations is presented comparing fiscal
years 2002 and 2001.
The financial information for OPP Química and Polialden, the subsidiaries
that comprise the Polyolefins segment, is derived from the financial statements
of OPP Química and Polialden for the years ended December 31, 2002 and 2001
prepared in accordance with accounting principles determined by the Brazilian
Corporate Law.
The financial information for Trikem, the subsidiary that comprises the
Companys Vinyls segment, is derived from the financial statements of Trikem
for the years ended December 31, 2002 and 2001 prepared in accordance with
accounting principles determined by the Brazilian Corporate Law.
The financial information for Nitrocarbono and Proppet, the subsidiaries
that comprise the Business Development segment, is derived from the financial
records of Nitrocarbono for September to December 2002 and financial records of
the Company with respect to its PET business. The Business Development Unit of
the Company is responsible for managing certain of the Companys investments,
principally its investments in Petroflex and Cetrel. However, as the results
of the Companys investments managed by the Business Development Unit are
reported as equity in earnings (losses) of affiliates, the results of these
companies are not included in the segment discussions included below.
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Historical Discussion
The following table sets forth the certain historical consolidated
financial information of the Company for the years ended December 31, 2002,
2001 and 2000.
The following table sets forth certain historical financial information
with respect to the Companys business segments for the years ended December
31, 2002, 2001 and 2000.
78
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Consolidated Results
Net
Sales.
Net sales of the Company increased by 34.9% during fiscal year
2002 to U.S.$2,391.1 million as compared to U.S.$1,771.9 million in fiscal year
2001, primarily as a result of the inclusion of the net sales of the
Polyolefins, Vinyls and Business Development Units following the date of the
Nova Camaçari Acquisition. See Results of Operation. In addition, net
sales for the Basic Petrochemicals segment, which represents the only business
segment included in the historical financial results for the full years of 2002
and 2001, decreased by 15.3% to U.S.$1,127.1 million in 2002 from U.S.$1,331.0
million in 2001.
Cost of Sales and Gross Profit.
Cost of sales increased by 31.4% during
fiscal year 2002 to U.S.$1,901.0 million as compared to U.S.$1,447.2 million
during fiscal year 2001, primarily as a result of the inclusion of the cost of
sales of the Polyolefins, Vinyls and Business Development Units following the
date of the Nova Camaçari Acquisition. See Results of Operation. In
addition, cost of sales for the Basic Petrochemicals segment, which represents
the only business segment included in the historical financial results for the
full years of 2002 and 2001, decreased by 13.9% to U.S.$972.5 million in 2002
from U.S.$1,129.8 million in 2001.
As a result, gross profit increased by 51% in fiscal year 2002 to
U.S.$490.1 million from U.S.$324.7 million in fiscal year 2001. Gross margin
for 2002 was 20.5% as compared to 18.3% in 2001.
Selling, General and Administrative Expenses.
Selling, general and
administrative expenses increased by 213.3% during fiscal year 2002 to
U.S.$252.5 million as compared to U.S.$80.6 million during fiscal year 2001,
primarily as a result of the inclusion of the selling, general and
administrative expenses of the Polyolefins, Vinyls and Business Development
Units following the date of the Nova Camaçari Acquisition. See Results of
Operation. Selling, general and administrative expenses represented 10.6%
of net sales during 2002 and 4.6% of net sales during 2001.
Credit from Federal Excise Tax (IPI).
Credit from Federal Excise Tax
(IPI) was U.S.$284.5 million in 2002, the year in which this credit was
recognized. See Effect of Taxes on the Companys Income Other Taxes
Federal excise tax (IPI) and Note 5 to the Consolidated Financial
Statements.
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Operating Income.
Operating income increased by 114% during fiscal year
2002 to U.S.$522.2 million as compared to U.S.$244.1 million during fiscal year
2001, primarily as a result of the Credit from Federal Excise Tax (IPI)
recognized in 2002 in the aggregate amount of U.S.$284.5 million and the
inclusion of the gross profit of the Polyolefins, Vinyls and Business
Development Units following the date of the Nova Camaçari Acquisition
.
In
addition, operating income for the Basic Petrochemicals segment decreased by
36.3% to U.S.$84.3 million during 2002 as compared with U.S.$132.3 million in
2001. Operating income represented 21.8% of net sales during 2002 and 13.8% of
net sales during 2001.
Financial Income.
Financial income increased by 108.8% during fiscal year
2002 to U.S.$167.9 million as compared to U.S.$80.4 million during fiscal year
2001, primarily as a result of the inclusion of the financial income of the
Polyolefins, Vinyls and Business Development Units following the date of the
Nova Camaçari Acquisition.
Financial
Expenses.
Financial expenses increased by 293.7% during fiscal
year 2002 to U.S.$1,159.8 million as compared to U.S.$294.6 million during
fiscal year 2001, primarily as a result of the inclusion of the financial
expenses of the Polyolefins, Vinyls and Business Development Units following the
date of the Nova Camaçari Acquisition.
Other Non-operating Expenses.
Other operating expenses increased by
117.9% during fiscal year 2002 to U.S.$57.3 million as compared to U.S.$26.3
million during fiscal year 2001. This increase was primarily as a result of
the write-off by the Company of certain obsolete assets in 2002.
Income Tax (Expense) Benefit.
Income tax (expense) benefit was an expense
of U.S.$20.4 million during fiscal year 2002 as compared to a benefit of
U.S.$14.3 million during fiscal year 2001. This change was primarily as a
result of the inclusion of the financial income of the Polyolefins, Vinyls and
Business Development Units following the date of the Nova Camaçari Acquisition.
Equity in Earnings (Losses) of Affiliates, net.
Equity in earnings
(losses) of affiliates, net was a gain of U.S.$22.5 million during fiscal year
2002 as compared to a loss of U.S.$6.1 million during fiscal year 2001. This
change was primarily as a result of caused by (1) an increase of approximately
U.S.$6.4 million in the equity in earnings of Copesul in 2002 as compared to
2001 and (2) equity in earnings of Politeno in an amount of U.S.$13.0 million
in 2002 as compared to equity in losses of Politeno in an amount of U.S.$8.2
million in 2001.
Minority Interest.
Minority interest was a gain of U.S.$65.0 million
during fiscal year 2002 as compared to a loss of U.S.$63.8 million during
fiscal year 2001. The gain recorded in 2002 offset the proportion of the
losses sustained by Trikem during that year (approximately U.S.$130.0 million)
that are attributable to the interests in Trikem held by Trikems minority
shareholders. In addition, the gain in 2002 was partially offset by a loss in
minority interest corresponding to the proportion of income earned by Polialden
during 2002 that is attributable to the interests in Polialden held by its
minority shareholders. In 2001, both Trikem and Polialden recorded net income,
a proportion of which was offset by the Company to reflect the proportional
interests of the minority shareholders in these companies.
Net Loss.
Net loss increased by 816.3% during fiscal year 2002 to
U.S.$460.0 million, or 19.2% of net sales, as compared to U.S.$50.2 million, or
2.8% of net sales, during fiscal year 2001.
80
Business Segment Results
Basic Petrochemicals
The financial information with respect to the Basic Petrochemicals segment
is derived from the financial statements of the Company for the years ended
December 31, 2002 and 2001. In accordance with SFAS 131, the segment data
included in the Companys financial statements is presented under the Brazilian
Corporate Law accounting principles.
Net Sales.
Net sales of the Basic Petrochemicals segment decreased by
15.3% during 2002 to U.S.$1,127.1 million from U.S.$1,331.0 million during
2001. This decrease is primarily attributable to a decrease of 6.6% in
ethylene sales volume resulting from the stoppage of the pyrolysis plant that
is part of Olefins Unit 1 for 92 days during 2002 and the 14.1% decrease in
average ethylene prices, to U.S.$414.80 per ton in 2002 from U.S.$483.10 per
ton in 2001. Sales of Utilities accounted for 9.5% of net revenue of the Basic
Petrochemicals Unit in 2002, totaling U.S.$106.8 million, of which U.S.$59.7
million was attributable to sales of steam, U.S.$38.1 million was attributable
to sales of electricity and U.S.$8.9 million was attributable to sales of water
and compressed air, a 10.3% decrease as compared to 2001.
Net revenues of the Basic Petrochemicals segment from export sales
increased by 5.4% during 2002 to U.S.$127.0 million from
U.S.$121.0 million in
2001. Exports of gasoline, initiated by the Basic Petrochemicals segment in
2002, amounted to U.S.$27.7 million and contributed strongly to this improved
export performance.
Sales volume of ethylene decreased by 6.6% to 994.8 thousand tons in 2002
as compared to 1,064.8 thousand tons in 2001, principally due to a scheduled
stoppage of the Pyrolysis I Plant. Average prices for ethylene decreased by
14.1% to U.S.$414.8 per ton in 2002 from U.S.$483.1 per ton in 2001.
Annual sales volume of propylene decreased by 5.7% in 2002, to 463.5
thousand tons from 491.7 thousand tons in 2001. Average domestic prices for
propylene remained relatively stable in 2002, including a modest increase of
0.6% to U.S.$354.5 per ton in 2002 as compared with U.S.$352.5 per ton in 2001,
principally due to higher demand for this product during 2002.
Cost of Sales and Gross Profit.
In 2002, total cost of sales of the
Basic Petrochemicals segment decreased by 13.9% to U.S.$972.5 million from
U.S.$1,129.8 million in 2001. This decrease is primarily attributable to the
lower sales volume registered in 2002, as well as to the decrease of 4.3% in
the average annual price of naphtha purchased by the Company during 2002, as
compared with 2001. Naphtha accounted for approximately 83% and 75% of the
Basic Petrochemicals segments cost of sales in 2002 and 2001, respectively.
Gross
profit of the Basic Petrochemicals segment decreased by 23.2% to
U.S.$154.6 million in 2002 from U.S.$201.2 million in 2001, thus resulting in a
reduced gross margin for 2002 of 13.7%, when compared with a gross margin of
15.1% for 2001.
Operating Income.
The operating income of the Basic Petrochemicals
segment decreased by 36.1% to U.S.$84.3 million during 2002 as compared with
U.S.$132.3 million in 2001. The Basic Petrochemicals operating margin for
2002 was 7.5%, as compared with 9.9% in 2001, principally as a result of the
decline in gross margins referred to above, coupled with the increase of 1.6%
in general and administrative expenses due to certain non-recurring expenses
incurred in 2002 and associated with the integration and restructuring process
that resulted in the formation of the Company. See Item 4. Information on the
CompanyHistory and Development of the Company.
81
Polyolefins
The financial information with respect to the Polyolefins segment is
derived from the financial statements of the Company for the years ended
December 31, 2002 and 2001. As a result of the common control exercised by the
Odebrecht Group over the Company and OPP Química prior to the OPP Produtos
Merger, in accordance with U.S. GAAP, the Company accounted for the acquisition
of OPP Produtos, including its subsidiary OPP Química, in a manner similar to a
pooling-of-interests as if this acquisition had occurred on July 25, 2001, the
date of the Nova Camaçari Acquisition and the date on which such common control
had commenced. In accordance with SFAS 131, the segment data included in the
Companys financial statements is presented under the Brazilian Corporate Law
accounting principles. The financial information with respect to OPP Química
and Polialden are based on financial statements of OPP Química and Polialden
for the years ended December 31, 2002 and 2001 prepared in accordance with
accounting principles determined by the Brazilian Corporate Law.
Net
Sales.
Net sales of the Polyolefins segment increased by 155.9% during
2002 to U.S.$873.7 million from U.S.$341.4 million during 2001. This increase
was primarily attributable to the effects of the OPP Produtos Merger, which
resulted in an increase of 155.4% in the sales volume of polyethylene and an
increase of 159.5% in the sales volume of polypropylene during 2002, when
compared with 2001. In addition, the aforementioned sales volume increases
more than offset the decreases of 9% and 3% in the average prices of
polyethylene and polypropylene, respectively, during 2002, when compared with
2001. Net export sales of the Polyolefins segment increased by 242.0% during
2002 to U.S.$260.7 million from U.S.$76.2 million during 2001. This increase
is primarily attributable to the effects of the OPP Produtos Merger, which
resulted in an increase of 151.2% in the export volumes of polyethylene and
polypropylene.
Net revenues of OPP Química and Polialden, the companies that comprise
Braskems Polyolefins segment, on a combined basis increased by 3.1% during 2002
to U.S.$873.7 million from U.S.$847.3 million during 2001. This increase was
primarily attributable to the increase of 54.4% in combined gross export sales
of the Polyolefins Unit, of OPP Química and Polialden, to U.S.$260.7 million in
2002 from U.S.$168.8 million during 2001. This increase is primarily
attributable to a 51% increase in LLDPE export sales volumes from 43.4
thousand tons in 2001 to 65.6 thousand tons in 2002 as well as to higher
export sales of UTEC in 2002, which amounted to U.S.$16.7 million in comparison
to U.S.$6.3 million in 2001.
Sales volume of polyethylene by OPP Química and Polialden on a combined
basis increased by 5% to 660.0 thousand tons in 2002 as compared to 628.5
thousand tons in 2001, principally due to a 24.1% increase in export volumes in
2002 as compared with 2001 (to 168.3 thousand tons in 2002 from 135.8 thousand
tons in 2001). This performance reflected a combination of factors,
including
securitization commitments and an improvement in international market demand
for this product. Average domestic prices for polyethylene decreased by 15.2%
to U.S.$704.3 per ton in 2002 as compared to U.S.$830.9 per ton in 2001,
following the trend in international market prices for polyethylene in 2002.
Sales volume of polypropylene by OPP Química and Polialden on a combined
basis increased by 9% to 411.4 thousand tons in 2002 as compared to 376.8
thousand tons in 2001, reflecting improved demand for thermoplastic
resins in
2002. Average domestic prices for polypropylene decreased by 14.2% to
U.S.$675.0 per ton in 2002 as compared to U.S.$787.0 per ton in 2001, following
the trend in international market prices for polypropylene in 2002.
Cost
of Sales and Gross Profit.
Cost of sales of the Polyolefins segment
increased by 197.4% during 2002 to U.S.$729.4 million from U.S.$245.2 million
during 2001. This increase was primarily attributable to the effects of the
OPP Produtos Merger. Purchases by the Polyolefins segment of raw materials from
the Basic Petrochemicals segment increased by 135.8% in 2002 to U.S.$156.5
million from U.S.$66.4 million in 2001.
Gross
profit of the Polyolefins segment increased by 50.3% to U.S.$144.4
million in 2002 from U.S.$96.1 million in 2001, mainly due to the effects of
the OPP Produtos Merger. Gross margin for the Polyolefins segment was 16.5% in
2002 and 28.2% in 2001, due mainly to the aforementioned decrease in the
average domestic prices of polyethylene and polypropylene in 2002 compared to
2001.
82
Cost of sales of OPP Química and Polialden on a combined basis increased
by 9.2% during 2002 to U.S.$729.4 million from U.S.$668.2 million during 2001.
This increase was primarily attributable to an increase of 6.4% in sales volume
of both polyethylene and polypropylene in 2002 in comparison with 2001, as well
as from increases in plant insurance expenses incurred in 2002. Purchases of
raw materials from the Company by OPP Química and Polialden decreased by 2% in
2002 to U.S.$155.3 million from U.S.$158.4 million in 2001.
Gross profit of OPP Química and Polialden on a combined basis decreased by
19.4% to U.S.$144.4 million in 2002 from U.S.$179.1 million in 2001, thus
resulting in a gross margin for 2002 of 16.5% and 21.1% in 2001, and reflecting
the aforementioned impacts on the cost of sales.
The
operating income of the Polyolefins segment increased by 494.5% to
U.S.$312.7 million during 2002 as compared to U.S.$52.6 million in 2001, due
mainly to the effects of the OPP Produtos Merger and the recognition in 2002 by
OPP of the U.S.$284.5 million IPI tax credit (see Effect of Taxes on the
Companys IncomeOther Taxes
Federal excise tax (IPI)
and Note 5
to the Consolidated Financial Statements). The operating margin for the
segment in 2002 was 35.8% as compared to 15.4% in 2001, due mainly to the
aforementioned IPI tax credit booked in 2002.
The operating income of OPP Química and Polialden on a combined basis
increased by 302.3% to U.S.$312.7 million during 2002 as compared with
U.S.$77.7 million in 2001. Operating margin for 2002 was 35.8% as compared
with 9.1% in 2001, principally due to the following:
Vinyls
The financial information with respect to the Vinyls segment is derived
from the financial statements of the Company for the years ended December 31,
2002 and 2001. As a result of the common control exercised by the Odebrecht
Group over the Company and Trikem prior to the OPP Produtos Merger, in
accordance with U.S. GAAP, the Company accounted for the acquisition of OPP
Produtos, including its subsidiary Trikem, in a manner similar to a
pooling-of-interests as if this acquisition had occurred on July 25, 2001, the
date of the Nova Camaçari Acquisition and the date on which such common control
had commenced. In accordance with SFAS 131, the segment data included in the
Companys financial statements is presented under the Brazilian Corporate Law
accounting principles. The financial information with respect to Trikem is
based on financial statements of Trikem for the years ended December 31, 2002
and 2001 prepared in accordance with accounting principles determined by the
Brazilian Corporate Law.
Net Sales.
Net sales of the Vinyls segment increased by 162.4% during
2002 to U.S.$403.9 million from U.S.$153.9 million during 2001. This increase
was primarily attributable to the effects of the OPP Produtos Merger, which
resulted in significant increases in the Vinyls segments main products, PVC
(171.3%) and caustic soda (153.2%). In addition, these sales volume increases
more than offset the decrease of 39% in average caustic soda prices during
2002. Net revenues of the Vinyls segment from export sales increased by 297.9%
during 2002 to U.S.$59.5 million from U.S.$14.2 million during 2001. This
increase is primarily attributable to the effects of the OPP Produtos Merger,
which resulted in significant increases in volumes of exports by the Vinyls
segments main products, EDC (504.7%) and PVC (124.7%).
Net sales of Trikem, the Companys subsidiary that comprises the Vinyls
segment, decreased by 5.8% during 2002 to U.S.$403.9 million from U.S.$428.6
million during 2001. This reduction was primarily attributable to the decrease
during 2002, when compared with 2001, of 5.4% in average domestic prices for
PVC and 48.3% in average domestic prices for caustic soda. Gross export sales
of Trikem, net of discounts, returns and allowances, increased by 44.1% during
2002 to U.S.$59.5 million from U.S.$41.3 million during 2001. This improved
performance was primarily attributable to an increase of export sales of EDC,
in an aggregate amount of U.S.$20.5 million in 2002, an increase of 173.3%
compared to 2001. This increase also reflected the increase in 2002, when
compared to 2001, of 135.6% in average EDC prices.
83
Trikems total sales volume of PVC increased by 8.8% to 379.3 thousand
tons in 2002 compared to 348.6 thousand tons in 2001, principally due to a 7.5%
increase in domestic sales volumes, which reflected improving domestic demand
for PVC in 2002. Average domestic prices for PVC decreased by 5.4% to
U.S.$677.8 per ton in 2002 as compared to U.S.$716.5 per ton in 2001, following
the trend in international market prices for PVC in 2002.
Trikems volume of caustic soda sales increased by 11.8% to 400.8 thousand
tons in 2002 as compared to 358.7 thousand tons in 2001, principally due to
higher domestic demand for caustic soda stemming from the termination, in
February 2002, of the Brazilian governments electric energy rationing program
initiated in June 2001. Average domestic prices for caustic soda decreased by
48.3% to U.S.$190.7 per ton in 2002 as compared with U.S.$368.9 per ton in
2001, following the trend in international market prices for caustic soda in
2002.
Cost of Sales and Gross Profit.
Cost of sales of the Vinyls segment
increased by 171.6% during 2002 to U.S.$289.5 million from U.S.$106.6 million
during 2001. This increase was primarily attributable to the effects of the
OPP Produtos Merger.
Gross profit of the Vinyls segment increased by 141.9% to U.S.$114.4
million in 2002 from U.S.$47.3 million in 2001, resulting in a gross margin for
2002 of 28.3% and of 30.7% in 2001.
Cost of sales of Trikem increased by 3.2% during 2002 to U.S.$289.5
million from U.S.$280.6 million during 2001. This increase was primarily
attributable to the 6.1% higher sales volume of the segments main products
(PVC, caustic soda and EDC), as well as to higher plant insurance expenses
booked in the period. Purchases by Trikem of raw materials from the Company
decreased by 6.2% in 2002 to U.S.$120.8 million from U.S.$128.8 million in
2001.
Gross profit of Trikem decreased by 22.7% to U.S.$114.4 million in 2002
from U.S.$148.0 million in 2001, resulting in a gross margin for 2002 of 28.3%,
as compared with 34.5% in 2001 which reflects the impacts of the 8.4% decrease
in net sales and the 3.2% increase in cost of sales.
Operating Income.
The operating income of the Vinyls segment declined by
20.8% to U.S.$18.7 million during 2002 as compared to U.S.$23.6 million in
2001. The operating margin for 2002 was 4.6% as compared to 15.3% in 2001.
This reduction was primarily attributable to: (1) additional U.S.$46.7 million
in expenses in 2002 associated with the full amortization of the deferred
exchange rate valiance in 2001; (2) certain non-recurring expenses incurred in
2002 and associated with the integration and restructuring process that
resulted in the formation of the Company; see Item 4. Information on the
CompanyHistory and Development of the Company; and (3) the variations
discussed above (net sales and cost of sales).
Trikems operating income declined by 81% to U.S.$18.7 million during 2002
as compared with U.S.$98.6 million in 2001. Trikems operating margin for 2002
was 4.6% as compared with 23% in 2001, principally as a result of: (1)
an additional U.S.$46.7 million in expenses in 2002 associated with the full
amortization of the deferred exchange rate valiance in 2001 (such expenses
amounted to U.S.$13.1 million in 2001); (2) certain non-recurring expenses
incurred in 2002 and associated with the integration and restructuring process
that resulted in the formation of the Company; see Item 4. Information on the
CompanyHistory and Development of the Company; and
(3) the variations
discussed above (net sales and cost of sales). The original deferral
of the exchange rate variance in 2001 had been recorded only in the
Brazilian Corporate Law financial statements and not in the U.S. GAAP
financial statements.
84
Business Development
The financial information with respect to the Business Development segment
is derived from the financial statements of the Company for the years ended
December 31, 2002 and 2001. In accordance with SFAS 131, the segment data
included in the Companys financial statements is presented under the Brazilian
Corporate Law accounting principles. The financial information with respect to
Nitrocarbono is based on financial records of Nitrocarbono for the four months
ended December 31, 2002 and financial information with respect to the
operations of the business of Proppet is based on the financial records of the
Company. The Business Development Unit of the Company is responsible for
managing certain of the Companys minority investments, principally its
investments in Petroflex and Cetrel. However, as the results of the Companys
investments managed by the Business Development Unit are reported as equity in
earnings (losses) of affiliates, the results of these companies are not
included in the segment discussions included below.
Net Revenue.
Net revenue of the Business Development segment increased by
225.7% during 2002 to U.S.$92.5 million from U.S.$28.4 million during 2001.
This increase was primarily attributable to the effects of the Nova Camaçari
Acquisition, coupled with the 52114 Merger, which collectively resulted in a
154.5% increase in the sales volume of PET to 61.3 thousand tons in 2002 as
compared with 24.1 thousand tons in 2001, as well as to the inclusion of the
sales volume of caprolactam of 40.9 thousand tons in the sales of the Business
Development segments for the last four months of 2002. Net revenue of the
Business Development segment from export sales was
U.S.$6.0 million during 2002. There were no exports during 2001.
Net sales of Nitrocarbono and Proppet, the companies that comprise the
Business Development segment, on a combined basis, increased by 44.8% during
2002 to U.S.$92.5 million from U.S.$63.9 million during 2001. This increase
was primarily attributable to: (1) an increase during 2002 of 12.9% in PET
sales volume; (2) an increase during 2002 of 27.2% in DMT sales volume; and (3)
the inclusion of net sales of caprolactam by Nitrocarbono of U.S.$20.1 million
in the last four months of 2002. Gross export sales, net of discounts, returns
and allowances, increased by U.S.$5.9 million during 2002 to U.S.$6.0 million
during 2001. This increase is primarily attributable to the effects of the
52114 Merger which included net sales of Nitrocarbono for the last
four months of 2002.
Sales volume of PET by Proppet increased by 12.9% to 59.8 thousand tons in
2002 as compared to 53.0 thousand tons in 2001, principally due to operating
improvements realized during 2002 which permitted the Companys PET production
facility to increase its level of production. Average domestic prices for PET
decreased by 16.7% to U.S.$907.0 per ton in 2002 as compared to U.S.$1,090.0
per ton in 2001, following the trend in international market prices for PET in
2002.
Sales volume of caprolactam by Nitrocarbono were 15.1 thousand tons in
2002, and the average domestic price for this product during 2002 was
U.S.$1,332.0 per ton.
Cost of Sales and Gross Profit.
Cost of sales of the Business
Development segment increased by 224.6% during 2002 to U.S.$77.9 million from
U.S.$24.0 million during 2001, reflecting the effects of the 52114 Merger. The
Business Development segment purchased U.S.$15.1 million of raw materials from
the Basic Petrochemicals segment in 2002.
Gross profit of the Business Development segment increased by 231.8% to
U.S.$14.6 million in 2002 from U.S.$4.4 million in 2001, resulting in a gross
margin for 2002 of 15.8% as compared to 15.6% in 2001.
Cost of sales of Nitrocarbono and Proppet on a combined basis increased by
38.3% during 2002 to U.S.$77.9 million from U.S.$56.3 million during 2001.
This increase was primarily attributable to: (1) an increase during 2002 of
12.9% in PET sales volume; (2) an increase of 27.2% during 2002 in DMT sales
volume; and (3) net sales by Nitrocarbono of caprolactam of U.S.$20.1 million
during the last four months of 2002, which corresponded to 38.6% of the
combined net sales of Nitrocarbono and Proppet. Purchases of raw materials
from the Company by Nitrocarbono and Proppet on a combined basis increased by
5% in 2002 to U.S.$25.0 million from U.S.$23.8 million in 2001.
85
Gross profit of Nitrocarbono and Proppet on a combined basis increased by
91.3% to U.S.$14.6 million in 2002 from U.S.$7.6 million in 2001, thus
resulting in a gross margin for 2002 of 15.8% as compared with 12% in 2001.
Operating Income (Loss).
The operating income of the Business Development
segment increased by 78.1% to U.S.$5.7 million during 2002 as compared to
U.S.$3.2 million in 2001. Operating margin for 2002 was 6.2% as compared to
11.3% in 2001, principally as a result of the effects of the 52114 Merger.
The operating income of Nitrocarbono and Proppet on a combined basis
increased by 7.5% to U.S.$5.7 million during 2002 as compared with U.S.$5.3
million in 2001. Operating margin during 2002 was 6.2% as compared with 8.3%
during 2001, principally because the 52114 Merger included four months
of Nitrocarbonos operations in its 2002 results, thus representing additional selling, general and
administrative expenses of U.S.$3.6 million in 2002.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Consolidated Results
Net Sales.
Net sales of the Company increased by 13.9% during fiscal year
2001 to U.S.$1,771.9 million as compared to U.S.$1,555.1 million in fiscal year
2000, primarily as a result of the inclusion of the net sales of the
Polyolefins, Vinyls and Business Development Units. In addition, revenues for
the Basic Petrochemicals segment, which represents the only business segment
included in the historical financial results for the full years 2001 and 2000,
decreased by 15.2% to U.S.$1,331.0 million in 2001 from U.S.$1,568.7 million in
2000.
Cost of Sales and Gross Profit.
Cost of sales increased by 15.6% during
fiscal year 2001 to U.S.$1,447.2 million as compared to U.S.$1,252.4 million
during fiscal year 2000, primarily as a result of the inclusion of the cost of
sales of the Polyolefins, Vinyls and Business Development Units. In addition,
cost of sales and services for the Basic Petrochemicals segment decreased by
9.8% to U.S.$1,129.8 million in 2001 from U.S.$1,252.4 million in 2000.
As a result, gross profit increased by 7.3% in fiscal year 2001 to
U.S.$324.7 million from U.S.$302.7 million in fiscal year 2000. Gross margin
for 2001 was 18.3% as compared to 19.5% in 2000.
Selling,
General and Administrative Expenses.
Selling, general and
administrative expenses increased by 4.7% during selling, fiscal year 2001 to U.S.$80.6
million as compared to U.S.$77.0 million during fiscal year 2000, primarily as
a result of the inclusion of the selling, general and administrative expenses of the
Polyolefins, Vinyls and Business Development Units.
Operating Income.
Operating income increased by 8.1% during fiscal year
2001 to U.S.$244.1 million as compared to U.S.$225.7 million during fiscal year
2000, primarily as a result of the inclusion of the operating income of the
Polyolefins, Vinyls and Business Development Units. In addition, operating
income for the Basic Petrochemicals segment decreased by 41.4% to U.S.$132.3
million in 2001 from U.S.$225.7 million in 2000. Operating income represented
13.8% of net revenue during 2001 and 14.5% of net revenue during 2000.
Financial
Income.
Financial income decreased by 15.3% during fiscal year
2001 to U.S.$80.4 million as compared to U.S.$94.9 million during fiscal year
2000, primarily as a result of a decrease in 2001 of (1) average cash equivalents and
time deposits and (2) domestic interest rates.
Financial
Expenses.
Financial expenses increased by 119.9% during fiscal
year 2001 to U.S.$294.6 million as compared to U.S.$134.0 million during fiscal
year 2000. This increase was primarily as a result of additional indebtedness
incurred in connection with the Auction, as well as the inclusion of the
indebtedness of the Polyolefins, Vinyls and Business Development Units.
As of
December 31, 2001, the Company had outstanding contracts for
risk management purposes in the notional amount of U.S.$226.2 million. The Company recognized
net gains of U.S.$6.2 million on these contracts in 2001.
86
Other Non-operating Expense.
Other non-operating expense increased by
952% during fiscal year 2001 to U.S.$26.3 million as compared to U.S.$2.5
million during fiscal year 2001. This increase was primarily as a result of
the inclusion of other non-operating expenses of the Polyolefins, Vinyls
and Business Development Units.
Income Tax (Expense) Benefit.
In 2001, the Company recorded an income tax
benefit of U.S.$14.3 million related to the recognition of a deferred income tax
asset in respect of the tax loss incurred in that year and tax effects of the change in
the net asset basis between U.S. GAAP and the Brazilian tax treatment.
In 2000, the Company recorded an income tax expense of U.S.$2.9 million
due to the tax effects of the change in the net asset basis between U.S. GAAP and
the Brazilian tax treatment.
Equity in Earnings (Losses) of Affiliates, Net.
Equity in earnings
(losses) of affiliates, net was a loss of U.S.$6.1 million during fiscal year
2001 as compared to a gain of U.S.$6.9 million during fiscal year 2000. This
change was primarily as a result of (1) equity in losses of Politeno in an
amount of U.S.$8.2 million in 2001 and (2) equity in earnings of Norcell in an
amount of U.S.$9.8 million in 2000.
Minority Interest.
Minority interest was a loss of U.S.$63.8 million
during fiscal year 2001 as compared to a gain of U.S.$15 thousand during fiscal
year 2001. This change was primarily as a result of the effects of the Nova
Camaçari Acquisition.
Net Income (Loss).
Net loss was U.S.$50.2 million, or 2.8% of net sales,
during fiscal year 2001 as compared to net income of U.S.$188.0 million, or
12.1% of net sales, during fiscal year 2000.
Business Segment Results
Basic Petrochemicals
The financial information with respect to the Basic Petrochemicals segment
is derived from the financial statements of the Company for the years ended
December 31, 2001 and 2000. In accordance with SFAS 131, the segment data
included in the Companys financial statements is presented under the Brazilian
Corporate Law accounting principles.
Net Revenue.
Net revenue of the Basic Petrochemicals segment decreased by
15.2% during 2001 to U.S.$1,331.0 million from U.S.$1,568.7 million during
2000. This decrease is primarily attributable to the reduction of 3.5% in the
sales volume of ethylene, from 1,103,800 tons in 2000 to 1,064,800 tons in
2001, as well as to the decrease of 15.1% in domestic prices of ethylene, from
U.S.$569 per ton in 2000 to U.S.$483 per ton in 2001. Sales of Utilities
accounted for 8.9% of net revenues of the Basic Petrochemicals segment in 2001,
totaling U.S.$119.0 million, representing a 4% decrease when compared with
2000. Of these aggregate sales in 2001, U.S.$58.9 million was attributable to
sales of steam, U.S.$50.7 million was attributable to sales of electricity and
U.S.$9.3 million was attributable to sales of water and compressed air.
Net revenue of the Basic Petrochemicals segment from export sales
decreased by 25.2% during 2001 to U.S.$121.1 million from U.S.$167.7 million
during 2000. This decrease is primarily attributable to the decline of
international prices for petrochemical products in 2001.
Sales volume of ethylene decreased by 3.5% to 1,064,800 tons in 2001 as
compared to 1,103,800 tons in 2000, principally due to the programmed
maintenance shutdown for 27 days in August 2001 of one of the production
facilities for olefins. Average prices for ethylene decreased by 15.1% to
U.S.$483.0 per ton in 2001 as compared to U.S.$569.0 per ton in 2000, following
the trend in international market prices for petrochemical products in 2001.
Sales volume of propylene decreased by 7.8% to 491,700 tons in 2001 as
compared to 533,500 tons in 2000, principally due to the programmed maintenance
shutdown for a period of 27 days in August 2001 of one of the production
facilities for olefins. Average domestic prices for propylene decreased by
24.1% to U.S.$352 per ton in 2001 as compared with U.S.$464 per ton in 2000, following the trend in
international market prices for petrochemical products in 2001.
87
Cost of Sales and Gross Profit.
Total cost of sales of the Basic
Petrochemicals segment decreased by 9.8% during 2001 to U.S.$1,129.8 million
from U.S.$1,252.3 million during 2000. This decrease is primarily attributable
to the lower volume of petrochemicals sold in 2001 in view of the
aforementioned maintenance shutdown, as well as to the decrease of 8.3% in
average naphtha prices in 2001 compared to 2000.
Gross profit of the Basic Petrochemicals segment decreased by 36.4% to
U.S.$201.2 million in 2001 from U.S.$316.4 million in 2000, thus resulting in a
gross margin for 2001 of 15.1% and of 20.2% for 2000.
Operating Income.
Operating income of the Basic Petrochemicals segment
decreased by 39.4% to U.S.$132.3 million during 2001 as compared with
U.S.$218.3 million in 2000. Operating margin for 2001 was 9.9% as compared to
13.9% in 2000, principally as a result of the decline in the gross margin of
this segment, which decline was partially offset by a U.S.$14.3 million charge
for the settlement of VAT claims that was incurred in 2000 that did not have a
corresponding charge in 2001.
Polyolefins
The
Companys Polyolefins segment was acquired in the OPP Produtos Merger.
As such, the results of operations of this segment were not included in the
historical 2000 results of operations, and therefore, the increases in this
segments operating results are the direct result of the OPP Produtos Merger
and the Nova Camaçari Acquisition.
Vinyls
The Companys Vinyls segment was acquired in the OPP Produtos Merger. As
such, the results of operations of this segment were not included in the
historical 2000 results of operations, and therefore, the increases in this
segments operating results are the direct result of the OPP Produtos Merger.
Business Development
The Companys Business Development segment was acquired in the Nova
Camaçari Acquisition and the 52114 Merger. As such, the results
of operations for this segment were not included in the historical
2000 results of operations,
and therefore, the increases in this segments operating results are the
direct result of the Nova Camaçari Acquisition and the 52114 Merger.
Supplemental Unaudited Pro Forma Discussion
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations of the Company that
would have occurred had the Nova Camaçari Acquisition and the Related Party
Mergers been consummated on January 1, 2001. In addition, the pro forma
operating results are not necessarily indicative of the future operating
results of the Company. Management expects that the strategic benefits of the
Related Party Mergers will result in incremental revenue and cost-savings
opportunities; however, such incremental revenues or cost savings have not been
reflected in the pro forma operating results.
Pro forma adjustments to record the Nova Camaçari Acquisition and the
Related Party Mergers as of January 1, 2001 include the following:
88
The following table sets forth certain pro forma consolidated financial
information of the Company for the years ended December 31, 2002 and 2001,
giving effect to the Nova Camaçari Acquisition and the Combined Companies
Mergers and the Related Party Mergers as if the Nova Camaçari Acquisition and
Related Party Mergers had occurred on January 1, 2001.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Net Revenue.
Net revenue of the Company decreased by 0.4% during fiscal
year 2002 to U.S.$2,391.1 million as compared to U.S.$2,401.5 million during
fiscal year 2001 primarily as a result of the scheduled shutdown at the
pyrolysis plant of the Olefins 1 Unit of the Basic Petrochemical Unit, that was
the major cause for the 6.6% decrease in the sales volume of ethylene. In
addition, the decrease of the prices of the thermoplastic resins and
basic petrochemicals products in the domestic market in 2002, in line with the
decrease in international prices, more than offset the increase of 7% in
the sales volume of thermoplastic resins. Export sales represented 22.4% of
total net revenue in 2002.
Costs of Sales and Services and Gross Profit.
Cost of sales and services
increased by 1.5% during fiscal year 2002 to U.S.$1,901.0 million as compared
to U.S.$1,872.1 million during 2001. Although naphtha and ethylene prices paid
by Braskem decreased in 2002 when compared to 2001, the increase in fixed costs
due to the aforementioned scheduled shutdown of the Basic Petrochemicals Unit and an
increase in the insurance costs for the Companys industrial facilities more
than offset the decrease in naphtha and ethylene prices, the main raw materials
of the Company.
89
As a result of the items discussed above, on a pro forma basis, gross
profit decreased by 7.4% in fiscal year 2002 to U.S.$490.1 million from
U.S.$529.4 million in fiscal year 2001. Gross margin for 2002 was 20.5% as
compared to 22% in 2001.
Selling, General and Administrative Expenses.
Selling, general and
administrative expenses increased by 42.9% during fiscal year 2002 to U.S.$252.5
million as compared to U.S.$176.7 million in fiscal year 2001. This increase
was mainly caused by the impact of non-recurring expenses related to the
Companys corporate restructuring process in 2002. Selling, general and administrative expenses
represented 10.6% of the Companys net revenue in 2002 and 7.4% of the
Companys net revenue in 2001.
Credit from Federal Excise Tax (IPI).
The Company recorded revenues of
U.S.$284.5 million in 2002 relating to a credit for IPI in respect of taxes
paid for raw materials that are in a zero percent tax bracket, which amount
includes approximately U.S.$75.0 million that had already been offset against
taxes payable in prior years. In connection with the recognition of this
revenue, the Company recognized a portion of this amount in taxes recoverable, including
U.S.$67.5 million as current assets and U.S.$148.8 million as non-current
assets. See Effect of Taxes on the Companys Income Other Taxes
Federal Excise Tax (IPI).
Operating Income.
Operating income increased by 48.1% during fiscal year
2002 to U.S.$522.2 million as compared to U.S.$352.7 million in fiscal year
2001. The major contributor to this variation was the recognition by the
Company in 2002 of IPI tax credits in an aggregate amount of U.S.$284.5
million. Operating income represented 21.8% of net revenue during 2002 and
14.7% of net revenue during 2001.
Financial Income.
Financial income in fiscal year 2002 amounted to
U.S.$167.9 million, practically in line with U.S.$173.5 million in financial
income in fiscal year 2001. Financial income represented 7% of the Companys
net revenue during 2002 and 7.2% of the Companys net revenue during 2001.
Financial
Expenses.
Financial expenses increased by 45.3% during fiscal
year 2002 to U.S.$1,159.8 million as compared to U.S.$798.4 million in fiscal
year 2001. The increase in financial expenses was due to the higher
devaluation of the
real
in relation to the U.S. Dollar in 2002, as compared to
the devaluation that occurred in 2001 (34.3% in 2002 and 15.7% in
2001).
Other Non-operating Expense, Net.
Other non-operating expenses, net,
increased by 51.5% during fiscal year 2002 to U.S.$57.3 million as compared to
U.S.$37.8 million in fiscal year 2001. The increase in other non-operating
expenses, net, was caused primarily by the write-off by the Company of certain
obsolete assets in 2002.
Income Tax and Social Contribution.
Income tax and social contribution
was an expense in the amount of U.S.$20.4 million during fiscal year 2002 as
compared to a credit of U.S.$33.3 million in fiscal year 2001. Income tax and
social contribution was an expense in 2002 because, despite the fact that the
Company incurred a loss in 2002, its subsidiary OPP Química had taxable income
in 2002 primarily as a result of its recognition of IPI tax credits during that
year. Income tax and social contribution was a credit in 2001 due to
the recording of a deferred tax credit in respect of losses sustained by the
Company during 2001.
Equity in Earnings (Losses) of Affiliates.
Equity in earnings (losses) of
affiliates increased during fiscal year 2002 to equity in earnings of
affiliates of U.S.$22.5 million as compared to equity in losses of affiliates
of U.S.$3.2
million in fiscal year 2001. The increase in equity in earnings (losses)
of affiliates in 2002 was primarily caused by (1) an increase of approximately
U.S.$6.0 million in the equity in earnings of Copesul in 2002 as compared to
2001 and (2) equity in earnings of Politeno in an amount of U.S.$13.0 million
in 2002 as compared to equity in losses of Politeno in an amount of U.S.$8.2
million in 2001. Copesul and Politeno are among the Companys affiliates
included in equity in earnings (losses) of affiliates.
90
Minority Interest.
Minority interest amounted to a gain of U.S.$65.0
million in 2002 million as compared to a loss of U.S.$42.6 million in fiscal
year 2001. The gain recorded in 2002 offset the proportion of the losses
sustained by Trikem during that year (approximately U.S.$130.0 million) that
are attributable to the interests in Trikem held by Trikems minority
shareholders. In addition, the gain in 2002 was partially offset by a loss in
minority interest corresponding to the proportion of income earned by Polialden
during 2002 that is attributable to the interests in Polialden held by its
minority shareholders. In 2001, both Trikem and Polialden recorded net income,
a proportion of which was offset by the Company to reflect the proportional
interests of the minority shareholders in these companies.
Loss.
Loss increased by 43.5% during fiscal year 2002 to
U.S.$460.0 million as compared to a loss of U.S.$320.7 million in fiscal
year 2001. The key factors for the increase in the loss between these
two years were the 7.4% decrease in the gross profit, the 45.3% increase in the
financial expenses and the 42.9% increase in the selling, general and
administrative expenses. These factors altogether, more than offset the
non-recurring gains associated with the IPI tax credit.
Liquidity and Capital Resources
The Companys principal cash requirements consist of the following:
The Companys principal sources of liquidity have traditionally consisted
of cash flows from operating activities and short-term, and long-term secured
borrowings, including pre-export financings. The Company is seeking to extend
the overall maturity of its outstanding indebtedness by refinancing certain
portions of its indebtedness that come due in the latter half of 2003 and
during 2004. The Company believes that this extension of its debt maturities
is important in order to better match the Companys cash generation capacity
with its debt service and capital expenditure obligations. The Company is also
seeking to sell certain of its non-core assets. See
Working Capital and Indebtedness and Financing Strategy Long-term
Indebtedness Notes.
The Companys cash and cash equivalents at December 31, 2002 and 2001 were
U.S.$35.5 million and U.S.$109.2 million. The decrease in the amount of the
Companys cash and cash equivalents at the end of 2002 compared to the end of
2001 was principally due to net cash used in financing activities, despite the
positive operating cash flow. The Company does not have any material unused
sources of liquidity.
Working Capital
The Company had consolidated negative working capital (current assets
minus current liabilities) of U.S.$594.7 million at December 31, 2002
(U.S.$610.2 million at December 31, 2001). Part of the Companys debt strategy
over the next few years involves the use of a substantial portion of its
consolidated cash flow (including from synergies resulting from the mergers
that formed part of its consolidation and from, possibly, the sale of certain
non-core assets) to pay principal and interest with respect to this
indebtedness, including by repaying short-term debt through longer-term
borrowings and issuing longer-term debt securities. Any failure by the Company
to refinance indebtedness coming due during the next 12-18 months that it does
not repay using cash flow generated from its operations and from the sale of
non-core assets would adversely affect the Company and its financial condition.
See Item 3. Key Information Risk Factors Risks Relating to the Company
The Companys indebtedness will require that a
significant portion of its
cash flow be used to pay the principal and interest with respect to that
indebtedness.
91
The
Company has short-term finance lines denominated in
reais
with many of
the most important banks operating in Brazil. Although the Company has no
committed lines of credit with these banks, the Companys management believes
that the Company will continue to be able to obtain sufficient credit to
finance its working capital needs.
Cash Flows
Cash flows from operating activities
Net cash from operating activities was U.S.$429.6 million in 2002 and
U.S.$124.4 million in 2001.
The Companys cash flows from operating activities in 2002 reflected an
245.3% increase over 2001, principally due to an increase in liabilities with
suppliers, other taxes and advances from customers.
Cash flow from investing activities
Investing activities, primarily including acquisitions, other capital
expenditures and investments in and loans to affiliated companies, used net
cash flow of U.S.$217.2 million in 2002 compared to using net cash flow of
U.S.$118.5 million in 2001. Cash flows used in investing activities in 2002
were mainly composed of additions to property and equipment related to
revamping and maintaining the pyrolysis plant of the Olefins Unit 1 of the
Companys Basic Petrochemicals Unit.
Cash flows used in investing activities in 2001 were mainly composed of
the investment in the Nova Camaçari Acquisition, partially offset by U.S.$147.6
million generated from cash and cash equivalents of the merged companies and
from a reduction in short-term and long-term investments.
Cash flow from financing activities
Financing activities (before distributions to shareholders), which include
short-term and long-term secured and unsecured borrowings, and debt
repayments,
used net cash flows of U.S.$191.1 million in 2002, compared to providing net
cash flows of U.S.$91.2 million in 2001.
During the year ended December 31, 2002, the Companys issuance and
repayments of debt were U.S.$1,701.3 million and U.S.$1,852.3 million,
respectively. During the year ended December 31, 2001, the Companys issuance
and repayments of debt were U.S.$1,491.6 million and U.S.$1,382.8 million,
respectively.
In 2002, the Companys principal source of long-term borrowed funds was an
issuance of unsecured convertible debentures in an aggregate amount of
U.S.$241.8 million, and an export prepayment financing in an aggregate amount
of U.S.$97.2 million. At December 31, 2002, these debentures and this export
prepayment financing had outstanding principal balances of U.S.$182.1 million
and U.S.$97.2 million, respectively. In 2001,
the Companys principal source of long term borrowed funds was (1) the
issuance by the Company of two series of secured, non-convertible debentures,
in an aggregate amount of U.S.$176.3 million and (2) an export prepayment
credit agreement in an aggregate amount equal to U.S.$300.0 million.
The Company paid cash dividends and interest attributable to shareholders
equity (including withholding taxes paid by the Company on behalf of its
shareholders in respect thereof) of U.S.$10.7 million and U.S.$39.9 million,
respectively, for the years ended December 31, 2002 and 2001.
92
Contractual Commitments
The following table summarizes significant contractual obligations and
commitments as of December 31, 2002 that impact the Companys liquidity:
In addition, the Company is 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 U.S.$209.4
million at December 31, 2002. The tax contingencies relate primarily to the
Contribution for Social Security Financing, Social Integration
Program, the Federal Excise Tax (IPI), the corporate income tax and social security
contributions. See Item 8. Financial Information Legal Proceedings and
Note 13 to the Consolidated Financial Statements.
Indebtedness and Financing Strategy
As of December 31, 2002, the Companys aggregate outstanding debt
(including short-term debt, current portion of long-term debt, long-term debt
and debentures) was U.S.$2,120.7 million, consisting of short-term debt,
current portion of long-term debt and current portion of debentures included in
current liabilities of U.S.$725.1 million and long-term debt and debentures
(excluding the current portion) in long-term liabilities of U.S.$1,395.6
million.
The Companys debt consisted of U.S.$706.1 million of
real
-denominated
debt and U.S.$1,414.6 million of foreign currency-denominated debt. See Item
11. Quantitative and Qualitative Disclosures About Market Risk for
information regarding the Companys interest rate exposure, its average
maturity and its policy with respect to mitigating foreign currency risks
through the use of financial instruments and derivatives.
The Companys cash interest expense was U.S.$274.8 million and U.S.$174.4
million for 2002 and 2001, respectively.
Short-term Indebtedness
During the last three years, the Company has instituted a policy of
attempting to reduce its short-term debt and the current portion of its
long-term debt as much as possible taking into account market conditions in
Brazil. The Company successfully reduced its short-term debt (including the
current portion of long-term debt and debentures) to U.S.$725.1 million as of
December 31, 2002, from U.S.$840.0 million as of December 31, 2001. As of
December 31, 2002, the Companys outstanding short-term debt consisted
primarily of advances on export
contracts and working capital debt with Brazilian financial institutions
and discounting of domestic trade receivables.
The Company has short-term finance lines denominated in
reais
with a
number of financial institutions operating in Brazil. Although the Company has
no committed lines of credit with these banks, the Companys management
believes that the Company will continue to be able to obtain sufficient credit
to finance its working capital needs.
Long-term Indebtedness
The Companys long-term debt consists primarily of notes issued in the
Brazilian and foreign capital markets, borrowings under credit agreements and
pre-export financings.
93
Sets forth below are descriptions of certain significant financing
transactions of the Company.
Debentures
On October 1, 2001, the Companys predecessor, Copene, issued the tenth
issue of secured non-convertible debentures (the Tenth Issue) in Brazil. The
Tenth Issue was issued in two series and is secured by a
garantia flutuante
,
or a floating lien over all of the Companys Basic Petrochemicals Units
assets. Copene used the proceeds from the debentures to refinance in part its
obligations in connection with the acquisition of the ESAE Assets in the
Auction. See Item 4. History and Development of the Company.
At December 31, 2002, the aggregate outstanding amount of the first series
of these debentures was U.S.$100.4 million. Interest on the first series
accrues at the rate per annum of 118.3% of the
Certificado Depósito
Interbancário
(the Brazilian interbank rate, or CDI), since December 1, 2002
(110% of CDI through November 30, 2002). Interest on the first series is
payable semi-annually, and the first series matures on October 1, 2006.
At December 31, 2002, the aggregate outstanding amount of the second
series was U.S.$63.4 million. Interest on the second series accrues at a rate
of 13.3% per annum, and the principal amount is adjusted for inflation on each
payment date using the IGP-M. Interest on the second series is payable
annually, and the second series matures on October 1, 2006.
The initial interest rates described above in respect of both series of
debentures will be in effect until October 1, 2004, when the Companys Board of
Directors will establish new interest rates for the period commending on such
date through the final maturity date thereof. The Company must redeem in full
the debentures of any holders that do not accept the new interest rates
established by its Board of Directors.
The
Tenth Issue contains a number of covenants (calculated in accordance with accounting
principles determined by the Brazilian Corporate Law) including a maximum net
debt to EBITDA ratio (declining over time); a minimum EBITDA to net financial
expenses ratio (increasing over time); a maximum short-term debt to EBITDA
ratio (declining over time), which applies if the net debt to EBITDA ratio is
greater than specified levels or the maximum EBITDA to net financial expenses
ratio is less than specified levels; and limitations on dividend payments,
loans to shareholders and affiliates, asset sales, liens and mergers and
acquisitions.
On May 31, 2002, OPP Produtos Petroquímicos issued registered,
subordinated convertible debentures in Brazil. As a result of the Related
Party Mergers, these debentures became obligations of the Company. At December
31, 2002, the aggregate outstanding principal amount of these debentures was
U.S.$ 182.1 million. Interest on these debentures accrues at the
Taxa de Juros
de Longo Prazo
, or TJLP, the Brazilian National Bank for Economic and Social
Developments long-term interest rate, plus 5.0% per annum. Interest on these
debentures is fully capitalized until the maturity date of these debentures on
July 31, 2007. The terms of these debentures provide that they (1) may not be
accelerated, redeemed, prepaid, renegotiated or amended and (2) are
subordinated to the Tenth Issue and to a U.S.$250 million export pre-payment
credit agreement, which is more fully discussed in Export Pre-Payment
Facilities.
The holders of these debentures have the option at any time before
maturity to convert their debentures into shares of the Companys capital
stock. The initial conversion price is R$975.2 (equivalent to U.S.$276 using
the
real
/U.S. dollar exchange rate at December 31, 2002) of debentures, plus
accrued interest, per 1,000 class A preferred shares. Upon conversion, the
Company is required to issue class A preferred shares up to the legal limit for
preferred shares of 66.6% of its total capital stock. After this 66.6% limit is
reached, the Company is required to issue any remaining shares to be converted
in the following proportions: one-third in common shares and two-thirds in
class A preferred shares.
Notes
On February 23, 1996, OPP Petroquímica issued and sold U.S.$125.0 million
aggregate principal amount of unsecured 11.5% Notes due 2004 pursuant to Rule
144A and Regulation S under the Securities Act. Interest on these notes is
payable semi-annually in arrears in February and August in each year, and the
notes mature on February 22, 2004. As of December 31, 2002, the outstanding
amount of these notes held by third parties was U.S.$28.0 million. The
obligations under these notes were assumed by OPP Química in December 2000,
when OPP Petroquímica merged with and into OPP Química, and then were assumed
by the Company as a result of the Related Party Mergers.
94
On October 29, 1996, OPP Petroquímica issued and sold U.S.$100.0 million
aggregate principal amount of unsecured 11% Notes due 2004, pursuant to Rule
144A and Regulation S under the Securities Act. Interest on these notes is
payable semi-annually in arrears of April and October in each year, and the
notes mature on October 29, 2004. As of December 31, 2002, the outstanding
amount of these notes held by third parties was U.S.$55.7 million. The
obligations under these notes were assumed by OPP Química in December 2000,
when OPP Petroquímica merged with and into OPP Química, and then were assumed
by the Company as a result of the Related Party Mergers.
By December 31, 2002, Lantana Trading Company (then a subsidiary of OPP
Química and currently a direct subsidiary of Braskem as a result of the Related
Party Mergers) had reacquired U.S.$180 million of OPP Petroquímica notes, and
had resold U.S.$37 million.
On June 25, 1997, the Company issued and sold U.S.$150.0 million aggregate
principal amount of unsecured 9% Notes due 2007 pursuant to Rule 144A and
Regulation S under the Securities Act. Interest on these notes is payable
semi-annually in arrears in June and December in each year, and the notes
mature on June 25, 2007. As of December 31, 2002, the outstanding amount was
U.S.$261.8 million.
On July 24, 1997, Trikem issued and sold U.S.$250.0 million aggregate
principal amount of unsecured 10.6% Notes due 2007 pursuant to Rule 144A and
Regulation S under the Securities Act. 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. Trikem
has the right to repurchase these notes on July 24 of each year beginning on
July 24, 2002. As of December 31, 2002, the outstanding amount of these Trikem
notes was U.S.$150.2 million.
Bank Credit Facilities
In July 1999, Odequi Overseas Inc., now one of the Companys direct
subsidiaries (Odequi Overseas), received a loan in the principal amount of
U.S.$110.0 million from a syndicate of financial institutions. Odequi Overseas
used the proceeds of this loan to acquire non-voting preferred shares of Odequi
and OPE Investimentos. Odequi Overseas pre-paid approximately U.S.$30.0 million
of this loan prior to its amendment and restatement in July 2002. The amended
and restated loan is in the principal amount of U.S.$80.0 million and matures
in July 2003. This loan bears interest at the rate of LIBOR plus 1.4% per annum
payable semi-annually in arrears in January and July of 2003. This loan is
secured by all of the non-voting preferred shares of Odequi and OPE
Investimentos, which shares are owned by Odequi Overseas. Odequi and OPE
Investimentos have agreed to pay dividends on the preferred shares in amounts
equal to the interest due on the Odequi Overseas loan and to redeem the
preferred shares for amounts that will be used by Odequi Overseas to pay the
principal of the loans. The
Company intends to refinance this debt on or prior to its maturity in July
2003. The outstanding balance of this loan as of December 31, 2002 was
U.S.$80.0 million.
In January 1998, several financial institutions granted a loan in the
amount of U.S.$30.0 million to Proppet to finance construction of its PET and
DMT plant in Camaçari, Bahia. This loan has since been amended to reflect,
among other provisions, the merger of Proppet into the Company. ODBPAR
Investimentos S.A., one of Braskems shareholders (ODBPAR), Norquisa and
Mitsubishi have guaranteed this loan. ODBPAR and/or Norquisa have also agreed
to reimburse Mitsubishi for any payments that it makes in respect of this
guarantee if the Company defaults on its payment obligations under the loan. To
guarantee their reimbursement obligations, Norquisa and ODBPAR have
caused the Company to grant Mitsubishi a second mortgage on its DMT and PET real
properties and to pledge the equipment related to its DMT and PET production.
The outstanding balance of this loan as of December 31, 2002 was U.S.$18.8
million.
95
Acquisition Financing
In September 1992, Odequi purchased shares of PPH Companhia Industrial de
Polipropileno and Poliolefinas S/A, the predecessors to OPP Química. Odequi
paid 10% of the purchase price in cash and the remaining 90% was financed by
Banco do Brasil over a 12-year term. The principal amount of this loan is
adjusted monthly for inflation, and the loan bears interest at the rate of 4.5%
per annum. Interest is payable semi-annually, and the principal amortizes in
17 semi-annual installments. The outstanding balance of this loan at December
31, 2002 was U.S.$34.9 million. This loan is secured by the shares of OPP
Química and is fully guaranteed by Odequi. As part of the
Companys corporate
restructuring, the obligations under this loan were fully assumed by OPP
Química in December 2000 and were subsequently assumed by the
Company as a result of the
Related Party Mergers.
In September 2001, BNDESPAR sold one billion Class B preferred shares of
Conepar to Nova Camaçari for a purchase price of approximately U.S.$46.4
million, and as part of the transaction, BNDESPAR extended a loan to Nova
Camaçari in a principal amount equal to the purchase price. This loan bears
interest at the TJLP rate plus 4% per annum, payable annually each August 15.
The principal amount of this loan is due on August 15, 2006. BNDESPAR has the
option to convert the principal amount of this loan into the
Companys class A preferred
shares upon the maturity of this loan. At December 31, 2002, the outstanding
amount of this loan was U.S.$50.0 million. The obligations under this loan
were assumed by the Company in connection with its merger with Nova Camaçari.
Export Prepayment Facilities
In December 2001, the Companys predecessor, Copene, entered into a
U.S.$250.0 million syndicated credit agreement. The loan is secured by certain
of the
Companys exports. The loan was disbursed in two tranches. Copene used the
proceeds from these debentures to refinance in part its obligations in
connection with the acquisition of the ESAE Assets in the Auction. This credit
agreement was amended and restated in October and December 2002 to change the
terms of certain financial covenants and to add related definitions.
The first tranche of this loan in the principal amount of U.S.$80.0
million bears interest at the rate of three-month LIBOR plus 4.25% per annum,
payable quarterly in arrears. Principal on the first tranche is payable in
seven installments beginning in June 2003 and the final maturity is in December
2004. Amortization of the principal is scheduled to match sales of the
Companys exports
that are not pledged to support other obligations.
The second tranche of this loan in the principal amount of U.S.$170.0
million bears interest at the rate of three-month LIBOR plus 5.25% per annum,
payable quarterly in arrears. Principal on the second tranche is payable in 15
installments beginning in June 2003 and the final maturity of the second
tranche is in December 2006. Amortization of the principal is scheduled to
match sales of the Companys exports that are not pledged to support other
obligations. At December 31, 2002, the principal amount outstanding to third
parties on the first and second tranches was U.S.$217.0 million.
In April 2001, Trikem received an export pre-payment loan of U.S.$50.0
million from two financial institutions. This loan matures in June 2004 and
bears interest at the rate of three-month LIBOR plus 2.375% per
annum payable quarterly in arrears. This loan amortizes in 14 equal
quarterly installments structured to correspond to excess distributions to
Trikem from the trust that issued the 6.7% Investor Certificates due 2004 as
part of an export securitization. This loan is secured by Trikems right to
payments from the trustee. The Company guarantees Trikems performance under
the loan documents. As of December 31, 2002, the outstanding principal of this
loan was U.S.$16.4 million.
On July 30, 1997, a trust formed by Trikem issued and sold U.S.$100
million aggregate principal amount of 6.7% 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 by a subsidiary of Trikem to Nissho
Iwai Corporation. Interest is payable quarterly in arrears in March, June,
September and December of each year, and the Investor Certificates mature on
June 1, 2004. The Investor Certificates represent fractional interests in the
trust whose sole asset is receivables generated pursuant to a supply agreement
with Nissho Iwai. Trikem agrees to sell PVC and EDC to its subsidiary so that
the subsidiary can sell the products to Nissho Iwai. Trikems obligations to
sell products to its subsidiary is supported by a surety bond. Trikem also
guarantees payment of the Investor Certificates. The outstanding balance of
these Investor Certificates as of December 31, 2002 was U.S.$72.2 million.
96
In June 2000, OPP Petroquímica entered into a prepayment advance for
products to be exported to a foreign customer in the amount of U.S.$75.3
million. This prepayment advance bears interest at the rate of six-month LIBOR
plus 1.7% per annum. The maximum term for shipment of the subject products
ends in December 2003. At December 31, 2002, the unpaid principal amount of
this prepayment advance was approximately U.S.$49.7 million. OPP Petroquímicas
obligation to deliver export products is secured by a surety bond. The
obligations under this prepayment advance were assumed by OPP Química in
December 2000 when OPP Petroquímica merged with and into OPP Química and were
assumed by the Company as a result of the Related Party Mergers.
In December 2002, OPP Química entered into a prepayment advance for
products to be exported to a foreign customer in the amount of U.S.$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 June 2003 to June 2006. At December 31, 2002, the
unpaid principal amount of this prepayment advance was approximately U.S.$97.2
million. OPP Químicas obligation to deliver export products is guaranteed by
a surety bond. The obligations under this prepayment advance were assumed by
OPP Química in December 2000 when OPP Petroquímica merged with and into OPP
Química and were assumed by the Company as a result of the Related Party
Mergers.
BNDES Development Loans
The Company maintains various credit facilities with BNDES to fund general
capital expenditures associated principally with the expansion of its
production capacity, environmental projects and the development of operation
control centers, laboratories and a waste treatment station, of which U.S.$76.2
million amount was outstanding at December 31, 2002. Amounts borrowed from
BNDES are secured by a mortgage on certain real estate properties and a pledge
of certain equipment and machinery the Company owns. The interest rate on
amounts the Company borrowed from BNDES is based on a floating index
(the TJLP, a reference interest rate or the BNDES basket of
currencies), plus a margin of 3.9% to 10.8% per annum. The principal and interest on these credit facilities are
payable monthly through July 2007.
Other
Petrobras maintains a R$570.0 million (equivalent to U.S.$161.3 at the
December 31, 2002
real
/U.S. dollar exchange rate) rotating naphtha supply line of credit with
the Company in respect of its supply of naphtha to the Company. As of February
24, 2003, the facility is guaranteed by the mortgage of two of OPP Químicas
industrial plants. The
Company is in the process of negotiating an additional credit facility
with Petrobras to be guaranteed by a mortgage on one of its plants in Triunfo,
in the State of Rio Grande do Sul.
The Company has other financing transactions to finance its working
capital requirements and certain investments, which are guaranteed by its
shares and properties.
Financing Strategy
The Companys financing strategy is to extend the average maturity of its
outstanding indebtedness, including by repaying short-term debt through
longer-term borrowings and issuing longer-term debt securities. In addition,
part of the Companys financing strategy over the next several years involves
the Companys use of a substantial portion of its consolidated cash flow
(including from synergies resulting from the mergers that formed part of the
Companys consolidation and possibly from the sale of certain non-core assets)
to pay principal and interest with respect to its outstanding indebtedness.
97
One of the Companys principal subsidiaries, Trikem, is party to certain
debt agreements that restrict its ability to transfer funds to the Company in
the form of cash dividends, loans or advances. As the Company does not reply
primarily on funding from its subsidiaries for working capital and other
purposes, these restrictions have not had, and are not expected to have, any
material adverse impact on the ability of the Company to meet its cash
obligations.
Research and Development
The Companys policy is to maintain the level of research and development
expenditure necessary to enable it to be a fast follower of state-of-the-art
technologies. This policy is directed towards sustaining the Companys
performance and enhancing the efficiency of the Companys operations. In
addition to its small team of staff, the Company also places emphasis on bench
research and has links with research and development programs at the major
Brazilian universities as well as recognized foreign research and development
centers. During 2002, 2001 and 2000 the Company invested U.S.$5.7 million,
U.S.$4.1 million and U.S.$2.3 million, respectively, in research and
development.
With the deregulation of the petrochemical sector, the Companys
technological activities have been directed to projects of a strategic nature,
aimed at increasing ethylene production capacity, development of new products and
processing of new raw materials. A German company, Linde A.G., was contracted
to prepare the engineering project for an increase of 80 thousand
tons in annual ethylene production capacity, as well as to develop the Conceptual Design
and Basic Engineering for a new Condensate Fractionation Unit. Other projects
have been developed in order to allow the upstream units to process these
higher capacities and improve their productivity.
The Company maintains a center for technology and innovation in Triunfo,
Rio Grande do Sul. The centers principal purpose is to evaluate and analyze
technology developed abroad for the petrochemical market and to adapt such
technology to be utilized in the Brazilian market. This center
integrates several laboratories and employs approximately 125 engineers and technicians
specialized in developing products and modern equipment, rendering technical
and support services to its customers and improving the Companys technological
standards. This center has developed new applications for the development of
linear low density polyethylene and the development of improvements in
polyolefins packaging for the Companys clients.
As a result of its
investments and the research performed at this center, the Company offers
numerous new products every year and currently has pending over 70 patent
applications. In 2002, the center provided services to approximately 180 clients. These
services consisted of performing specific tests and responding to requests to develop new
products on behalf of the Companys clients. The
Company inaugurated a new wing in
December 2002 to assist in its continued efforts to develop new
products and applications and to improve its competitiveness.
In addition to developing new products and applications, the center is an
important part of the Companys strategy to improve its clients products and
to create new domestic and international business opportunities. The Company
works closely with its customers in order to understand their concerns and to
provide a tailored product. This technical assistance enables the Company to
enhance customer loyalty.
The Company also maintains partnerships with Brazilian and foreign
universities, research centers and public institutes to assist it in developing
research projects, including among other universities and institutes, the
Universidade de São Carlos
,
Universidade Federal de Campina Grande
,
Unicamp
,
Instituto de Pesquisa Nuclear
(Nuclear Research Institute, or IPEN).
The original patents covering the majority of the Companys petrochemical
production process are in the public domain. The Company was licensed to use
certain technology in connection with the construction of the second ethylene
plant but is not dependent on any external patents or know-how for its
operations. This is also true for the majority of its aromatics plants, with
the exception of the para-xylene expansion project, concluded in 1998, where a
know-how license is in effect for 15 years.
98
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Year ended December 31,
2002
2001
2000
(in thousands of U.S. dollars, except percentages)
U.S.$
2,391,116
U.S.$
1,771,891
U.S.$
1,555,100
(1,900,987
)
(1,447,207
)
(1,252,357
)
490,129
324,684
302,743
(252,475
)
(80,632
)
(77,035
)
284,509
522,163
244,052
225,708
167,854
80,448
94,869
(1,159,842
)
(294,593
)
(134,000
)
(57,281
)
(26,312
)
(2,494
)
(20,422
)
14,332
(2,937
)
22,467
(6,090
)
6,889
65,024
(63,848
)
15
1,767
U.S.$
(460,037
)
U.S.$
(50,244
)
U.S.$
188,050
20.5
18.3
19.5
21.8
13.8
14.5
Year ended December 31,
2002
2001
2000
(in thousands of U.S. dollars, except percentages)
U.S.$
1,127,142
U.S.$
1,330,987
U.S.$
1,568,713
(972,506
)
(1,129,833
)
(1,252,357
)
154,636
201,153
316,356
84,348
132,255
218,335
13.7
%
15.1
%
20.2
%
7.5
%
9.9
%
13.9
%
U.S.$
873,748
U.S.$
341,364
(729,351
)
(245,246
)
144,398
96,118
312,667
52,570
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Year ended December 31,
2002
2001
2000
(in thousands of U.S. dollars, except percentages)
16.5
%
28.2
%
35.8
%
15.4
%
U.S.$
403,930
U.S.$
153,864
(289,500
)
(106,602
)
114,430
47,262
18,739
23,574
28.3
%
30.7
%
4.6
%
15.3
%
U.S.$
92,506
U.S.$
28,368
(77,869
)
(23,952
)
14,637
4,417
5,721
3,208
15.8
%
15.6
%
6.2
%
11.3
%
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the positive impact as a result of the recognition in 2002 by OPP
of the U.S.$284.5 million IPI tax credit (see Effect of Taxes on
the Companys IncomeOther Taxes
Federal excise tax (IPI)
and Note 5 to the Consolidated Financial Statements); and
the negative impact of a U.S.$19.4 million increase (or 74%) in
amortization expenses, from U.S.$26.2 million in 2001 to U.S.$45.6
million in 2002, due mainly to the full amortization of the deferred
exchange rate variance of 2001, which amounted to U.S.$34.9 million in
2002 in comparison to U.S.$13.9 million in 2001. The original
deferral of the exchange rate variance in 2001 had been recorded only
in the Brazilian Corporate Law financial statements and not in the
U.S. GAAP financial statements.
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The inclusion of the results of operations of each of the companies
included in the Nova Camaçari Acquisition, as well as OPP Produtos and
its subsidiaries, for the period from January 1 to July 25, 2001, the
date of the Nova Camaçari Acquisition.
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An adjustment to the depreciation expense of the companies included
in the Nova Camaçari Acquisition, representing the depreciation expense
for the period from January 1 to July 25, 2001, based upon the fair value
adjustment of these companies fixed assets recorded as part of the
purchase accounting process.
An adjustment to interest expense for the period from January 1 to
July 25, 2001, representing the interest expense on the loans
incurred in connection with the Nova Camaçari Acquisition, as if such
loans had been contracted on January 1, 2001.
Elimination of intercompany revenues and expenses involving the
companies included in the pro forma presentation.
Inclusion of the estimated income tax and social contribution
effects of the above adjustments.
Year ended December 31,
2002
2001
(in thousands of U.S. dollars, except percentages)
U.S.$2,391,116
U.S.$2,401,450
(1,900,987
)
(1,872,088
)
490,129
529,362
(252,475
)
(176,675
)
284,509
522,163
352,687
167,854
173,461
(1,159,842
)
(798,353
)
(57,281
)
(37,811
)
(20,422
)
33,316
22,467
(3,190
)
65,024
(42,570
)
1,767
U.S.$(460,037
)
U.S.$(320,693
)
20.5
22.0
21.8
14.7
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working capital needs;
the servicing of the Companys indebtedness;
capital expenditures related to investments in operations and property, plant and equipment; and
dividend payments on its shares.
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Payments Due by Period (in millions of U.S. dollars)
2003
2004
2005
2006
2007
Thereafter
Total
413.0
363.5
158.5
131.3
405.2
0.3
1,471.8
9.1
154.7
182.1
345.9
110.4
110.4
110.4
110.4
110.4
653.8
1,205.8
532.5
628.6
268.9
241.7
697.7
654.1
3,023.5
(1)
Purchase commitments of raw materials and electric power based upon the
applicable purchase price as of December 31, 2002.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
Braskems bylaws provide that its Board of Directors is composed of eleven members and eleven alternate members. During periods of absence or temporary unavailability of a regular member of Braskems Board of Directors, the corresponding alternate member substitutes for the absent or unavailable regular member. Braskems Board of Directors is a decision-making body responsible for, among other things, determining policies and guidelines for Braskems business and Braskems wholly-owned subsidiaries and controlled companies. Braskems Board of Directors is responsible for supervising Braskems Board of Executive Officers and monitors its implementation of the policies and guidelines established by the Board of Directors. Under the Brazilian Corporate Law, Braskems Board of Directors is also responsible for hiring external auditors.
The members of Braskems Board of Directors are elected at general meetings of shareholders for two-year terms and are eligible for reelection. Under a shareholders agreement, the Odebrecht Group has the right to nominate a majority of the Companys Board of Directors, and the Mariani Group has the right to nominate at least one member of the Companys Board of Directors. See Item 7. Major Shareholders and Related Party TransactionShareholders AgreementsControlling Shareholders Agreement. The terms of all current members expire in 2004. Members of Braskems Board of Directors are subject to removal at any time with or without cause at a general meeting of shareholders. Braskems bylaws do not contain any citizenship or residency requirements. The members of Braskems Board of Directors must be shareholders of Braskem. The President and the Vice President of Braskems Board of Directors are elected at a general meeting of shareholders from among the members of Braskems Board of Directors, serve for one-year terms, are eligible for reelection and are subject to removal at any time with or without cause at a general meeting of shareholders. Braskems Board of Directors is presided over by the President and, in his absence, by the Vice President.
Braskems Board of Directors ordinarily meets four times a year and extraordinarily when a meeting is called by the President, the Vice-President or any two members of Braskems Board of Directors. Decisions of Braskems Board of Directors require a quorum of a majority of the directors and are taken by majority vote.
The following table sets forth certain information with respect to the
current members of Braskems Board of Directors:
Name
Member Since
Position Held
Age
Pedro Augusto Ribeiro Novis
Aug. 15, 2001
President of the Board
56
Alvaro Fernandes da Cunha Filho
Nov. 6, 1997
Vice-President of the Board
54
José de Freitas Mascarenhas
Aug. 15, 2001
Board Member
61
Luiz Fernando Cirne Lima
Aug. 15, 2001
Board Member
70
Newton Sergio de Souza
Aug. 15, 2001
Board Member
50
Alvaro Pereira Novis
Aug 15, 2001
Board Member
59
Francisco Teixeira de Sá
May 24, 2001
Board Member
54
Fernando de Castro Sá
April 29, 2003
Board Member
36
Carlos Alberto de Meira Fontes
Aug. 15, 2001
Board Member
53
Margareth Feijó Brunnet
Sept. 27, 2002
Board Member
44
Cezar dos Santos
April 29, 2003
Board Member
63
Summarized below is information regarding the business experience, areas of expertise, and principal outside business interests of Braskems current directors:
99
Pedro Augusto Ribeiro Novis. Mr. Novis was elected to Braskems Board of Directors as a nominee of ODB. He has been a member of the Companys Board of Directors since August 2001 and was elected president of the Board in March 2002. He has also been: a member of the Board of Directors of ODB since October 1997; the chief executive officer of ODB; the chief executive officer of ODBPAR; and a member of the advisory council of CNO (another one Braskems shareholders). Mr. Novis also worked at: CNO from March 1968 through 1980, where he was the general officer of the vice president of the business projects since August 1979; Companhia Brasileira de Projetos e Obras CBPO, where he was executive officer from August 1980 through March 1984 and general officer from April 1984 through March 1985; and vice-president executive officer from March 1985 through September 1997, when he started working at ODB. He holds a law degree from the Universidade Federal da Bahia.
Alvaro Fernandes da Cunha Filho. Mr. Cunha Filho was elected to Braskems Board of Directors as a nominee of ODB and has been a member of the Companys Board of Directors since 1997. He is currently the vice president of Braskems Board of Directors and of the Board of Directors of Norquisa. Mr. Cunha also served as: the Secretary of Industry, Commerce and Tourism of the State of Bahia from 1983 through 1987; executive vice president of Unipar União de Indústrias Petroquímicas S.A. from 1993 through 1994; a member of the board of directors of Unipar União de Indústrias Petroquímicas S.A. from 1994 through 1996 and president of OPP Química, Trikem, Odequi, Copec Complexo Petroquímico de Camaçari, Cetrel Central de Tratamento de Efluentes Líquidos S.A., and Copesul. Mr. Cunha Filho holds a bachelors degree in civil engineering and a masters degree in economics from the Universidade Federal da Bahia.
José de Freitas Mascarenhas. Mr. Mascarenhas was elected to Braskems Board of Directors as a nominee of ODB in 2001. He is an executive officer of ODB and a member of the advisory council of CNO; the president of Fieb Federação das Indústrias do Estado da Bahia and of Cieb Centro das Indústrias do Estado da Bahia since September 1992; and vice president of CNI Confederação Nacional das Indústrias since October 1985 and of ABIQUIM since May 1993. Mr. Mascarenhas has also served as the president of Veracel Celulose S.A., EPB Empresas Petroquímicas do Brasil S.A. from August 1988 through March 1998 and was a member of the board of directors of Coelba Companhia de Eletricidade do Estado da Bahia from March 1987 was a April 1997. Mr. Mascarenhas holds a bachelors degree of civil engineering from Universidade Federal da Bahia.
Luiz Fernando Cirne Lima. Mr. Lima was elected to Braskems Board of Directors as a nominee of ODB in 2001. He is currently the superintendent executive officer of Copesul and a member of the Board of Directors of Banco Icatu S.A., a Brazilian bank. Mr. Lima has also served as: the Minister of Agriculture from 1969 through 1973; a member of the board of directors of Gazeta Mercantil from 1977 through 1993, a member of the executive board of politic and social orientation of Fiesp Federação das Indústrias do Estado de São Paulo; and a member of the board of executive officer of Varig S.A. Mr. Lima holds a bachelors degree of agronomical engineering from the Universidade Federal do Rio Grande do Sul.
Newton Sergio de Souza. Mr. Souza was elected to Braskems Board of Directors as a nominee of ODB in 2001. He is currently the general counsel and an executive officer of ODB, an alternate member of the Board of Directors of Norquisa, an executive officer of ODBPAR, the vice president of the board of directors of Companhia de Concessões Rodoviárias CCR, an operator of toll roads, the vice president of the board of directors of Concessionária da Rodovia Presidente Dutra S.A., an operator of toll roads, the vice president of the Board of Directors of Concessionária do Sistema Anhanguera-Bandeirantes S.A., an operator of toll roads, the vice president of the Board of Directors of Concessionária Ponte Rio-Niterói S.A., an operator of toll roads, a member of the Board of Directors of Concessionária Rodovia dos Lagos S.A., an operator of toll roads, an executive officer of Odebrecht Serviços de Infra-Estrutura S.A., and a member of the Advisory Council of CNO. Mr. Souza has also served as a visiting lawyer at the law firm Dechert, Price & Rhoads (Philadelphia, USA), as a senior lawyer at the law firm Pinheiro Neto Advogados from 1976 through 1982, and as senior counsel of Latin America and Caribbean Division of the World Bank (Washington DC, USA) from 1982 through 1987. Mr. Souza holds a law degree from Pontifícia Universidade Católica do Rio de Janeiro and an LL.M. from the University of Pennsylvania, with a specialization in capital markets.
Alvaro Pereira Novis. Mr. Novis was elected to Braskems Board of Directors as a nominee of ODB in 2001. He is currently the chief financial officer and executive officer of ODB and an executive officer of ODBPAR. Mr. Novis has also served as: the national division vice president of BankBoston in 1966. In 1980, he was elected Managing Director of Banco Iochpe de Investimentos, where he became president in 1995 upon its association with Bankers Trust. From 1989 to 1991, Mr. Novis worked in the Banco BHM, in association with Aralbank. Mr. Novis holds a bachelors degree in economics from the Universidade do Rio de Janeiro and a masters degree in Public Administration from Fundação Getúlio Vargas.
100
Francisco Teixeira de Sá. Mr. Sá was elected to Braskems Board of Directors as a nominee of ODB in 2001. He is the president of the Board of Directors of Norquisa, the president of the Board of Directors of Copene Monômeros Especiais S.A., the president of Pronor, the president of the Board of Directors of Engepack S.A., an executive officer of CPN Distribuidora de Combustíveis Ltda., an executive officer of Tegal Terminal de Gases Ltda., an executive officer of PIN Petroquímica S.A. and an executive officer of Latapack S.A. Mr. Sá has also served as: engineering and production manager of Dow Química S.A. from 1973 through 1984; as industrial officer of EDN Estireno do Nordeste S.A. from 1984 through 1989; and commercial officer and superintendent officer of Caraíba Metais S.A. from 1989 through 1997. He holds a bachelors degree in chemical engineering from the Universidade Federal da Bahia.
Fernando de Castro Sá. Mr. Sá was elected to Braskems Board of Directors as a nominee of Petros on April 29, 2003. He is currently the supply legal manager of Petrobras and a partner of the law office De Castro Sá e Pagnano Advogados Associados. Mr. Sá has also served as a trainee in the legal department of Banco Nacional S.A. and as a lawyer with the law firm of Teixeira & Advogados Associados. Mr. Sá holds a bachelors degree in sociology from the Universidade Federal do Rio de Janeiro and a post graduate degree in business law from Fundação Getúlio Vargas (FGV).
Cezar dos Santos. Mr. Santos was elected to Braskems Board of Directors as a nominee of Previ on April 29, 2003. He is a retired employee of Previ and Banco do Brasil S.A. While an employee of Banco do Brasil S.A. and Previ, Mr. Santos also served as: a member of the fiscal council of Companhia de Eletricidade do Estado da Bahia COELBA from April 1998 through April 2001; and is president of the fiscal council of Tupi S.A. since April 2001. Mr. Santos has a degree in economics from Universidade do Estado do Rio de Janeiro, a law degree from the Universidade Santa Úrsula, Rio de Janeiro, and an MBA degree from Fundação Getúlio Vargas (FGV).
Carlos Alberto de Meira Fontes. Mr. Fontes was elected to Braskems Board of Directors as a nominee of Petroquisa in 2001. He is currently the president of Petroquisa since April 2000, the Petrochemical Executive Manager of Petrobras, the president of the Advisory Council of the Fábrica Carioca de Catalisadores, a chemical catalyst company, the vice president of the Board of Directors of Petroquímica União S.A., the vice president of the Board of Directors of Rio Polímeros S.A. and a member of the Officers Council of Associação Brasileira de Indústrias Químicas e Produtos Derivados (Brazilian Association of Chemical Industry and Derivative Products, or ABIQUIM). Mr. Fontes has also served as manager of petrochemical projects at Petrobras. Mr. Fontes holds a bachelors degree in chemical engineering from the Instituto Militar de Engenharia (IME), took courses in engineering given by Petrobras, holds a postgraduate degree in business management from the Universidade Federal do Rio de Janeiro and attended a program for advanced management.
Margareth Feijó Brunnet. Mrs. Brunnet was elected to Braskems Board of Directors as a nominee of Petroquisa in 2002. She is the manager of Petrochemicals Projects of Petrobras, the general manager of Investments in Petrochemical Centers of Petrobras, an executive officer of Petroquisa, an executive officer of Downstream Participações S.A., a holding company, and a member of the Board of Directors of Copesul. Mrs. Brunnet has also served as petrochemical projects manager from April 2000 through April 2002, as petrochemical projects coordinator from December 1999 through April 2000, as chief of the department of hydrorefinement at a Petrobras refinery in 1999 and chief of the department of special products at a Petrobras refinery from 1996 through 1998. Mrs. Brunnet holds a bachelors degree in chemical engineering from the Universidade Federal do Rio Grande do Sul, took courses in process engineering from Petrobras and holds a postgraduate degree in management development.
101
Board of Executive Officers
Braskems Board of Executive Officers is Braskems executive management body. Braskems executive officers are Braskems legal representatives and are responsible for Braskems internal organization and day-to-day operations and the implementation of the general policies and guidelines set forth by the Board of Directors.
Braskems bylaws require that the Board of Executive Officers consist of a Chief Executive Officer and between three and nine additional members, each responsible for business areas that Braskems Board of Directors assigns to them. The members of Braskems Board of Executive Officers, other than Braskems Chief Executive Officer, have no formal titles (other than the title of executive officer) but have the informal titles set forth in the table below.
The members of Braskems Board of Executive Officers are elected by Braskems Board of Directors for two-year terms, corresponding to the terms of the members of Braskems Board of Directors, and are eligible for reelection. The current term of all of Braskems executive officers ends in 2004. Braskems Board of Directors may remove any executive officer from office at any time with or without cause. According to the Brazilian Corporate Law, executive officers must be residents of Brazil but need not be shareholders of the Company. Braskems Board of Executive Officers holds meetings when called by Braskems Chief Executive Officer.
The following table lists the current members of Braskems Board of
Executive Officers:
Name
Year of Appointment
Position Held
Age
José Carlos Grubisich Filho
2002
Chief Executive Officer
46
Paul Elie Altit
2002
Vice President
Executive Officer and
Chief Financial officer
45
Bernardo Afonso de Almeida Gradin
2002
Vice President Executive Officer
38
Luiz de Mendonça
2002
Vice President Executive Officer
40
Mauricio Roberto de Carvalho Ferro
2002
Vice President
Executive Officer and
General Counsel
37
Roberto Prisco Paraíso Ramos
2002
Vice President Executive Officer
56
Rogério Affonso de Oliveira
2002
Vice President Executive Officer
52
Summarized below is information regarding the business experience, areas of expertise and principal outside business interests of Braskems current executive officers:
José Carlos Grubisich Filho. Mr. Grubisich is currently Braskems chief executive officer. He is also currently the chief executive officer of Odequi, Copene Participações and Trikem and the vice president of the board of directors of Copesul. He was the chief executive officer of OPP Química and the president of the board of directors of OPP Química. In January 1997, Mr. Grubisich became the chairman and the chief financial officer of Rhodia S.A. (currently known as Rhodia Brasil Ltda, a member of the Rhône Poulenc Group) for Brazil and Latin America. From 1999 to 2001, he served as vice-president of Rhodia Fine Organics worldwide and was member of the executive committee of the Rhône Poulenc Group. Mr. Grubisich holds a bachelors degree in chemical engineering from Escola Superior de Química Oswaldo Cruz and an MBA degree from INSEAD France .
Bernardo Afonso de Almeida Gradin. Mr. Gradin is currently one of Braskems vice president executive officers and head of Braskems Vinyls Unit. He is also a member of the Board of Directors of Copene Participações and Trikem and an executive officer of Odequi and of Trikem. Mr. Gradin was a member of the board of directors of OPP Química. Mr. Gradin also served as the production manager of CNO from July 1986 through May 1990, as contract manager of Odebrecht of America, from July 1990 through June 1996 and as superintendent officer of CNO from September 1996 through December 2000. Gradin holds a bachelors degree in civil engineering from the Universidade Federal da Bahia.
102
Luiz de Mendonça. Mr. Mendonça is currently one of Braskems vice president Executive Officers and head of Braskems Polyolefins Unit. He is also an executive officer of Copene Participações and Polialden (Superintendent) and a member of the board of directors of Polialden and was an executive officer of OPP Química. Mr. Mendonça also worked 15 years at Rhodia, where he served as general manager of production, supply and finance and marketing, an officer of the chemical division (Latin America) and vice-president of Rhodia U.S.A. Mr. Mendonça holds a bachelors degree in production engineering from Escola Politécnica da Universidade de São Paulo and an MBA degree from INSEAD France.
Mauricio Roberto de Carvalho Ferro. Mr. Ferro is currently Braskems vice president and general counsel, an executive officer of Odequi, a member of the Board of Directors of Companhia Industrial Alagoas Cinal, a utilities company, an executive officer of Copene Monômeros Especiais S.A., a member of the board of directors of Copene Participações, an alternate member of the Board of Directors of Politeno, a member of the Board of Directors of Polialden and a member of the Board of Directors of Trikem. Mr. Ferro was also an executive officer and general counsel of OPP Química and a member of the Board of Directors of Nitrocarbono. Mr. Ferro has also served as a lawyer at the law firm of Carlos Eduardo Paladini Cardoso in 1989 and as a lawyer at the law firm of Bulhões Pedreira, Bulhões Carvalho e Advogados Associados from 1991 until 1995. Ferro holds a law degree from the Pontifícia Universidade Católica do Rio de Janeiro and an LL.M. degree from the University of London and from the London School of Economics.
Paul Elie Altit. Mr. Altit is currently one of Braskems vice president executive officers and Braskems chief financial officer, an alternate member of the Board of Directors of Companhia de Desenvolvimento Rio Verde Codeverde, a utilities company, an executive officer of Odequi, a member of the Board of Directors of Cinal, the vice president of the Board of Directors of Copene Participações, a member of the Board of Directors of Polialden, the investor relations officer of Polialden, a member of the Board of Directors of Trikem and the investor relations officer of Trikem. Mr. Altit was also the vice president of the Board of Directors of OPP Química, an executive officer and chief financial officer of OPP Química, a member of the Board of Directors of Nitrocarbono and the investor relations officer of Nitrocarbono. Mr. Altit has also served as the manager of business development of CNO from 1988 through 1990, controller of CNO from 1991 through 1993 and as the chief financial officer and investor relations officer of CNO from 1994 through 2002. Mr. Altit holds a bachelors degree in engineering from the Universidade Federal do Rio de Janeiro and a post-graduate degree in finance from the Pontifícia Universidade do Rio de Janeiro.
Roberto Prisco Paraíso Ramos. Mr. Ramos is currently one of Braskems vice president executive officers and head of Braskems Business Development Unit. He is also an executive officer and co-chairman of the North Sea Production Company Ltda. (Scotland), and a member of the board of directors of Cinal. Mr. Ramos was a member of the board of directors of OPP Química, the president of the board of directors of Nitrocarbono and the chief executive officer of Nitrocarbono. Mr. Ramos has also served as the chief financial officer of Filippo Fochi SpA (Italy) from September 1992 through April 1995, as the chief financial officer of Tenenge Técnica Nacional de Engenharia (London and São Paulo) from May 1995 through June 1997, as superintendent officer and chairman of Odebrecht Oil and Gas Ltd. (London) from July 1997 through July 2000, and as superintendent officer and chairman of Odebrecht Oil & Gas Ltda. from August 2000 through August 2002. Mr. Ramos holds a bachelors degree in mechanical engineering from the Universidade Federal do Rio de Janeiro, a post-graduate degree in the Program for Management Development from Harvard Business School and a masters in finance from the University of Leicester, England .
Rogério Affonso de Oliveira. Mr. Oliveira is currently one of Braskems vice president executive officers and head of Braskems Basic Petrochemicals Unit. He is also the vice president of the Board of Directors of Cinal, a member of the Board of Directors of Copene Participações and an alternate member of the Board of Directors of Polialden. Mr. Olivera was also a member of the Board of Directors of OPP Química. Mr. Oliveira has also served as an executive officer of Ceman S.A. Central de Manutenção de Camaçari from January 1989 through April 2002, acting in the commercial and industrial areas. Mr. Oliveira holds a degree of mechanical engineering from the Universidade Federal do Rio Grande do Sul and took courses in equipment engineering given by Petrobras.
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Fiscal Council
The Brazilian Corporate Law permits the Company to establish, and allows shareholders to request the establishment of, a permanent conselho fiscal (Fiscal Council). Accordingly, Braskems bylaws provide for a Fiscal Council composed of five members and their respective alternate members. The Brazilian Corporate Law requires that the Fiscal Council be independent of management and Braskems external auditors. The primary responsibility of the Fiscal Council is to review managements activities and the financial statements, and to report their findings to the shareholders.
The members of Braskems Fiscal Council are elected by Braskems shareholders at the annual general shareholders meeting for one-year terms and are eligible for reelection. The terms of the members of Braskems Fiscal Council expire at the next ordinary annual general shareholders meeting. Under the Brazilian Corporate Law, the Fiscal Council may not contain members that are: on the Board of Directors or on the Board of Executive Officers; Braskems employees; employees of a controlled company or of a company that is a member of the controlled group of companies; or spouses or relatives of any member of Braskems management. A person elected to serve on the Fiscal Council must be a resident of Brazil and either be a university graduate or have been a company officer or Fiscal Council member of a Brazilian company for at least three years prior to election to the Fiscal Council.
Holders of preferred shares without voting rights and non-controlling common shareholders that together hold at least 10% of Braskems voting shares are each entitled to elect one member and his or her respective alternate to the Fiscal Council.
The following table lists the current members of Braskems Fiscal Council
that were elected by Braskems shareholders on April 29, 2003:
First Year of
Name
Appointment
Sérgio Pereira da Rocha
2001
Júlio Diniz Bastos Pinto
1999
Ismael Campos de Abreu
2003
Manoel Mota Fonseca
2002
Walter Murilo Melo de Andrade
2002
Compensation
According to Braskems bylaws, Braskems shareholders are responsible for establishing the aggregate compensation the Company pays to the members of Braskems Board of Directors, Braskems Executive Officers and Fiscal Council members. Braskems shareholders determine this aggregate compensation at the general shareholders meeting each year. Once aggregate compensation is established, the members of the Board of Directors are responsible for distributing such aggregate compensation individually to the members of Braskems Board of Directors and Braskems Board of Executive Officers in compliance with Braskems bylaws. Braskems Board of Directors does not have a compensation committee.
For the year ended December 31, 2001, the aggregate compensation paid by the Company to all members of Braskems Board of Directors, members of Braskems Board of Executive Officers and members of the Fiscal Council for services in all capacities was approximately R$2.85 million. For the year ended December 31, 2002, the aggregate compensation paid by the Company to all members of Braskems Board of Directors, members of Braskems Board of Executive Officers and members of Braskems Fiscal Council for services in all capacities was approximately R$2.5 million. On April 29, 2003, Braskems shareholders (acting in the annual general meeting) established the following compensation for the year 2003: (1) Board of Directors: an aggregate limit of R$950,000; (2) Executive Officers: a total amount of R$6.5 million; and (3) the Fiscal Council: 10% of the average monthly compensation of the Executive Officers to each regular member, plus travel and lodging expenses (the statutory minimum set forth in the Brazilian Corporate Law and in Braskems bylaws). The members of Braskems Board of Directors participate in the Companys profit sharing plan.
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Braskems Executive Officers receive the same benefits generally provided to Braskems employees, such as medical (including dental) assistance, private pension plan and meal vouchers. Like the companys employees, Braskems Executive Officers also receive the equivalent to an additional months salary paid annually or proportionally to number of months worked in the year (known as the thirteenth (monthly) salary in Brazil), 33.3% of one-months salary for vacation, and contributions of 8% of their salary in a public pension fund known as the Fundo de Garantia por Tempo de Serviço (Guarantee Fund for Years of Service, or FGTS).
Employees
Braskem has invested in a series of courses for the training of operations, laboratory and maintenance personnel through agreements with training entities. Education and training activities are a direct result of the survey of competencies and abilities necessary for employee performance. In the year 2002, the Braskems total investment in education and training amounted to U.S.$1.2 million for 310,000 hours of training, an average of 111 hours per employee.
Braskems career plan is based on abilities. The program was established with Braskems own resources and technology and has become a national benchmark in human resources practices. In 2002, the career plan permitted salary increases for 36% of Braskems employees.
The
following table sets forth on a pro forma basis the number of
employees of the Company, including the companies which are currently subsidiaries of Braskem, as of the dates
indicated.
Year ended December 31,
2002
2001
2000
1999
1998
Number of Employees
2,817
3,204
3,160
3,260
3,250
Braskems employees and their dependents have medical and dental assistance through a system that uses a network of accredited doctors and services. Braskem principally pays the costs for these services, with a smaller amount being paid by the employees. A small monthly fee is also charged to the employees to pay for more costly medical services. In 2002, Braskem spent U.S.$4.1 million with this assistance.
Braskem pays part of the monthly payments made to three private pension funds: Odebrecht Previdência ; Fundação Petrobras de Seguridade Social and PREVINOR Associação de Previdência Privada . The majority of the Companys employees, 2,201 at present, participate in these funds. The private pension funds pay supplementary pension and retirement amounts relative to those paid by the Brazilian governments official pension system, intending to provide its members with a comfortable income at the end of their professional activities. In 2002, Braskem paid approximately U.S.$2.4 million into these funds. See Note 12 to the Consolidated Financial Statements.
Braskems program of participation in results is an established practice and is based on concepts and criteria negotiated with a committee of employees. In 2002, the program of participation in results paid U.S.$9.6 million to 2720 employees. An aggregate amount of U.S.$1.68 million of this amount was paid to the Companys Executive Officers in 2002. The members of the Companys Board of Directors do not participate in the Companys program of participation in results.
In Brazil, both employees and employers have the right to organize unions. Within the confines of a defined geographic area, employees belonging to any specific professional category and employees constituting a specific economic category may each be represented by only one union. Individual unions generally belong to state-wide union federations, which in turn belong to nationwide union confederations.
Braskem is a member of the Petrochemicals and Synthetic Resins Industries Union of the States of Bahia, Alagoas and Rio Grande do Sul, and Braskems employees belong to the Petrochemicals Industries Workers Unions in each of these States.
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Share Ownership of Directors and Officers
The total number of shares owned by members of Braskems Board of Directors and Executive Officers as of June 23, 2003 represented 0.01% of Braskems capital stock.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
The Company has a total authorized capital of 6,100,000,000 shares composed of common shares and preferred shares, all without par value. As of May 31, 2003, the Company had R$1,847,767,225.23 in outstanding capital and 2,196,000,000 authorized shares of common stock, 3,843,000,000 authorized shares of class A non-voting preferred stock and 61,000,000 authorized shares of class B non-voting preferred stock. As of May 31, 2003, there were 1,226,091,148 outstanding shares of common stock, 2,160,832,034 outstanding shares of class A preferred stock and 11,457,740 outstanding shares of class B preferred stock. Under the Brazilian Corporate Law, the aggregate number of non-voting shares of the Company may not exceed two-thirds of the total number of shares.
The Company has registered one class of American Depositary Shares (each, an ADS or a Preferred Class A ADS) with the Commission pursuant to the Securities Act, each ADS evidenced by American Depositary Receipts (each, an ADR or a Preferred Class A ADR) representing 50 class A preferred shares. As of June 27, 2003, the Company had approximately 35 record holders of class A preferred shares, or ADSs representing class A preferred shares, in the United States. The Companys ADRs are issued by Citibank N.A. pursuant to a deposit agreement.
The following table sets forth information concerning the ownership of the
Companys common shares and preferred shares as of May 31, 2003 by each person
who the Company knows to be the owner of more than 5% of any class of its
outstanding capital stock, and by all of the Companys directors and executive
officers as a group.
Class B Preferred
Common Stock
Class A Preferred Shares
Shares(4)
Total(5)
Number of
Number of
Number of
Number of
shares
%
shares
%
shares
%
shares
%
Odebrecht Group (1)
553,764,188
45.2
%
941,352,460
43.6
%
1,495,116,648
44.0
%
Mariani Group (2)
43,634,909
3.6
%
78,401,603
3.6
%
122,036,512
3.6
%
Norquisa
377,750,595
30.8
%
35,492,482
1.6
%
413,243,076
12.2
%
Petroquisa (3)
99,590,749
8.1
%
283,324,254
13.1
%
382,915,003
11.3
%
All directors and
executive officers as
a group (18 persons)
9
0.0
%
290,029
0.01
%
290,038
0.01
%
Treasury
53,007,864
2.4
%
53,007,864
1.6
%
Others
151,350,698
12.3
%
768,963,342
35.6
%
11,457,740
100
931,771,781
27,4
%
(1) | Represents direct ownership of 122,266,186 shares of common stock owned by ODB, 424,243,853 shares of common stock owned by ODBPAR, 7,254,149 shares of common stock owned by Copene Participações (formerly Conepar), 937,725,386 shares of class A preferred stock owned by ODB and 3,627,074 shares of class A preferred stock owned by Copene Participações. In addition, ODB and ODBPAR together own 50% of the voting capital stock of Norquisa. Accordingly, the Odebrecht Group also beneficially owns 50% of the Companys shares owned directly by Norquisa. The Odebrecht Group disclaims ownership of the Companys shares owned by Norquisa other than with respect to its proportionate interest in these shares. The Odebrecht Group also owns convertible debentures issued originally by OPP Produtos. Approximately 80% of such debentures could be converted into the Companys shares at any time, at the Odebrecht Groups discretion. If such right had been exercised on December 31, 2002, 606,907 new shares of the Company would have been issued. See Note 9 to the Companys consolidated financial statements. | |
(2) | Represents direct ownership of 43,634,909 shares of common stock owned by Pronor and 78,380,866 shares of class A preferred stock owned by Pronor. In addition, Pronor owns 16.1% of the voting capital stock of Norquisa. Accordingly, the Mariani Group (through Pronor) also beneficially owns 16.1% of the Companys shares owned directly by Norquisa. The Mariani Group disclaims ownership of the Companys shares owned by Norquisa other than with respect to its proportionate interest in these shares. | |
(3) | Represents direct ownership of 99,590,749 shares of common stock owned by Petroquisa and 283,324,254 shares of class A preferred stock owned by Petroquisa. Under the Petroquisa Memorandum of Understanding, as amended, ODB granted Petroquisa an option to purchase the number of the Companys common shares and preferred shares necessary for Petroquisa to hold a number of shares equal to the number held by ODB, PQBA and Norquisa, collectively. Petroquisa can exercise this option in full on a single occasion on the last day of any month on or prior to April 30, 2005 at a price based on the Companys enterprise valuation. If Petroquisa exercises this option, Petroquisa is required to pay the exercise price with all of the Copesul shares that it holds. If, after Petroquisa exercises its option, its percentage ownership of the Companys shares is less than the aggregate percentage ownership of ODB, PQBA and Norquisa, collectively, then ODB must sell to Petroquisa a sufficient number of the Companys shares so that such percentages are equal. See Shareholders Agreements Petroquisa Memorandum of Understanding. |
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(4) | All of the Companys class B preferred shares were subscribed for by the Fundo de Investimento do Nordeste FINOR (the Northeast Investment Fund, or FINOR) and are subject to restrictions on transfer for four years from the date of their transfer by FINOR. | |
(5) | The Company has no option plans or options outstanding. Holders of the Companys common shares each are entitled to one vote per common share. |
Changes in Ownership
As of January 1, 2000: Norquisa, owned directly and indirectly, 58.4% of the Companys common shares and 22.8% of the Companys total capital stock; Petroquisa owned 15.4% of the Companys common shares and 21.4% of the Companys total capital stock; Previ owned 5.8% of the Companys common shares and 6.5% of the Companys total capital stock; Petros owned 5.7% of the Companys common shares and 2% of the Companys total capital stock; and Odequi, a member of the Odebrecht Group, owned 1.7% of the Companys common shares and 0.6% of the Companys total capital stock.
In December 2001, Odequi acquired the common shares of Norquisa held by Trikem, and Odequi transferred all of its shares of Norquisa and the company to ODBPAR.
As of January 1, 2000, the holders of the common shares of Norquisa were Petronor with 23.7%, Pronor with 16.1%, Trikem with 16%, Politeno with 12.5%, EDN with 12.5%, Oxiteno with 10.4%, Polipropileno with 8.9% and Conepar with 0.04%.
In connection with the Auction, on July 25, 2001, Nova Odequi Ltda., a subsidiary of Odequi, acquired 23.7% of the common shares of Norquisa from Petronor.
In connection with the Related Party Mergers, on August 16, 2002, the Company issued (1) shares representing 43.7% of its voting and total capital stock to ODB as consideration for the capital stock of OPP Produtos, and (2) shares representing 3.6% of its voting and total capital stock to Pronor, as consideration for the capital stock of 52114 Participações. Following the Related Party Mergers, ODB transferred a portion of the shares that it acquired to ODBPAR.
As a result of these transactions, as of December 31, 2002: the Odebrecht Group owned 44.6% of the Companys common shares and 44% of the Companys total capital stock; the Mariani Group owned 3.6% of the Companys total capital stock; Norquisa owned 30.8% of the Companys common shares and 12.2% of the Companys total capital stock; Petroquisa owned 8.1% of the Companys common shares and 11.3% of the Companys total capital stock; Previ owned 3.1% of the Companys common shares and 3.4% of the Companys total capital stock; and Petros owned 3.1% of the Companys common shares and 1.1% of the Companys total capital stock.
In addition, as of December 31, 2002, the holders of the voting stock of Norquisa were the Odebrecht Group with 39.7%, Pronor with 16.1%, Politeno with 12.5%, EDN with 12.5%, Oxiteno with 10.4%, Polipropileno with 8.9% and Copene Participações (formerly Conepar) with 0.04%.
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Shareholders Agreements
Controlling Shareholders Agreement
On July 27, 2001, Odequi and PQBA entered into a shareholders agreement with respect to their shares of Norquisa and the Company, which was amended on July 29, 2002 pursuant to the First Amendment to Shareholders Agreement among Odequi, ODB, ODBPAR and PQBA (as amended, the Controlling Shareholders Agreement).
The Controlling Shareholders Agreement provides that:
| The Odebrecht Group has the right to nominate a majority of Norquisas board of directors and a majority of the Companys Board of Directors; | ||
| The Mariani Group has the right to nominate at least one member of Norquisas board of directors and at least one member of the Companys Board of Directors; | ||
| The Odebrecht Group has the right to nominate all of the members of Norquisas board of executive officers and the Companys Board of Executive Officers; provided that, if Norquisas board of directors is eliminated, the Mariani Group will have the right to nominate at least one member to Norquisas board of executive officers; | ||
| ODB, ODBPAR and PQBA will exercise their voting rights with respect to the Company and Norquisa to implement the organizational restructuring of the Company; and | ||
| ODB, ODBPAR and PQBA will meet prior to each general shareholders meeting of Norquisa to coordinate their voting with respect to matters to be submitted to the meeting. |
Under the Controlling Shareholders Agreement, ODB and ODBPAR, on the one hand, and PQBA, on the other hand, granted to the other a right of first refusal in respect of sales or transfers of shares of Norquisa owned by either of them. If the Odebrecht Group sells any of its shares of Norquisa, PQBA has the right to sell a pro rate portion of its shares of Norquisa on the terms and conditions under which the Odebrecht Group sells its shares. If the Odebrecht Group sells a sufficient number of its shares of Norquisa to result in a change of joint control of Norquisa, PQBA has the right to sell all of its shares of Norquisa on the terms and conditions under which the Odebrecht Group sells its shares. If the Odebrecht Group sells or transfers direct or indirect control of the Company to a third party, PQBA has the right to sell all of its shares of the Company on the same terms offered by the third party acquiring control of the Company.
Petroquisa Memorandum of Understanding
On July 3, 2001, Odequi and PQBA entered into a Memorandum of Understanding regarding Shareholders Agreement with Petroquisa (the Petroquisa MOU). The Petroquisa MOU grants (1) veto rights to Petroquisa over certain actions by the shareholders and the Board of Directors, (2) Petroquisa a right of first refusal in respect of the Companys common or preferred shares and (3) Petroquisa tag-along rights. The Petroquisa MOU has a term of 20 years from the date of the Auction, unless a shareholders agreement containing the terms set forth below is entered into prior to that date.
Under the Petroquisa MOU, Petroquisa will have veto rights over the following matters at any general meeting of the Companys shareholders:
| Any modification of the rights conferred on shares of the Company by its bylaws if that modification would adversely affect the value of the Companys shares; | ||
| Any change, increase or reduction of the scope of the Companys corporate purpose, except as necessary for the Company to operate as an integrated petrochemical company; |
108
| Any increase in the number of members of the Companys Board of Directors; | ||
| Any decrease in the number of members of the Companys Board of Directors to be nominated by Petroquisa below two directors; | ||
| Any capital increase by the Company paid in by tendering goods or rights, unless those goods or rights relate to the Companys corporate purpose and a valuation of those goods or rights is performed by a first tier investment bank or independent auditing firm; | ||
| Any merger or, spin-off of the Company into another company or of another company into the Company that could result in the unjustified dilution of the percentage ownership of Petroquisa except that the integration of the second generation companies controlled by the controlling shareholders is expressly permitted; and | ||
| Dissolution or liquidation of the Company. |
Under the Petroquisa MOU, Petroquisa has veto rights over resolutions of the Companys Board of Directors relating to the following matters:
| acquisitions, sales or granting of liens against the Companys fixed assets with values in excess of 30% of the Companys net worth, if such acquisition, sale or grant of a lien is not related to, or is outside the scope of, the Companys corporate purpose; | ||
| transactions involving affiliates of the parties to the Petroquisa MOU, other than second generation petrochemical producers affiliated with the parties; | ||
| any resolution that would cause the Company to fail to meet any of the following financial ratios, with any projections to determine compliance with this provision to be performed by an internationally recognized entity: | ||
projected net debt to EBITDA of less than 3.5; | |||
EBITDA to interest expense greater than 3.0; and | |||
EBITDA to debt service (excluding trade finance) greater than 1.75; and | |||
| investments in other companies, unless they are in the same business as the Company. |
Petroquisa has the right to sell a pro rata portion of its shares of the Company in connection with any sale of the Companys shares by the controlling shareholder to a third party that involves a change of control.
Petroquisa also has a right of first refusal to increase its participation to 35% of the Companys voting capital stock, in case of a transfer of shares by the controlling shareholder.
The Petroquisa MOU was amended on July 26, 2002 by ODB and Petroquisa. Under this amendment, ODB granted Petroquisa an option to purchase the number of the Companys common shares and preferred shares necessary for Petroquisa to hold a number of shares equal to the number held by ODB, PQBA and Norquisa, collectively. Petroquisa can exercise this option in full on a single occasion on the last day of any month on or prior to April 30, 2005 at a price based on the Companys enterprise valuation. If Petroquisa exercises the option, Petroquisa is required to pay the exercise price with all of the Copesul shares that it holds. If, after Petroquisa exercises its option, its percentage ownership of the Companys shares is less than the aggregate percentage ownership of ODB, PQBA and Norquisa collectively, then ODB must sell to Petroquisa a sufficient number of the Companys shares so that such percentages are equal.
109
Under the amendment, the controlling shareholders and Petroquisa agreed that in the event that Petroquisa exercises the option:
| the controlling shareholder (acting jointly) and Petroquisa will have equal decision-making powers with respect to the Company, including the right to elect an equal number of members to the Companys Board of Directors; | ||
| the controlling shareholders and Petroquisa will coordinate their votes in shareholders meetings and meetings of the Companys Board of Directors and will vote as a block; | ||
| Petroquisa would be required to sell all of its investments, other than passive investments, in companies that compete with the Company within 18 months of the exercise of the option; and | ||
| the controlling shareholder and Petroquisa will be prohibited from acquiring additional shares of the Company from third parties unless otherwise agreed by the non-acquiring parties. |
In addition, under this amendment, Odebrecht and Petroquisa each granted to the other the right to purchase the Companys common shares held by the other on the same terms as such shares were offered to a third party.
Pension Funds Memorandum of Understanding
On July 20, 2001, Odequi and PQBA entered into a Memorandum of Understanding regarding Shareholders Agreement with Petros and Previ (the Pension Funds MOU). The Pension Funds MOU grants veto rights to Petros and Previ over certain actions by the Companys shareholders and Board of Directors. Certain provisions in the Pension Funds MOU have a term of 20 years, unless a shareholders agreement containing the terms set out below is entered into prior to that date.
Under the Pension Funds MOU, the parties agreed to adopt the following basic principles for the Companys management:
| the Board of Directors will be composed of competent professionals; | ||
| the dividend policy will have as its objective the distribution of at least 50% of net income available during the relevant period; provided that all necessary reserves for the efficient operation and development of the business are established and maintained; and | ||
| the Company will adopt a commercial policy that assures the regular and continuous supply of raw materials and utilities on a competitive basis and in line with the domestic and international markets. |
Under the Pension Funds MOU, Petros and Previ have veto rights (to be exercised jointly) over the matters for which Petroquisa would have veto rights at meetings of the shareholders under the Petroquisa MOU.
Under the Pension Funds MOU, Petros and Previ have veto rights (to be exercised jointly) over resolutions of the Board of Directors relating to the following matters:
| acquisitions, sales or encumbrances of the Companys fixed assets, or entering into contracts, with values in excess of 30% of the Companys net worth, if such acquisition, sale or grant of a lien is not related to, or is outside the scope of, the Companys corporate purpose; | ||
| entering into contracts with related entities, unless a valuation is performed by an investment bank selected by the controlling shareholder from a list of five, first-tier banks prepared by Petroquisa, Petros and Previ; and |
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| any resolution that would cause the Company to fail to meet any of the following financial ratios, with any projections to determine compliance with this provision to be performed by an internationally recognized entity: |
| projected net debt to EBITDA of less than 3.5; | ||
| EBITDA to interest expense greater than 3.0; and | ||
| EBITDA to debt service (excluding trade finance) greater than 1.75. |
The veto rights of Petros and Previ are valid so long as on a combined basis they own, together with other private pension funds, at least 15% of the Companys voting capital. If the percentage of voting capital owned by Petros and Previ together is diluted below 15% at any time due to the integration of the second generation companies, those veto rights will remain in effect for three years after that time, during which Petros and Previ may purchase more of the Companys shares in order to maintain their veto rights beyond such three-year period. Accordingly, although as a result of the Related Party Mergers the participation of Petros and Previ in the Companys voting capital was diluted to 6.1%, their veto rights remain in effect.
The Pension Funds MOU contains the following liquidity provisions with respect to the Companys shares owned by Petros and Previ:
| Petros and Previ are guaranteed a right of first refusal in respect of sales or transfers of shares owned by either of them or by other pension funds, as well as the right to elect members of the Board of Directors and the Fiscal Council; | ||
| Under the shareholders agreement contemplated by the Pension Funds MOU, Petros and Previ will have the right to sell a pro rata portion of the Companys shares owned by each of them in connection with any sale of the Companys shares by the Companys controlling shareholders to a third party that involves a change of control; and | ||
| In order to transfer their veto rights under the Pension Funds MOU, Petros and Previ must give the controlling shareholder a right of first refusal to purchase the Companys shares owned by each of them in the event of a proposed sale except that the controlling shareholder will not have a right of first refusal if the Companys shares are being sold to another private pension fund or to a company that does not compete with the controlling shareholder. |
Related Party Transactions
The following summarizes the material transactions that the Company has engaged in with its principal shareholders and their respective affiliates since January 1, 2002.
The Company maintains trade accounts receivable and current and long-term payables with certain of its affiliates with which it has commercial relationships. These balances result mainly from purchases and sales of goods and services, which are at prices and on terms equivalent to the average terms and prices of transactions that the Company enters into with third parties.
The Odebrecht Group
OPP Química
OPP Química was merged into the Company on March 31, 2003. From August 16, 2002 until March 31, 2003, OPP Química was a subsidiary of the Company. From July 25, 2001 to August 16, 2002, OPP Química was an affiliate of the Company as a result of the Odebrecht Groups significant influence over the Company. For a description of the OPP Produtos Merger, see Item 4. Information on the CompanyHistory and Development of the CompanyThe Related Party Mergers.
111
Prior to the merger of OPP Química into the Company, the Company sold ethylene and propylene to OPP Química under a long-term contract.
Trikem
Trikem has been a subsidiary of the Company since August 16, 2002. From July 25, 2001 to August 16, 2002, Trikem was an affiliate of the Company as a result of their common control by the Odebrecht Group. Before July 25, 2001, Trikem was an affiliate of the Company as a result of the Odebrecht Groups significant influence over the Company.
Trikem, as operator of the Vinyls Unit, purchases all its ethylene, its primary raw material, from the Basic Petrochemicals Unit.
Trikem also purchases electric power, steam, water, compressed air and nitrogen on market terms from the Basic Petrochemicals Unit.
The Mariani Group
Nitrocarbono
Nitrocarbono was merged into the Company on March 31, 2003. From August 16, 2002 until March 31, 2003, Nitrocarbono was a subsidiary of the Company. Prior to August 16, 2002, Nitrocarbono was an affiliate of the Company as a result of the Mariani Groups significant indirect shareholding in the Company. For a description of the 52114 Participações Merger, see Item 4. Information on the CompanyHistory and Development of the CompanyThe Related Party Mergers.
Prior to the merger of Nitrocarbono into the Company, the Company sold ethylene, propylene, electricity and other utilities to Nitrocarbono under a long-term contract.
Petrobras
Petróleo Brasileiro S.A.
Petrobras is the controlling shareholder of Petroquisa, which holds 8.1% of the Companys voting capital stock and 11.3% of the Companys total capital stock. The Company purchases naphtha from Petrobras and sells gasoline and LPG to Petrobras through its wholly-owned subsidiary Petrobras Distribuidora S.A. The Company recorded purchases of raw materials and utilities from Petrobras of U.S.$722.9 million during the fiscal year ended December 31, 2002.
Prior to August 9, 2000 the Company was required under Brazilian law to purchase all of its naphtha requirements from Petrobras. Beginning on August 9, 2000, the Brazilian government implemented a policy of free naphtha price negotiation and permitted the Company to purchase naphtha from suppliers other than Petrobras. On June 22, 1978, the Company entered into a 10-year renewable contract with Petrobras under which the prices paid by the Company to Petrobras for naphtha are established based on ARA quotations and are linked to fluctuations in the U.S. dollar/ real exchange rate.
112
Norquisa Shareholders and Affiliates
Polialden Petroquimica S.A.
Polialden has been the Companys subsidiary since July 2001. Prior to the Auction, Polialden indirectly owned 23.7% of the Companys voting capital stock through Petronor. In connection with the Auction, Polialden sold the Companys shares that it owned to Odequi. The Company sells ethylene, utilities and hydrogen to Polialden under long-term contracts that are renewable automatically for five-year periods. In 2002, the Basic Petrochemical Unit sold approximately 10.8% of its total ethylene sales volumes to Polialden.
The Polyolefins Unit, which includes the operations of Polialden, purchases 33% of its ethylene and propylene from Basic Petrochemicals Unit. In 2002, these purchases represented approximately 25% of the total cost of sales of the Polyolefins Unit. The Polyolefins Unit also purchases electric power, steam and water on market terms from the Basic Petrochemicals Unit.
Politeno Indústria e Comércio S.A.
Politeno owns 12.5% of Norquisa, which, in turn, owns 30.8% of the Companys voting capital stock. In addition, since September 2001, the Company has owned 35% of the voting capital stock of Politeno. The Company sells ethylene, propylene, electricity and other utilities to Politeno under long-term contracts that are renewable automatically for five-year periods.
Polibrasil S.A.- Indústria e Comércio (formerly known as Polipropileno S.A.)
Polibrasil S.A. Indústria e Comércio is controlled by the Suzano Group. Polibrasil owns 8.9% of Norquisa, which, in turn, owns 30.8% of the Companys voting capital stock. As a result of the Auction and the control exercised by the Odebrecht Group over Norquisa and the Company, Polibrasil and the Suzano Group have not had significant influence over the Company since July 25, 2001. The Company sells propylene to Polibrasil under a long-term contract that is renewable automatically for five-year periods.
EDN - Estireno do Nordeste S.A.
EDN owns 12.5% of Norquisa, which, in turn, owns 30.8% of the Company voting capital stock. As a result of the Auction and the control exercised by the Odebrecht Group over Norquisa and the Company, EDN has not had significant influence over the Company since July 25, 2001. The Company primarily sells ethylene and benzene to EDN under long-term contracts that are renewable automatically for five-year periods.
Oxiteno do Nordeste S.A.
Oxiteno owns 10.4% of Norquisa, which, in turn, owns 30.8% of the Companys voting capital stock. As a result of the Auction and the control exercised by the Odebrecht Group over Norquisa and the Company, Oxiteno has not had significant influence over the Company since July 25, 2001. The Company sells ethane, methane, oxygen, electricity and other utilities to Oxiteno under long-term contracts that are renewable automatically for five-year periods.
Investors of the Company
Copesul
The Polyolefins Unit purchases 67% of its ethylene and propylene from Copesul, in which the Company has a 29.5% interest. The Company has a long-term supply contract with Copesul that is described in BusinessPolyolefins UnitRaw Materials of the Polyolefins UnitSupply Contracts and Pricing.
The Polyolefins Unit also buys nitrogen on market terms from Copesul.
113
COPESUL International Trading Inc.
COPESUL International Trading Inc. is a subsidiary of Copesul. The Company owns 29.5% of the capital stock of Copesul. At December 31, 2002, the Company had an outstanding loan from COPESUL International Trading Inc. of U.S.$72.8 million, which arises from an arrangement between OPP and its subsidiary Lantana Trading Company, with interest rates equivalent to market rates. In addition to the U.S. dollar exchange variation, the average annual financial charges correspond to 7.8% to 8.3%.
Ipiranga Petroquímica S.A.
Ipiranga Petroquímica S.A. is one of the controlling shareholders of Copesul and has entered into a shareholders agreement with the Company in connection with its interests in Copesul.
CETREL S.A. - Empresa de Proteção Ambiental
The Company owns 21.1% of the voting and total capital stock of Cetrel. The Company purchases treatment services on market terms from Cetrel for the wastewater and organic residues generated by the Company in the Northeastern Complex. The Company recorded net purchases from Cetrel of U.S.$4.6 million during the fiscal year ended December 31, 2002.
Petroflex Indústria e Comércio S.A.
The Company owns 20.1% of the voting and total capital stock of Petroflex. The Company sells butadiene-1 to Petroflex on market terms under a long-term contract renewable automatically for further five-year periods. The Company recorded net sales to Petroflex of U.S.$74.0 million during the fiscal year ended December 31, 2002.
ITEM 8. FINANCIAL INFORMATION
Consolidated Statements and Other Financial Information
Reference
is made to Item 19 for a list of the financial statements filed
as part of this Registration Statement.
Legal Proceedings
Tax Proceedings
As with many other industrial companies in Brazil, the Company is engaged in
several disputes with Brazilian tax authorities. There are currently certain
legal proceedings pending in which the Company or its properties are involved
that, if decided adversely to the Company, could have a material adverse effect
on its results of operations, financial condition or properties. The principal
tax dispute involves a claim for the acknowledgement of federal
Imposto sobre
Produtos Industrializados
(Federal Excise Tax, or IPI) credits arising
from purchases of ethylene and propylene, taxed at a zero percent rate. The
Brazilian tax authorities argue that Brazilian companies should not be granted
the right to use IPI credits on such raw materials, because there is no legal
provision expressly authorizing such procedure.
IPI is a federal excise tax assessed on a non-cumulative basis. In other
words, the amount of tax paid by suppliers in earlier steps in the production
chain generates a credit to be offset against the IPI due upon the sale of the
final product. According to the tax authorities, the acquisition of raw
materials taxed at a zero percent rate, or that are tax-exempt or non-taxable,
does not generate IPI tax credits. The Company believes that the
interpretation of the federal tax authorities violates the non-cumulative
principle and is not supported by the Brazilian constitution, which does not
impose restrictions on IPI credits derived from transactions involving raw
materials taxed at a zero-percent-rate, or that are tax-exempt or non-taxable.
In 1999, OPP Química and Trikem filed lawsuits in each state in which they
operate seeking IPI tax credits in respect of purchases of ethylene and
propylene from Copene and Copesul. In December 2002, the Federal
Supreme Court, Brazils highest court, ruled in favor of OPP Química (now merged
with and into the Company), granting OPP Química tax credits in an aggregate
amount of U.S.$284.5 million in respect of IPI taxes paid in respect of OPP
Químicas operations in the State of Rio Grande do Sul from 1992 through 2002.
The Company has two other similar IPI lawsuits pending on behalf of OPP Química
in the States of Bahia and São Paulo. Trikem has three similar IPI lawsuits
pending in the States of Alagoas, Bahia and São Paulo. Polialden has one
similar IPI lawsuit pending in the State of Bahia. The Company believes that
it will prevail in each of these lawsuits in light of the recent Federal
Supreme Court decision in favor of OPP Química, based on its assessment of the
merits of the claims and the advice of Brazilian legal counsel. For
the Companys
accounting treatment of this matter, see Item 5. Operating and Financial
Review and ProspectsEffects of Taxes on the Companys Net IncomeOther Taxes.
114
The Company is also involved in disputes for acknowledgement of IPI
premium credits. Decree-Law No. 491/69 granted bonuses (premium credits) to
companies that export manufactured products, in order to reimburse these
companies for taxes paid in Brazil prior to the export of the manufactured
products. According to IPI regulations, premium credits could be offset
against other taxes, and could also be transferred to third parties. However,
the Brazilian tax authorities issued a sequence of administrative rules that
reduced, restricted and suspended the use of these premium credits. The
Company believes that these administrative rules are unconstitutional because
rules should not modify or restrict a benefit granted by a Decree-Law. Based
on this legal theory, the Company and its consolidated subsidiaries filed
lawsuits against the Brazilian government in each state in which it operates.
The Company is claiming more than R$551 million (equivalent to U.S.$155.9
million using the
real
/U.S. dollar exchange rate at December 31, 2002) in IPI
premium credits. Federal tax authorities issued deficiency notices against the
Company in respect of such credits. The Company has appealed to the taxpayers
council (an administrative appeal board) and is awaiting judgment. The Federal
Supreme Court recently held one of the rules suspending IPI premium credits
unconstitutional, concluding that the Brazilian exporter in that case could
offset IPI premium credits against other taxes without limitation. In light of
this decision, the Company, based on the opinion of its Brazilian counsel,
believes that it will prevail in these suits.
Trikem and OPP also filed suits for the acknowledgement of IPI credits
arising from the acquisition of fixed assets and materials not used in
production. According to IPI regulations, the acquisition of fixed assets and
materials not used in production does not generate IPI credits. Nevertheless,
the Brazilian constitution imposes no restrictions on the grant or use of IPI
credits arising from such acquisitions. Therefore, the Company believes that
it has the right to receive IPI credits related to these transactions. The
federal tax authorities have issued deficiency notices with respect to the
amounts already reimbursed to the Company. The Company is discussing the matter
both in administrative and judicial courts.
Another important tax dispute involves the Companys challenge to the
constitutionality of a federal contribution tax on profits, the
Contribuição
Social sobre o Lucro Líquido
(Social Contribution on Net Profits, or CSLL).
The Companys predecessor, Copene, prevailed on this claim in 1992 when,
pursuant to the decision of the Federal Court, approximately R$42.2 million
(equivalent to U.S.$11.9 million using the
real
/U.S. dollar exchange rate at
December 31, 2002) in court deposits were released to the Company. However,
based on an intervening decision by the Federal Supreme Court in an unrelated
proceeding holding that the collection of CSLL is constitutional, the National
Treasury filed a so-called rescission action (
ação rescisória
) in November
1993 seeking relief from the 1992 court decision, which had held that the
collection of the CSLL was unconstitutional. Although this rescission action is
still pending in the Superior Court of Justice, the federal tax authorities
issued deficiency notices and commenced tax foreclosure proceedings in respect
of CSLL taxes that they alleged were overdue. The Companys Brazilian legal
counsel has advised it that it is not required to pay any new CSLL assessments
until the rescission action has been finally resolved. Based on the opinion of
its Brazilian counsel, the Company believes that it is unlikely that it will be
required to make the related social contribution tax payments, and therefore, it
has not made any provision in its consolidated financial statements for these
contingencies.
The Company has also filed suits seeking reimbursement or refund of a
portion of PIS paid from August 1, 1991 through January 1995. During this
period, the Company paid PIS in accordance with the rules of Decree-Law No.
2445/88 and Decree-Law No. 2249/88. Subsequent to the enactment of these laws,
the Federal Supreme Court held these laws unconstitutional, concluding that PIS
should have been charged in accordance with Supplementary Law 7/70, which
established a more favorable methodology for the calculation of PIS. Based on
existing jurisprudence, the Company believes that it will prevail in these
suits.
115
As of February 1999, Law No. 9,718/98 increased the calculation of the tax
base for contributions in respect of COFINS and PIS from 2% to 3%. The Company
believes that these increases in the tax base and the tax rate are
unconstitutional and have filed suit against the Brazilian government seeking
as relief the right to pay PIS and COFINS at rates prevailing prior to the
enactment of Law No. 9,718/98.
According to Article 138 of the National Tax Code, the federal government
may not impose fines and penalties on taxpayers that voluntarily confess their
tax infractions and pay the corresponding outstanding taxes plus interest.
However, Brazilian tax authorities hold that such confessions do not relieve
the taxpayer from late payment fines. In order to collect late payment fines
with respect to IPI debts confessed and paid by OPP Química, the Brazilian tax
authorities issued deficiency notes against OPP Química, demanding the payment
of approximately R$28.7 million (equivalent to U.S.$8.1 million using the
real
/U.S. dollar exchange rate at December 31, 2002) in late payment fines.
OPP Química filed an appeal with the taxpayers council (an administrative
appeal board), and is awaiting a decision. The Company believes that it may
prevail in its appeal and that the late payment fines may be withdrawn.
Trikem has also filed a judicial action to overturn the imposition of fines on
overdue taxes payable in installments. The Company believes that Trikem may
prevail in its suit and that the late payment fines may be withdrawn.
Shareholders Rights Proceedings
Certain owners of the Companys class B preferred shares have filed suits
against the Company requesting voting and other rights conferred upon owners of
the Companys class A preferred shares, including in respect of the
distribution of dividends. The Company lost one of these proceedings in the
first instance, but has filed a rescission action seeking to overturn this
decision and has obtained a stay on the enforcement of this decision until the
rescission action has been resolved. These class B shareholders are also
seeking indemnification for damages that they allege that they have sustained.
The damages portion of the proceeding that the Company lost is still pending.
The other minority shareholder suits against the Company remain pending.
Labor Proceedings
The Company and other companies in the Northeastern Complex enter into
annual collective bargaining agreements with the petrochemical workers union.
The collective bargaining agreement in force between September 1989 and August
1990 required employers to pay workers cost of living adjustments equal to
84.3% of the
Índice de Preços ao Consumidor
(a consumer price index, or IPC)
per month and prohibited the substitution of the IPC by any index with lower
values than the IPC.
In March 1990, the Brazilian government introduced an economic plan known
as the Collor Plan, named after the then-President of Brazil. The Collor
Plan provided that cost of living adjustments in wages could be based on other
indices but not on the IPC specifically. Based on judicial precedent, the
Company interpreted the Collor Plan as prohibiting wage increases based on the
IPC, which interpretation was contrary to the terms of the collective
bargaining agreement. To determine which interpretation was legally correct,
the petrochemical employers union filed a lawsuit against the petrochemical
workers union, seeking a declaration that the cost of living adjustment
indices provided in the Collor Plan preempted the conflicting provisions in the
collective bargaining agreement. The Regional Labor Court ruled in favor of
the workers union, which decision was later modified in part on appeal by the
Superior Labor Court. In 1998, the employers union filed an extraordinary
appeal to the Federal Supreme Court.
This decision was later reconsidered by the Federal Supreme Court, which
reversed a prior decision and held that a private collective bargaining
agreement cannot preempt federal law, especially a law that related to
Brazilian public policy. In 2003, the workerss union requested
reconsideration of this decision. At the time of the filing of this
Annual Report, the judgment was suspended, considering that two of five judges had
already decided in favor of the Company. The decision of the Federal Supreme
Court in this matter is not final and does not address damages. The Federal
Supreme Court may overturn its determination, in which case, this could
adversely effect the Company, as any judgment will most likely also impact the
wages paid by the Company from April 1990 to the present.
116
In addition, the Company and its subsidiaries, Trikem S.A., Ceman and
Polialden Petroquímica S.A. are involved in 785 labor suits that involve claims
totaling approximately R$45.0 million (equivalent to U.S.$15.2 million using
the
real
/U.S. dollar exchange rate at June 1, 2003) as of June 1, 2003.
Copesul, Alclor Química de Alagoas Ltda., Cinal, Coponer Florestal Ltda.,
Petroflex, ESAE and Politeno are involved in 448 labor suits that involve
claims totaling approximately R$18.5 million (equivalent to U.S.$6.2 million
using the
real
/U.S. dollar exchange rate at June 1, 2003) as of June 1, 2003.
Braskem has established a provision for labor contingencies in
the amount of R$7.64 million as of June 1, 2003 (equivalent
to U.S. $2.2 million using the
real
/U.S. dollar exchange
rate at June 1, 2003).
Social Security Proceedings
The Company is involved in several administrative and judicial proceedings
regarding social security disputes, which in May 2003 totaled R$62.3 million
(equivalent to U.S.$21.0 million using the
real
/U.S. dollar exchange rate at
May 31, 2003). The Company deposited approximately R$17.6 million (equivalent
to U.S.$5.9 million using the
real
/U.S. dollar exchange rate at May 31, 2003)
of this amount with the court. The Company has not established a provision in
respect of these proceedings in its balance sheet, and the
Instituto Nacional
de Seguro Social
(the National Social Security Institute, or INSS) does not
allow the payment of social security debts in installments.
Exemption of Income Tax
Copene was exempt from income tax in respect of sales of basic
petrochemical products and Utilities until the year ended December 31, 2001.
This tax exemption was instituted as part of a policy to benefit industrial and
other economic activities conducted in the Northeast of Brazil in an effort to
develop that region.
Based on Provisional Measure MP number 2199-14/2001, the Company filed
with the Northeast Development Agency (SUDENE) a request for a 75% income tax
rate reduction as from January 1, 2002 in respect of income from sales of basic
petrochemicals and Utilities. The request was rejected, but the Company
obtained a Declaration from the National Integration Ministry authorizing a
reduction of 37.5% for the calendar years of 2002 and 2003 (an effective tax
rate of 15.62%), 25% from 2004 to 2008 (an effective tax rate of 18.75%) and
12.5% from 2009 to 2013 (an effective tax rate of 21.87%). This declaration is applicable to the
Companys DMT sales as well.
117
Dividends And Dividend Policy
Dividends
The following table sets forth the dividends paid to holders of Braskems
Common Shares and Preferred Shares since 1998 in U.S. dollars translated from
reais
at the Commercial Rate in effect as of the date of payment.
Reserves and Distributions
The discussion below summarizes the main provisions of the Brazilian
Corporate Law regarding the establishment of reserves by corporations and rules
with respect to the distribution of dividends, including provisions regarding
interest attributed to shareholders equity.
Calculation of Distributable Amount
At each annual shareholders meeting, the Board of Directors is required
to recommend how to allocate the Companys net profits for the preceding fiscal
year. Such allocation is subject to approval by the Companys shareholders.
The Brazilian Corporate Law defines net profits for any fiscal year as net
income after income taxes and social contribution taxes for such fiscal year,
net of any accumulated losses from prior fiscal years and any amounts allocated
to employees and managements participation in the Companys net profits in
such fiscal year. In accordance with the Brazilian Corporate Law, an amount,
known as the distributable amount, equal to half of the Companys net profits,
as further reduced by amounts allocated to a legal reserve or a contingency
reserve, and increased by any reversals of reserves constituted in prior
years, will be available for dividend distributions or payment of interest on
shareholders equity in any particular year. The Company may also establish
discretionary reserves, contingency reserves, reserves for investment projects,
an unrealized income reserve and tax incentive investment reserves, as
discussed below.
118
The Brazilian Corporate Law provides that all discretionary allocations of
net profits, including any discretionary reserves, a contingency reserve, an
unrealized income reserve and a reserve for investment projects, are subject to
approval by the shareholders voting at the annual shareholders meeting and may
be transferred to shareholders equity or used for the payment of distributions
in subsequent years. The tax incentive investment reserve and the legal
reserve are also subject to approval by the shareholders voting at the annual
shareholders meeting and may be transferred to capital or used to absorb
losses but are not available for the payment of distributions in subsequent
years.
The Companys calculation of net profits and allocations to reserves for
any fiscal year are determined on the basis of financial statements prepared in
accordance with the Brazilian Corporate Law. The Companys consolidated
financial statements included herein have been prepared in accordance with U.S.
GAAP, and although the Companys allocations to reserves and distributions will
be reflected in these financial statements, investors will not be able to
calculate such allocations or mandatory distributable amounts from these
consolidated financial statements.
Reserve Accounts
Legal Reserve Account.
Under the Brazilian Corporate Law and the
Companys bylaws, the Company is required to maintain a legal reserve to which
the Company must allocate 5% of its net profits for each fiscal year until the
aggregate amount of the reserve equals 20% of the Companys paid-in capital.
However, the Company is not required to make any allocations to the Companys
legal reserve in a fiscal year in which the legal reserve, when added to the
Companys other established capital reserves, exceeds 30% of the Companys
total capital.
Discretionary Reserve Accounts.
Under the Brazilian Corporate Law, the
Company is permitted to provide for the allocation of part of the Companys net
profits to discretionary reserve accounts that may be established in accordance
with the Companys bylaws. While the Companys bylaws do not currently provide
for any discretionary reserves, the Companys shareholders may amend the
Companys bylaws in order to establish one or more discretionary reserves. The
allocation of the Companys net profit to discretionary reserve accounts may
not be made if it serves to prevent the distribution of the mandatory
distribution.
Contingency Reserve Account.
Under the Brazilian Corporate Law, a
percentage of the Companys net profits may be allocated to a contingency
reserve for anticipated losses that are deemed probable in future years. Any
amount so allocated in a prior year either must be reversed in the fiscal year
in which the loss had been anticipated if the loss does not occur as projected
or charged off in the event that the anticipated loss occurs.
Reserves for Investment Projects.
Under the Brazilian Corporate Law, a
portion of the Companys net profits may be allocated to a reserve for
investment projects based on a capital expenditure budget previously presented
by the Companys management and approved by the Companys shareholders. Under
Brazilian Corporate Law, if a project relating to this approved capital
expenditure budget has a term exceeding one year, the budget relating to the
project must be re-submitted to the annual shareholders meeting each fiscal
year until the relevant investment has been completed. After completion of a
relevant capital investment project, the Company may retain the reserve
allocated for such project until the shareholders vote to transfer all or a
portion of such reserve to capital or to retained earnings. The allocation of
the Companys net profits to investment project reserve accounts may not be
made if it serves to prevent the distribution of the mandatory distribution.
Unrealized Income Reserve Account.
Under Brazilian Corporate Law, as of
March 1, 2002 the amount by which the distributable amount exceeds the
realized net profits for any particular year may be allocated to an
unrealized income reserve account. The Brazilian Corporate Law defines
realized net profits as the amount by which the Companys net profits exceed
the sum of (1) the Companys net positive results, if any, from the equity
method of accounting for earnings and losses of the Companys subsidiaries and
certain of its affiliates and (2) the profits, gains, or returns obtained from
transactions taking place after the end of a fiscal year.
The unrealized income reserve account must be used for the payment of the
mandatory distribution.
119
Tax Incentive Investment Reserves.
Under Brazilian tax laws, a portion of
net profits also may be allocated to a general tax incentive investment
reserve in amounts corresponding to reductions in the Companys income tax
generated by credits for particular government approved investments. The
reserve is available only in connection with the acquisition of capital stock
of companies undertaking specific government approved projects. See Dividend
Preference of Preferred Shares.
Mandatory Distributions.
The bylaws of a Brazilian corporation may
specify a minimum percentage of the distributable amount that must be
distributed to shareholders as dividends or interest on shareholderss equity,
also known as the mandatory distributable amount. Under the Companys bylaws,
the mandatory distributable amount is 25% of the distributable amount, after
any allocations to any legal reserve, contingency reserve, reserve for
investment projects, unrealized income reserve or tax incentive investment
reserve. See Calculation of Distributable Amount.
In addition to the mandatory distributable amount, the Board of Directors
may recommend that the shareholders approve the payment of additional
distributions from other funds legally available for distribution.
Distributions made to holders of the Companys preferred shares are computed in
determining whether the Company has paid the mandatory distribution. Any
payment of interim distributions is netted against the amount of the mandatory
distribution for that fiscal year.
While the Brazilian Corporate Law requires the mandatory distribution to
be paid in every fiscal year, the Brazilian Corporate Law permits companies to
suspend the mandatory distribution if the Board of Directors report to the
annual shareholders meeting that the distribution would be incompatible with
the Companys financial condition. Any suspension of the mandatory
distribution must be approved by the Fiscal Council. In addition, management
of companies with publicly traded securities, including the Company, also must
submit a report setting out the reasons for the suspension to the CVM. Net
profits not distributed by virtue of a suspension are allocated to a special
reserve and, if not absorbed by subsequent losses, are required to be
distributed as soon as the financial condition of the company permits such
payments. The Companys dividend distribution policy included the distribution
of periodic dividends, based on quarterly balance sheets approved by the Board
of Directors. However, since the first quarter of 2002, the Board of Directors
has recommended that payment of the mandatory distribution be suspended in
light of the Companys results of operations.
Payment of Dividends and Interest on Shareholders Equity
The mandatory distribution may be made in the form of dividends or
interest attributable to shareholders equity, which is equivalent to a
dividend but may be deducted by the Company in calculating its income tax
provisions.
Dividends.
The Company is required by the Brazilian Corporate Law and by
the Companys bylaws to hold an annual shareholders meeting by no later than
April 30 of each year at which, among other decisions, the shareholders may
vote to declare an annual dividend. The payment of annual dividends is based
on the audited financial statements prepared for the immediately preceding
fiscal year.
Any holder of record of shares at the time that a dividend is declared is
entitled to receive dividends. Under the Brazilian Corporate Law, dividends
are generally required to be paid within 60 days following the date on which
the dividend is declared, unless the shareholders resolution establishes
another date of payment, which, in any case, must occur prior to the end of the
fiscal year in which the dividend is declared.
A shareholder has a three-year prescription period from the date of the
dividend payment to claim dividends or interest payments with respect to its
shares, after which the aggregate amount of any unclaimed dividends legally
reverts to the Company. The Company is not required to adjust the amount of
the dividend payment for any inflation that occurs during the period from the
date of declaration to the payment date.
The Board of Directors may declare interim dividends based on the accrued
profits recorded or the realized profits in the Companys annual or semi-annual
financial statements approved by the Companys shareholders. In addition, the
Company may pay dividends from the net income based on the Companys unaudited
quarterly financial statements. These quarterly interim dividends may not exceed
the amounts accounted for in the Companys capital reserve accounts. Any
payment of interim dividends may be set off against the amount of mandatory
distributions relating to the net profit earned in the year in which the
interim dividends were paid.
120
Interest on Shareholders Equity.
Since January 1, 1996, Brazilian
companies have been permitted to pay limited distributions to holders of equity
securities and treat such payments as a deductible expense for calculation of
Brazilian income tax and since 1998, for calculation of social contribution
tax. In accordance with Law No. 9,249 dated December 26, 1995, as amended, the
Companys bylaws permit the distribution of interest on shareholders equity as
an alternative form of payment of distributions to shareholders. The interest
rate applied to these distributions generally cannot exceed the Brazilian
long-term interest rate, or TJLP, for the applicable period. The amount of
interest paid that can be deducted for tax purposes cannot exceed the greater
of:
For accounting purposes, although the interest charge must be included as
a financial expense in the income statement to be tax-deductible, the interest
charge is reversed before calculating net income in the income statement and is
deducted from shareholders equity like a dividend.
Any payment of interest on shareholders equity to holders of ADSs or
common shares, whether or not they are Brazilian residents, is subject to
Brazilian withholding tax at the rate of 15%, provided that a 25% withholding
tax rate applies if the person receiving this interest is a resident of a tax
haven jurisdiction (
i.e.
, a country that does not impose income tax or that
imposes it at a maximum rate lower than 20%). See Brazilian Tax
Considerations. Under the Companys bylaws, the amount distributed to
shareholders as interest on shareholders equity, net of any withholding tax,
may be included as part of the mandatory distribution.
Dividend Preference of Preferred Shares
Pursuant to the Companys bylaws, holders of preferred shares are entitled
to a minimum annual non-cumulative preferential dividend equal to 6% of their
pro rata
share of the Companys paid-in capital prior to dividends payable to
holders of common shares. To the extent that the Company declares a dividend
in an amount that exceeds the preferential dividend due to holders of
preferred shares, and after holders of common shares have received
distributions equivalent, on a per share basis, to the preferential dividend
payable to preferred shares, holders of common shares and of class A preferred
shares are entitled to receive the same additional dividend amount per share.
After holders of class B preferred shares have received distributions
equivalent, on a per share basis, to the preferential dividend payable to such
shares, holders of class B preferred shares shall not be entitled to receive
additional dividend amounts, in compliance with Law
No. 10,303/2001 and Decree-Law nº
1,376/74, which regulates the creation of investment funds and fiscal incentive
programs in the Northeast of Brazil.
Significant Changes
Other than as otherwise disclosed in this annual report, no significant
change has occurred since the date of the Consolidated Financial
Statements included in this annual report.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Nominal Brazilian Currency per 1,000
U.S.$ equivalent per 1,000
First
Preferred
Preferred
Preferred
Preferred
Payment
Common
Class A
Class B
Common
Class A
Class B
Year
Date
Shares
Shares
Shares
Shares
Shares
Shares
February 10, 1998
R$
12.50
R$
12.50
R$
9.40
11.097301
11.097301
8.345170
May 7, 1998
R$
10.40
R$
10.40
R$
10.40
9.082176
9.082176
9.082176
August 5, 1998
R$
10.70
R$
10.70
R$
10.70
9.168023
9.168023
9.168023
November 5, 1998
R$
10.30
R$
10.30
R$
10.30
8.651827
8.651827
8.651827
February 10, 1999
R$
10.20
R$
10.20
R$
10.20
5.381734
5.381734
5.381734
May 12, 1999
R$
10.40
R$
10.40
R$
10.40
6.259781
6.259781
6.259781
August 17, 1999
R$
10.40
R$
10.40
R$
10.40
5.526036
5.526036
5.526036
November 18, 1999
R$
10.40
R$
10.40
R$
10.40
5.391395
5.391395
5.391395
February 22, 2000
R$
17.20
R$
17.20
R$
10.40
9.649369
9.649369
5.834502
May 23, 2000
R$
17.20
R$
17.20
R$
17.20
9.278740
9.278740
9.278740
August 22, 2000
R$
17.20
R$
17.20
R$
17.20
9.466674
9.466674
9.466674
November 21, 2000
R$
17.20
R$
17.20
R$
7.17
9.005236
9.005236
3.753927
February 20, 2001
R$
17.20
R$
17.20
(1
)
8.572995
8.572995
(1
)
May 20, 2001
R$
11.50
R$
11.50
R$
11.50
5.013000
5.013000
5.013000
August 20, 2001
R$
11.50
R$
11.50
R$
11.50
4.544000
4.544000
4.544000
November 20, 2001
R$
11.50
R$
11.50
R$
11.50
4.674000
4.674000
4.674000
February 25, 2002
(1
)
R$
7.07
R$
7.07
(1
)
2.938000
2.93800
May 20 2002
(1
)
R$
10.40
R$
10.40
(1
)
4.195748
4.195748
(1)
Braskem did not pay dividends for these classes of shares on these dates.
Table of Contents
Table of Contents
Table of Contents
50% of net income (after the deduction of the provision of social
contribution tax and before the deduction of the corporate income tax
provision) before taking into account any such distribution for the
period in respect of which the payment is made; or
50% of the sum of retained earnings and profit reserves.
ITEM 9. THE OFFER AND LISTING
Markets for the Companys Equity Securities
The principal trading market for Braskems Common Shares and Preferred Class A and B Shares is the BOVESPA. Braskems Common Shares and the Preferred Class A Shares began trading on the BOVESPA on November 11, 1980 and the Preferred Class B Shares on August 19, 1983.
121
At December 31, 2002, there were an aggregate of 2,160,764,336 Preferred Class A Shares (including 54,620,037 treasury shares owned or held by or for the account of the Company), 11,457,740 Preferred Class B Shares and 1,226,091,148 Common Shares issued and outstanding and Braskem had approximately 5,000 shareholders. As of December 31, 2002, the number of U.S. resident holders of Braskems Preferred Class A Shares, Preferred Class B Shares and Common Shares was approximately 33, 0 and 2, respectively. As of December 31, 2002, there were 10,608,395 Common Shares, 208,095,399 Preferred Class A Shares, and 0 Preferred Class B Shares held by foreign investors.
Braskem has registered one class of American Depositary Shares (ADSs) on Form F-6 pursuant to the Securities Act. One ADS evidenced by American Depositary Receipts (ADRs) represents 50 Preferred Class A Shares without par value.
The ADSs of Copene, the Companys predecessor, were traded in the U.S. as
Level I ADRs, under the symbol CPEPY beginning in January 1993. On December
21, 1998, Copenes ADRs began trading on the New York Stock Exchange (NYSE),
with Citibank N.A. as depositary bank. On October 8, 2002, following the
change to its present name, Braskem was invited by the NYSE to be present at
the so-called Opening Bell Ceremony at the start of the Companys ADRs Level
II trading in New York under the new ticker symbol BAK. On December 31,
2002, there were 2,161,346 Preferred Class A ADRs outstanding, representing
108,067,300 Preferred Class A Shares or approximately 5% of Braskems
outstanding Preferred Class A Shares.
Price History of the Companys Stock
The tables below set forth the high and low closing sales prices for the
Preferred Class A Shares on the BOVESPA and the equivalent high and low closing
sales prices for the Preferred Class A ADRs in U.S. dollars for the periods
indicated.
Annual High and Low Market Prices
U.S. dollars per 50
U.S. dollars per Preferred
Preferred Class A Shares
(1)
Class A ADRs
High
Low
High
Low
U.S.$17.72
U.S.$3.65
U.S.$16.53
U.S.$4.98
16.32
3.65
16.19
3.68
22.40
14.17
22.88
14.19
18.07
5.87
17.88
6.14
12.76
2.66
12.75
2.57
Quarterly High and Low Market Prices
U.S. dollars per 50
U.S. dollars per Preferred
Preferred Class A Shares
(1)
Class A ADRs
High
Low
High
Low
U.S.$19.97
U.S.$14.26
U.S.$20.13
U.S.$14.50
19.70
14.17
19.50
14.19
22.40
19.34
22.88
18.88
20.43
14.59
20.38
14.63
18.07
14.01
17.88
14.05
13.96
10.46
14.10
10.40
12.90
5.87
13.00
6.20
122
Quarterly High and Low Market Prices
U.S. dollars per 50
U.S. dollars per Preferred
Preferred Class A Shares
(1)
Class A ADRs
High
Low
High
Low
U.S.$9.99
U.S.$6.05
U.S.$10.02
U.S.$6.14
12.76
10.34
12.75
10.05
11.96
6.72
11.77
6.09
7.09
2.98
7.11
3.18
3.49
2.66
3.50
2.57
3.76
2.22
4.10
2.20
Monthly High and Low Market Prices
U.S. dollars per 50
U.S. dollars per Preferred
Preferred Class A Shares
(1)
Class A ADRs
High
Low
High
Low
U.S.$3.47
U.S.$2.63
U.S.$3.50
U.S.$2.57
3.76
2.64
4.10
2.52
2.60
2.22
2.60
2.20
2.99
2.47
3.20
2.45
5.16
3.94
5.71
3.35
7.21
5.61
7.20
5.50
(1) | U.S. dollar amounts are translated from Brazilian reais at the Commercial Market Rates in effect on the date of the corresponding Brazilian currency quotation for Preferred Class A Shares. Such U.S. dollar amounts may reflect exchange rate fluctuations and may not correspond to changes in nominal reais prices over time. |
On December 31, 2002, the closing sales price of the (1) the Preferred Class A Shares on the BOVESPA was U.S.$3.11 per 50 shares and (2) the Preferred Class A ADRs on the NYSE was U.S.$3.30 per Preferred Class A ADR. See Item 3. Key Information Selected Financial Data Exchange Rates for additional information on the applicable exchange rates during the periods indicated above.
Trading on the Brazilian Stock Exchanges
Braskems shares are trade on the BOVESPA, which is the most significant stock exchange in Brazil. On January 27, 2000, the BOVESPA and the Rio de Janeiro Stock Exchange announced an agreement that led to the unification of the Brazilian securities market under the management of the BOVESPA.
Trading on each Brazilian stock exchange is limited to member brokerage firms and a limited number of authorized non-members. The BOVESPA has one open outcry trading session each day, from 10:00 a.m. to 5:00 p.m. Trading is also conducted during this time on an automated system called Sistema de Negociação Assistida por Computador , or CATS. The CVM and each of the Brazilian stock exchanges have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances. Off-exchange trading may be effected in certain circumstances, although such trading is very limited.
Settlement of transactions is effected three business days after the trade date without any adjustment for inflation. Payment for shares is made through the facilities of the BOVESPAs clearinghouse, Companhia Brasileira de Liquidação e Custódia (CLBC). The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date.
123
In order to better control volatility, the BOVESPA adopted a circuit breaker system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the BOVESPA share index falls more than 10% or 15%, respectively, in relation to the index registered in the previous trading session.
The BOVESPA is less liquid than the New York Stock Exchange or of many other of the worlds major stock exchanges. As of December 31, 2002, according to information provided by BOVESPA, the aggregate market capitalization of the 407 companies listed on the BOVESPA was equivalent to approximately U.S.$124.04 billion, and the 10 largest companies listed on BOVESPA represented approximately 46% of the total market capitalization of all listed companies. Although any of the outstanding shares of a listed company may trade on the BOVESPA, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by governmental entities or by one principal stockholder. As of December 31, 2002, approximately 21.6% of the market capitalization of all listed companies on the BOVESPA was controlled, directly or indirectly, by the Brazilian government. At December 31, 2002, Braskems preferred class A shares posted a closing price of R$11.00 per 50 shares, 46% less than the closing price for December 31, 2001. During 2002, Braskems securities were traded on all the days that the BOVESPA was open. The closing price for Braskems Level II ADRs was 72% less in 2002, ending the year at U.S.$3.30.
Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes (a non-Brazilian holder) is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on the BOVESPA in accordance with the requirements of Resolution No. 2,689 of January 26, 2000 of the Conselho Monetário Nacional (the National Monetary Council). Resolution No. 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the CVM. In addition, Resolution No. 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on the BOVESPA or qualifed over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through a private transaction. See Item 10. Additional Information Exchange Controls.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Law No. 6,385 dated December 7, 1976, as amended (the Brazilian Securities Law) and the Brazilian Corporate Law.
Under the Brazilian Corporate Law, a company is either public, a companhia aberta, such as Braskem, or private, a companhia fechada. All public companies are registered with the CVM and are subject to periodic reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market (the Brazilian OTC Market). The shares of a listed company, including Braskem, also may be traded privately subject to certain limitations.
The Brazilian OTC Market consists of direct trades between persons in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM must receive notice of all trades carried out in the Brazilian OTC Market by the respective intermediaries.
Trading of a companys securities on the Brazilian stock exchanges may be suspended at the request of a company prior to its making a material announcement if the company requests and obtains the same suspension for trading on any international stock exchange. Trading may also be suspended by a Brazilian stock exchange or the CVM, 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 the inquiries by the CVM or the relevant stock exchange.
124
The Brazilian Securities Law provides for, among other things, disclosure requirements, restrictions on insider trading and other forms of price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as the United States securities markets or markets in certain other jurisdictions.
ITEM 10. ADDITIONAL INFORMATION
Description of the Companys Bylaws
Set forth below is a summary of certain significant provisions of the Companys bylaws and of the Brazilian Corporate Law. In Brazil, the companys bylaws ( Estatuto Social ) is the principal governing document of a corporation. This description does not purport to be complete and is qualified in its entirety by reference to the Brazilian Corporate Law and the Companys bylaws. An English translation of the Companys bylaws has been filed herewith. Information on the trading market for the Companys preferred shares is set forth under Item 9. The Offer and ListingPrincipal Market and Trading Market Price Information and information on ownership of the Companys shares is set forth under Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders.
General
The Companys registered name is Braskem S.A., and the Companys registered office is located in the Municipality of Camacari, State of Bahia, Brazil. The Companys registration number with the Brazilian Commercial Registry is 42.150.391/0001-70. The Company is duly registered with the CVM under No. 4820. The Companys principal place of business is in the City of São Paulo, Brazil.
Company Objects and Purposes
Article 2 of the Companys bylaws establishes the Companys corporate purposes to include:
| the manufacture, trading, import and export of chemical and petrochemical products; | ||
| production of utilities for use by component companies of the Northeastern Complex, including the supply of steam, water, compressed air, industrial gases, electricity, as well as the provision of various services to these companies; | ||
| the holdings of equity stakes (quotas or shares) in other companies; and | ||
| the manufacture, distribution, sale, import and export of gasoline, diesel oil, liquified petroleum gas and other oil derivatives. |
Board of Directors
In accordance with the Brazilian Corporate Law, any matters subject to the approval of the Board of Directors can be approved by a simple majority of votes of the members present at a duly convened meeting, unless the Companys bylaws otherwise specify. Pursuant to the Companys bylaws, the Board of Directors may only deliberate if a majority of its members are present at a duly convened meeting. Any resolutions of the Board of Directors may be approved by the affirmative vote of a majority of the members present at the meeting.
Election of Directors; Fiduciary Duties
In accordance with the provisions of the Controlling Shareholders Agreement, the majority of the members of the Board of Directors are elected by the Odebrecht Group. All members of the Board of Directors owe fiduciary duties towards the Company and all of its shareholders. In addition, any director appointed by a shareholder pursuant to a shareholders agreement is also bound by the terms of such agreement. See Item 7. Major Shareholders and Related Party TransactionsShareholders Agreements.
125
Qualification of Directors
The Brazilian Corporate Law requires members of a companys board of directors to be the shareholders of the company, but there is no minimum share ownership or residency requirement for qualification as a director. The Companys bylaws do not require the members of the Board of Directors to be resident in Brazil. Brazilian Corporate Law requires the Companys executive officers to reside in Brazil.
Conflicts of Interest
Under the Brazilian Corporate Law, if a director or an executive officer has a conflict of interest with the Company in connection with any proposed transaction, the director or executive officer may not vote in any decision of the Board of Directors or of the Board of Executive Officers, as the case may be, regarding such transaction and must disclose the nature and extent of his conflicting interest for inclusion in the minutes of the meeting.
Any transaction in which a director or executive officer may have an interest, including any borrowings, can only be approved on reasonable or fair terms and conditions that are no more favorable than the terms and conditions prevailing in the market or offered by third parties. If any such transaction does not meet this requirement, then the Brazilian Corporate Law provides that the transaction may be nullified and the interested director or executive officer must return to the Company any benefits or other advantages that he obtained from, or as result of, such transaction. In accordance with the Brazilian Corporate Law and upon the request of a shareholder that owns 5% or more of the Companys total capital stock, directors and executive officers must reveal to the shareholders at an ordinary meeting of the shareholders certain transactions and circumstances that may give rise to a conflict of interest.
Compensation
Under the Companys bylaws, the Companys common shareholders approve the aggregate compensation payable to directors and executive officers. Subject to this approval, the Board of Directors establishes the compensation of its members and of the executive officers. See Item 6. Directors and Senior Management Compensation.
Mandatory Retirement
Neither the Brazilian Corporate Law nor the Companys bylaws establish any mandatory retirement age for directors or executive officers.
Capital Stock
Under the Brazilian Corporate Law, the number of issued non-voting shares or shares with limited voting rights, such as the Companys issued preferred shares, may not exceed 50% of the total number of issued shares. Prior to the Brazilian Corporate Law taking effect, the limit of the number of issued non-voting shares was 66.6% of the total number of issued shares. Companies seeking to register with the CVM for the first time are required to observe the new percentage limitation. Companies with an existing CVM registration may mantain the proportion between common shares and preferred shares existing as of March 1, 2002 or they may elect one of the following two options, which will not result in appraisal rights for minority shareholders:
| issue additional common shares up to the amount necessary to meet the required proportion; or | ||
| repurchase preferred shares from the shareholders. |
126
Each common share entitles its holder to one vote at annual and extraordinary shareholders meetings. Holders of common shares are not entitled to any preference in respect of the Companys dividends or other distributions or otherwise in case of the Companys liquidation.
The Companys preferred class A shares and preferred class B shares are non-voting, except under limited circumstances, and have priority over the Companys common shares in the case of the Companys liquidation. See Voting Rights for more information regarding the voting rights of the Companys preferred shares, Reserves and DistributionsDividend Preference of Preferred Shares for more information regarding the distribution preferences of the Companys preferred shares, and Liquidation for more information regarding the liquidation preferences of the Companys preferred shares.
Shareholders Meetings
The Companys shareholders have the power to determine any matters related to changes in the Companys corporate purposes and to pass any resolutions they deem necessary to protect and enhance the development of the Company.
Pursuant to the Brazilian Corporate Law, shareholders have the power, among other powers, to vote at shareholders meetings to:
| amend the Companys bylaws; | ||
| elect or dismiss members of the Board of Directors and members of the Fiscal Council at any time, subject to the right of the Companys preferred shareholders to elect or dismiss one member of the Board of Directors and of the Fiscal Council; | ||
| accept or reject financial statements approved by the Board of Directors, including the allocation of net profits and the distributable amount for payment of the mandatory distribution and allocations to the various reserve accounts; | ||
| approve any capital increase in excess of the amount of the authorized capital; | ||
| approve any capital reduction; | ||
| accept or reject the valuation of assets contributed by a shareholder in consideration for issuance of capital stock; | ||
| suspend the rights of any shareholder in default of obligations established by law or by the Companys bylaws; | ||
| authorize the issuance of convertible debentures; | ||
| approve the: reorganization of the Companys legal form; or the merger, consolidation or split-off of the Company; authorize the dissolution and liquidation of the Company and the election and dismissal of liquidators appointed in connection therewith and examine their accounts; | ||
| participate in a centralized group of companies; | ||
| approve the disposition of the control of any of the Companys subsidiaries; | ||
| approve the disposition of any convertible debentures issued by the Companys subsidiaries and held by the Company; |
127
| waive the right to subscribe to shares or convertible debentures issued by the Companys subsidiaries or affiliates; | ||
| approve the aggregate compensation payable to the Companys directors and executive officers; | ||
| approve the cancellation of the Companys registration as a publicly-traded company and in such cases, to select an experienced company to prepare the appraisal of the economic value of the Companys shares; and | ||
| authorize management to declare the Company insolvent and to request a concordata (a procedure involving protection of the Company from its creditors similar in nature to a reorganization under the U.S. Bankruptcy Code). |
The Company convenes its shareholders meetings, including the annual shareholders meeting, by publishing a notice in the Diário Oficial do Estado da Bahia and in at least two additional newspapers designated by the shareholders with general circulation in Bahia, where the Company maintains its registered office. The notice must be published no fewer than three times, beginning at least 15 calendar days prior to the scheduled meeting date. The notice must contain the meetings agenda and, in the case of a proposed amendment to the bylaws, an indication of the subject matter of the proposed amendment. For ADS holders, the Company is required to provide notice to the Depositary for distribution to ADS holders at least 30 calendar days prior to a shareholders meeting.
Annual shareholders meetings must be held by April 30 of each year. The Board of Directors may convene a shareholders meetings. In addition, under the Brazilian Corporate Law, shareholders meetings may also be convened by the Companys shareholders as follows:
| by any shareholder if, under certain circumstances set forth in the Brazilian Corporate Law, the directors do not convene a shareholders meeting within 60 days; | ||
| by the shareholders of not less than 5% of the Companys total capital stock if, after a period of eight days, the directors fail to call a shareholders meeting that has been requested by such shareholders; and | ||
| by the shareholders of not less than 5% of either the Companys total voting capital stock or the Companys total non-voting capital stock, if after a period of eight days, the directors fail to call a shareholders meeting for the purpose of appointing a Fiscal Council that has been requested by such shareholders. |
Each shareholders meeting is presided over by a President and Secretary elected by the shareholders present at the meeting. An extraordinary shareholders meeting may be held whenever the interests of the Company so require. A shareholder may be represented at a shareholders meeting by an attorney-in-fact appointed by the shareholders not more than one year before the meeting. The attorney-in-fact must be a shareholder, an officer of the Company, a lawyer or a financial institution, and the power of attorney appointing the attorney-in-fact must comply with certain formalities set forth by Brazilian law.
In order for a valid action to be taken at a shareholders meeting, shareholders representing at least one quarter of the Companys issued and outstanding common shares must be present. However, shareholders representing at least two-thirds of the Companys issued and outstanding common shares must be present at a shareholders meeting to amend the Companys bylaws. If a quorum is not present, the Board of Directors may call a second meeting by publishing a notice as described above at least five calendar days prior to the scheduled meeting. The quorum requirements do not apply to the second meeting, subject to the voting requirements for certain matters described below. A shareholder without a right to vote may attend a shareholders meeting and take part in the discussion of matters submitted for consideration.
Voting Rights
Pursuant to the Brazilian Corporate Law and the Companys bylaws, each of the Companys common shares carries the right to vote at a shareholders meeting. Preferred shares generally do not confer voting rights, except as described below. The Company may not restrain or deny any voting rights without the consent of the majority of the shares affected. Whenever the shares of any class of capital stock are entitled to vote, each share is entitled to one vote.
128
Except as otherwise provided by law, resolutions of a shareholders meeting are passed by a simple majority vote of the holders of the common stock of the Company present or represented at the meeting, without taking abstentions into account. Under the Brazilian Corporate Law, the approval of shareholders representing at least a majority of the issued and outstanding voting shares is required for the types of action described below, as well as, in the case of the first and second bullet points, a majority of issued and outstanding shares of the affected class:
| creating a new class of preferred shares or disproportionately increasing an existing class of preferred shares relative to the other classes of preferred shares, other than to the extent permitted by the bylaws, which permit the Company to modify the proportion between the various classes of the Companys preferred shares; | ||
| changing a priority, preference, right, privilege or condition of redemption or amortization of any class of preferred shares or creating a new class of preferred shares that has a priority, preference, right, condition or redemption or amortization superior to an existing class of preferred shares; | ||
| reducing the mandatory distribution; | ||
| changing the corporate purpose; | ||
| merging the Company with another company, or consolidating or splitting the Company, subject to the conditions set forth in the Brazilian Corporate Law; | ||
| transferring all of the shares of the Company to another company, known as incorporação de ações ; | ||
| participating in a centralized group of companies as defined under the Brazilian Corporate Law and subject to the conditions set forth therein; and | ||
| dissolving or liquidating the Company or canceling any ongoing liquidation of the Company. |
Decisions on the Companys transformation into another form of company require the unanimous approval of the Companys shareholders, including the preferred shareholders.
Brazilian Corporate Law requires that the President of any shareholders meeting shall disregard any vote taken that violates the provisions of any shareholders agreement if that shareholders agreement has been duly filed with the Company.
Under the Brazilian Corporate Law, neither the Companys bylaws nor actions taken at a shareholders meeting may deprive a shareholder of certain specific rights, including:
| the right to participate in the distribution of profits; | ||
| the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the Company; | ||
| the right to supervise the management of the corporate business as specified in the Brazilian Corporate Law; | ||
| the right to preemptive rights in the event of an issuance of shares, debentures convertible into shares or subscription bonuses (other than with respect to a public offering of such securities, as may be set out in the bylaws); and |
129
| the right to withdraw from the Company under the circunstances specified in the Brazilian Corporate Law. |
Voting Rights of Minority Shareholders
Under the Brazilian Corporate Law, shareholders that are not controlling shareholders, but that together hold either
| preferred shares representing at least 10% of the total share capital of the Company, or | ||
| common shares representing at least 15% of the voting capital of the Company, |
may separately appoint one member and an alternate to the Board of Directors at the shareholders meeting. If no group of common or preferred shareholders meets the thresholds described above, shareholders holding preferred shares or common shares representing at least 10% of the total share capital of the Company are entitled to combine their holdings to appoint one member and an alternate to the Board of Directors. The shareholders seeking to exercise these minority rights must prove that they have held their shares for not less than three months preceding the shareholders meeting at which the Director will be appointed. Until 2005, the director or directors appointed by the preferred shareholders as a group, or collectively with the common shareholders, are chosen from a list of three names prepared by the controlling shareholder. Any directors appointed by the non-controlling shareholders have the right to veto the selection of the Companys independent auditors.
In accordance with the Brazilian Corporate Law, preferred shareholders together with common shareholders (excluding the controlling shareholders) are entitled to a representative on the Fiscal Council, and one of the members of the Fiscal Council and his alternate may be appointed and/or dismissed by holders of common stock, other than the controlling shareholders, if such holders collectively own not less than 10% of the common shares.
Shareholders holding shares representing not less than 10% of the shares entitled to vote at the shareholders meeting, or such smaller percentage applicable according to a sliding scale determined by the CVM and based on the total capital of the company, have the right to request that a cumulative voting procedure be adopted. Under such procedure, each voting share shall have as many votes as there are positions of directors to be filled, and each shareholder may cast all of its votes for a single candidate or distribute them among various candidates. If the cumulative voting procedure is adopted, the controlling shareholders always retain the right to elect at least the same numbers of members as the other shareholders plus one, independently of the total number of directors. This procedure must be requested by the shareholders at least 48 hours prior to the shareholders meeting.
Voting Rights of the Preferred Shares
Holders of preferred shares are not entitled to vote on any matter except with respect to the election of directors by holders of at least 10% of the Companys preferred stock and in the limited circumstances provided below.
Under the Brazilian Corporate Law, preferred shareholders together with common shareholders (excluding the controlling shareholders) will be entitled to a representative on the Fiscal Council. Under the Companys bylaws one of the members of the Fiscal Council and his or her alternate may be appointed and/or dismissed by a majority vote of the holders of preferred shares.
The Brazilian Corporate Law and the Companys bylaws provide that non-voting or restricted-voting shares, such as the Companys preferred shares, acquire unrestricted voting rights beginning when a company has failed for three consecutive fiscal years (or for any shorter period set forth in the companys by laws) to pay any fixed or minimum dividend to which such shares are entitled. This voting right shall continue until payment in full has been made. The Companys bylaws do not set forth a shorter period. Preferred shareholders also obtain the right to vote if the Company enters into a liquidation process.
130
Liquidation
The Company shall be liquidated pursuant to the terms of Brazilian law. In the event of an extrajudicial liquidation of the Company, a shareholders meeting shall determine the manner of liquidation and appoint the liquidator and the Fiscal Council that will function during the liquidation period.
Upon liquidation, the Companys preferred shares have a preference over the Companys common shares. In the event of a liquidation, the assets available for distribution to the Companys shareholders would be distributed first to the preferred shareholders in an amount equal to their pro rata share of the legal capital of the company, prior to making any distributions to the Companys common shareholders. If the assets to be so distributed are insufficient to fully compensate the Companys preferred shareholders, the preferred shareholders would each receive a pro rata amount (based on their pro rata share of the legal capital of the Company excluding the common shares in such calculation) of any available assets.
Conversion Rights
According to the Companys bylaws, the Companys preferred shares are not convertible into common shares. However, the holders of class B preferred shares are permitted by the Companys bylaws to convert such shares into class A preferred shares. The ratio of any such conversion is two class B preferred shares for each class A preferred share.
Preemptive Rights
Pursuant to the Brazilian Corporate Law, each of the Companys shareholders has a general preemptive right to subscribe for shares or securities convertible into shares in any capital increase, in proportion to the number of shares held by such shareholder. However, pursuant to the Companys bylaws, the holders of shares subscribed with using funds originating from fiscal incentives provided under Law No. 6,404/76 do not have preemptive rights. In the event of a capital increase that would maintain or increase the proportion of capital represented by the preferred shares, holders of preferred shares would have preemptive rights to subscribe to newly issued preferred shares only. In the event of a capital increase that would reduce the proportion of capital represented by the preferred shares, holders of preferred shares would have preemptive rights to subscribe to any new preferred shares in proportion to the number of shares that they hold, and to common shares only to the extent necessary to prevent dilution of their interests in the Companys total capital.
Under the Companys bylaws, except when issuing voting shares or securities convertible into voting shares, the Board of Directors or the shareholders, as the case may be, may decide not to extend preemptive rights to the Companys shareholders with respect to any issuance of shares, debentures convertible into shares or warrants made in connection with a public exchange made to acquire control of another company or in connection with a public offering.
The preemptive rights may be exercised for a period of at least 30 days following the publication of notice of the issuance of securities convertible into shares, and the right may be transferred. Under the Brazilian Corporate Law, the Board of Directors may reduce the 30 day period for the exercise of preemptive rights with respect to any issuance of shares, debentures convertible into shares or warrants in connection with a public exchange made to acquire control of another company or in connection with a public offering.
In the event of a capital increase that would maintain or increase the proportion of capital represented by preferred shares, holders of ADSs will have, except under the circumstances described above, preemptive rights to subscribe to newly issued preferred shares. In the event of a capital increase which would reduce the proportion of capital represented by preferred shares, holders of ADSs will have preemptive rights to subscribe for preferred shares, in proportion to their shareholdings, and for common shares to the extent necessary to prevent dilution of their overall interest in the Company. However, U.S. holders may not be able to exercise the preemptive rights relating to the preferred shares underlying their 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.
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Redemption, Amortization, Tender Offers and Rights of Withdrawal
The bylaws of a company or the shareholders at a shareholders meeting may authorize the use of profits or reserves to redeem or amortize shares in accordance with conditions and procedures established for such redemption or amorization. The Brazilian Corporate Law defines redemption ( resgate de ações ) as the payment of the value of the shares in order to permanently remove such shares from circulation, with or without a corresponding reduction of the companys total capital. The Brazilian Corporate Law defines amortization ( amortização ) as the distribution to the shareholders, without a corresponding capital reduction, of amounts that they would receive if the company were liquidated. If an amortization has been effected, the shareholders who received an amortization distribution will receive, upon the eventual liquidation of the Company, a pro rata portion of any remaining capital after the other shareholders that did not participate in the amortization transaction receive the amount that they would have received had they received an amortization distribution.
Brazilian Corporate Law authorizes the Company to redeem shares not held by the controlling shareholder if, after a tender offer, the controlling shareholder of the Company increases its participation in the total share capital of the Company to more than 95%. The redemption price in such case would be the same price paid for the shares in the tender offer.
In addition, the Brazilian Corporate Law and the Companys bylaws require the Company to make a tender offer for shares held by minority shareholders under certain circumstances described below, and permit dissenting shareholders to withdraw their capital from the Company under certain circumstances described below.
Mandatory Tender Offers
Brazilian Corporate Law requires that if the Company is delisted or there is a substantial reduction in liquidity of the shares of the Company, as defined by the CVM, in each case as a result of purchases by the controlling shareholders of the Company, the controlling shareholders must effect a tender offer for the remanining shares of the Company at a purchase price equal to the fair value of the shares taking into account the total number of outstanding shares.
Brazilian Corporate Law also requires any acquiror of direct or indirect control of the Company to make a tender offer for the Companys remaining common shares and preferred shares not owned by the acquiror, in each case, at a price equal to 80% of the price per share paid for the controlling block of shares. In addition, the Brazilian Corporate Law provides that public companies, including the Company, must grant its preferred shareholders at least one of the following three rights:
| the right to participate in the distribution of the mandatory distribution in accordance with the following criteria: (1) priority in the receipt of dividends corresponding to at least 3% of the preferred shares book value; and (2) the right to participate equally in the distribution of profits with the common shares after the common shares have received dividends equal to at least 3% of the book value of the common shares; | ||
| the right to receive dividends in an amount per share at least 10% higher than the amount per share paid to holders of common shares; or | ||
| tag-along rights of at least 80% of the price paid to the controlling shareholder in case of transfer of control and dividends at least equal to the dividends paid to the holders of common shares. |
The Companys bylaws provide that all of the Companys shares will be entitled to tag-along rights in the event that the control of the Company is transferred, with all shares receiving the same price per share paid to the controlling shareholders.
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If the controlling shareholders enter into a transaction which results in a change of control of the Company, the controlling shareholders must include in the documents governing such transaction an obligation on the part of the acquiring party to make a public offer for the purchase of all common shares and preferred shares issued by the Company for the same price per share paid to the controlling shareholders. The tender offer must be made within a period of 30 days prior to the formal transfer of the shares representing the controlling stake and is effected through the financial institution responsible for the custody of the Companys shares.
The Companys bylaws provide that no change of control will be deemed to occur if the party acquiring control is an existing member of the block of controlling shareholders, and/or a signatory to an agreement among the Companys shareholders governing the exercise of rights over the shares held by the controlling shareholders. The Companys bylaws also provide that the tag-along right will not apply in the event that the change of control occurs as a result of:
| a court ruling or act, such as a judicial seizure or execution; or | ||
| a final decision by regulatory authorities, including CADE, that obliges the controlling shareholders of the Company to divest part or all of their shares in the Company. |
Rights of Withdrawal
Brazilian law provides that, under certain limited circumstances, a dissenting shareholder may withdraw its equity interest from the Company and be reimbursed by the Company for the value of the common or preferred shares that it holds.
This right of withdrawal may be exercised by the holders of the adversely affected common or preferred shares if the Company decides:
| to create a new class of preferred shares or to disproportionately increase an existing class of preferred shares relative to the other classes of preferred shares (unless such actions are provided for or authorized by the bylaws, which permit the Company to modify the proportion between the various classes of the Companys preferred shares); or | ||
| to modify a preference, privilege or condition of redemption or amortization conferred on one or more classes of preferred shares, or to create a new class of preferred shares with greater privileges than the existing classes of preferred shares. | ||
| to merge into another company or to consolidate with another company; | ||
| to transfer all of the Companys shares to another company, known as an incorporação de ações ; | ||
| to participate in a centralized group of companies as defined under the Brazilian Corporate Law; | ||
| to reduce the mandatory distribution; | ||
| to change the Companys corporate purposes; | ||
| to spin-off a portion of the Companys company, subject to certain conditions set forth in the Brazilian Corporate Law; or | ||
| to create founder shares ( partes beneficiárias ). |
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As a general rule, shareholders who acquire their shares after the first notice convening the relevant shareholders meeting or after a press release concerning the relevant shareholders meeting is published will not be entitled to withdrawal rights.
This right of withdrawal may also be exercised if the entity resulting from a merger, incorporação de ações , or consolidation or spin-off of the Company fails to become a listed company within 120 days of the shareholders meeting at which such decision was taken (one of the companies involved must be a public company prior to the merger). Furthermore, if a governmental entity acquires control of the Company through expropriation of shares, shareholders may withdraw from the Company and be reimbursed for the value of the shareholders equity attributable to their equity interest.
Any redemption of shares arising out of the exercise of any withdrawal rights would be made at book value per share, determined on the basis of their most recent audited balance sheet approved by the shareholders. However, if the shareholders meeting approving the action giving rise to withdrawal rights occurred more than 60 days after the date of the most recent approved audited balance sheet, a shareholder may demand that his or her shares be valued on the basis of a balance sheet dated within 60 days of such shareholders meeting. The right of withdrawal lapses 30 days after the date of publication of the minutes of the shareholders meeting that approved the corporate action described above. The Company may reconsider any action giving rise to withdrawal rights within 10 days following the expiration date for such rights if it believes that the withdrawal of shares of dissenting shareholders would jeopardize the Companys financial stability.
Liability of The Companys Shareholders for Further Capital Calls
Neither Brazilian law nor the Companys bylaws provide for any capital calls. The Companys shareholders liability for capital calls is limited to the payment of the issue price of the shares subscribed or acquired.
Disclosures of Share Ownership
Brazilian regulations require that the controlling shareholders, directly or indirectly, and the shareholders who have elected members of the Board of Directors, as well as any person or group of persons representing a person that has directly or indirectly acquired or sold an interest corresponding to at least 5% of the total number of shares of any type or class, to disclose its share ownership or divestment to the CVM and the BOVESPA and the Brazilian OTC Market (or the over-the-counter markets), as the case may be. In addition, a statement containing the required information must be published, unless the CVM waives compliance with this rule. Any subsequent increase or decrease by 5% or more in the ownership of shares of any type or class must be similarly disclosed.
The Companys controlling shareholders, shareholders that appoint members of the Board of Directors or Fiscal Council and members of the Board of Directors, Board of Executive Officers or Fiscal Council must immediately file a statement of any change in their holdings of the Companys shares with the CVM and the Brazilian stock exchanges (or the over-the-counter markets) on which the Companys securities are traded.
Restrictions on Non-Brazilian Holders
Non-Brazilian holders do not face any legal restrictions on the ownership of the Companys common or preferred shares or of ADSs based on the Companys common or preferred shares, and are entitled to all the rights and preferences of such common or preferred shares, as the case may be.
However, the ability to convert dividend payments and proceeds from the sale of common or preferred shares or preemptive rights into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, the registration of the relevant equity investment with the Central Bank of Brazil. For a description of these exchange control restrictions and foreign investment legislation, see Item 3. Key InformationExchange Rates. Nonetheless, any non-Brazilian holder who registers with the CVM in accordance with Resolution No. 2,689 may buy and sell securities on the BOVESPA without obtaining a separate certificate of registration from the Central Bank for each transaction.
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Form and Transfer
The Companys preferred shares and common shares are in book-entry form registered in the name of each shareholder or its nominee. The transfer of the Companys shares is governed by Article 35 of the Brazilian Corporate Law, which provides that a transfer of shares is effected by the Companys transfer agent, Banco Itaú S.A., by an entry made by the transfer agent in its books, upon presentation of valid share transfer instructions to the Company by a transferor or its representative. When preferred or common shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of the Companys transfer agent by a representative of a brokerage firm or the stock exchanges clearing system. The transfer agent also performs all the services of safe keeping of the Companys shares. Transfers of shares by a foreign investor are made in the same manner and are executed on the investors behalf by the investors local agent. If the original investment was registered with the Central Bank pursuant to foreign investment regulations, the foreign investor is also required to amend, if necessary, through its local agent, the certificate of registration to reflect the new ownership.
The BOVESPA operates a central clearing system through CBLC. A holder of the Companys shares may choose, at its discretion, to participate in this system, and all shares that such shareholder elects to be put into the system are deposited in custody with CBLC (through a Brazilian institution that is duly authorized to operate by the Central Bank and maintains a clearing account with CBLC). Shares are subject to the custody of the CBLC are noted as such in the Companys registry of shareholders. Each participating shareholder will, in turn, be registered in the register of beneficial shareholders of the Company that is maintained by CBLC and are treated in the same manner as registered shareholders.
Material Contracts
Naphtha and Gas Oil Purchase and Sale Contract
On June 22, 1978, Petrobras and the Company entered into the Naphtha and Gas Oil Purchase and Sale Contract. The Companys predecessor, Copene, filed an English translation of this contract with the Commission on September 30, 1998 as Exhibit 3.04 to its Registration Statement on Form 20-F. On February 8, 1993, Petrobras and the Company entered into the First Amendment to Naphtha and Gas Oil Purchase and Sale Contract (the First Amendment). The Companys predecessor, Copene, filed an English translation of this amendment with the Commission on September 30, 1998 as Exhibit 3.05 to its Registration Statement on Form 20-F. On February 24, 2003, Petrobras and the Company, with the acknowledgement of OPP Química, entered into the Second Amendment to Naphtha and Gas Oil Purchase and Sale Contract (the Second Amendment). The Second Amendment is attached as exhibit 4.03 to this annual report.
Under the Naphtha and Gas Oil Purchase and Sale Contract, as amended:
| Petrobras agrees to sell and deliver to the Company naphtha and gas oil for use by the Company as raw materials at its basic petrochemicals plants in the Northeastern Complex; | ||
| the contract provides minimum and maximum volumes of naphtha and gas oil to be supplied by Petrobras and purchased by the Company through 1994; | ||
| after 1994, the Company may establish on September 30 of each year the volume that it expects to consume in the following calendar year; | ||
| if the Company requests to purchase more volumes of naphtha and gas oil than projected on an annual basis, Petrobras must use its best efforts to meet this higher demand, but is not required to meet such higher demand; | ||
| if the Company fails to purchase the minimum volumes that it agreed to purchase in any given year, the Company will be required to pay Petrobras damages, and if Petrobras fails to deliver to the Company the minimum volumes that it agreed to deliver in any given year, Petrobras will be required to pay the Company damages; |
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| Petrobras can suspend deliveries under the contract, in whole or in part, or may terminate the contract without penalties if required by the ANP as a result of a national contingency plan that affects the supply of petroleum derivatives in Brazil; and | ||
| the term of the Amended Naphtha and Gas Oil Purchase and Sale Contract is ten years and is automatically renewable. |
Petrobras has provided a R$570 million credit line to the Company to purchase naphtha and gas oil, which is guaranteed by first mortgages (formalized under a Public Deed of Mortgage) on two parcels of property owned by the Company (which property belonged to OPP Química prior to its merger with and into the Company on March 31, 2003).
The Company has not entered into any other material contracts other than those entered into in the ordinary course of business or those disclosed elsewhere within this Form 20-F.
Exchange Controls
There are no restrictions on ownership or voting of Braskems capital stock by individuals or legal entities domiciled outside Brazil.
The right to convert dividend payments and proceeds from the sale of the Companys capital stock into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other provisions, registration of the relevant investment with the Central Bank. Restrictions on the remittance of foreign capital abroad could hinder or prevent Banco Itaú S.A. (the Custodian), as custodian for the Preferred Shares represented by Preferred ADSs or holders who have exchanged Preferred ADSs for Preferred Shares, from converting dividends, distributions or the proceeds from any sale of Preferred Shares into U.S. dollars and remitting such U.S. dollars abroad. Holders of Preferred ADSs could be adversely affected by delays in, or refusal to grant any required government approval for conversions of Brazilian currency payments and remittances abroad in respect of the Preferred Shares underlying the Preferred ADSs. See Risk Factors Exchange Controls and Restrictions on Remittances Abroad May Adversely Affect Holders of ADSs.
Resolution No. 1,927 of the National Monetary Council, which is the Amended and Restated Annex V to Resolution No. 1,289 (the Annex V Regulations), provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The Central Bank and the CVM have approved the issuance of the ADSs under the Annex V Regulations. Accordingly, the proceeds from the sale of the ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment. See Taxation Brazilian Tax Considerations.
A certificate of capital registration has been issued in the name of Citibank, N.A., as Depositary for the Preferred Class A ADRs (the Depositary), and is maintained by the Custodian on behalf of the Depositary. Pursuant to the certificate, the Custodian and the Depositary may convert dividends and other distributions with respect to the Preferred Class A Shares represented by Preferred Class A ADRs into foreign currency and remit the proceeds in foreign currency outside Brazil. In the event that a holder of Preferred Class A ADRs exchanges Preferred Class A ADRs for Preferred Class A Shares, such holder may continue to rely on the Depositarys certificate of capital registration for only five business days following such exchange, and thereafter such holder must seek to obtain its own certificate of capital registration with the Central Bank. Thereafter, unless the Preferred Class A Shares are held pursuant to the Annex IV Regulations of the National Monetary Council by a duly qualified investor, such holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such Preferred Class A Shares, and such holder generally will be subject to less favorable Brazilian tax treatment than a holder of Preferred Class A ADRs. See Taxation Brazilian Tax Considerations.
The Company makes all cash distributions with respect to its shares, including the Preferred Class A Shares, solely in Brazilian currency. Accordingly, exchange rate fluctuations may reduce the U.S. dollar amounts received by the holders of Preferred Class A ADSs on conversion by the Depositary of such distributions into U.S. dollars for payment to holders of Preferred Class A ADSs. Fluctuations in the exchange rate between reais and the U.S. dollar may also reduce the U.S. dollar equivalent of the reais price of the Preferred Class A Shares on the Brazilian stock exchanges. See Item 3. Key InformationExchange Rates .
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Brazilian law provides that, whenever there is a serious imbalance in Brazils balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989 and early 1990, for example, to attempt to conserve Brazils foreign currency reserves, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance that similar measures will not be taken by the Brazilian Government in the future. See Risk Factors Exchange Controls and Restrictions on Remittances Abroad May Adversely Affect Holders of ADSs.
For a description of the foreign exchange markets in Brazil, see Item 3. Key Information Selected Financial Data Exchange Rates.
Taxation
The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of Preferred Class A Shares and Preferred Class A ADRs, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase any such securities. In particular, for U.S. federal income tax purposes, this summary is applicable only to holders that hold Preferred Class A Shares or Preferred Class A ADRs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the Code), and does not address the tax treatment of a holder that may be subject to special tax rules, such as financial institutions, insurance companies, real estate investment trusts, regulated investment companies, grantor trusts, tax-exempt entities, traders or dealers in securities or currencies, persons that will hold Preferred Class A Shares or Preferred Class A ADRs in a hedging transaction or as a position in a straddle or conversion transaction for U.S. federal income tax purposes, persons that have a functional currency other than the U.S. dollar, persons that will hold Preferred Class A Shares or Preferred Class A ADRs as compensation for the performance of services, persons liable for alternative minimum tax or estate and gift tax or persons that own or are treated as owning 10% or more of the voting shares or value of the Company. Prospective purchasers of any of such securities should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase, ownership and disposition of Preferred Class A Shares or Preferred Class A ADRs, including, in particular, the effect of any foreign, state or local tax laws.
The summary is based upon the tax laws of Brazil and the United States and regulations thereunder and administrative and judicial interpretations thereof, in each case as in effect and available on the date hereof, which are subject to change (possibly with retroactive effect), and to differing interpretations. There is at present no income tax treaty between Brazil and the United States. This summary is also based upon the representations of the Depositary and on the assumption that each obligation in the Deposit Agreement relating to the Preferred Class A ADRs and any related documents will be performed in accordance with its terms.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of Preferred Class A Shares or Preferred Class A ADRs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation and, in the case of a holder of Preferred Shares, which has registered its investment in such securities with the Central Bank as a U.S. dollar investment (in each case, a non-Brazilian holder). The following discussion does not specifically address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult his or her own tax advisor concerning the Brazilian tax consequences of an investment in any of such securities.
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Taxation of dividends
Dividends paid with respect to income earned since January 1, 1996, including dividends paid in kind (1) to the Depositary in respect of the Preferred Class A Shares underlying the Preferred Class A ADRs or (2) to a non-Brazilian holder in respect of Preferred Class A Shares, are not subject to any withholding tax in Brazil. The new tax legislation eliminated the then existing 15% withholding tax on dividends paid to companies, resident individuals or non-residents in Brazil. Accordingly, dividends with respect to profits generated on or after January 1, 1996 are not subject to withholding tax in Brazil. Dividends related to profits generated in the years of 1994 and 1995 shall be subject to withholding tax at the rate of 15% at the time of its distribution.
Taxation of gains
Gains realized outside Brazil by a non-Brazilian holder on the disposition of Preferred Class A ADRs to another non-Brazilian holder are not subject to Brazilian tax.
The withdrawal of Preferred Class A Shares in exchange for Preferred Class A ADRs is not subject to Brazilian tax. The deposit of Preferred Class A Shares in exchange for Preferred Class A ADRs is not subject to Brazilian tax provided that the Preferred Shares are registered by the investor or its agent under the provisions of Resolution No. 2,689/00 of the National Monetary Council. In the event the Preferred Class A Shares are not so registered, the deposit of Preferred Class A Shares in exchange for Preferred Class A ADRs may be subject to Brazilian capital gains tax at the rate of 15%. On receipt of the underlying Preferred Shares, a non-Brazilian holder who qualifies under Resoluton No. 2689/00 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described below.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on sales of Preferred Class A Shares that occur abroad or on the proceeds of a redemption of, or a liquidating distribution with respect to, Preferred Class A Shares. As a general rule: (1) non-Brazilian holders are subject to a withholding tax imposed at the rate of 15% on gains realized on sales or exchanges of Preferred Class A Shares that occur in Brazil to or with a resident of Brazil; and (2) at the rate of 20% on gains realized on sales or exchanges in Brazil of Preferred Class A Shares that occur on a Brazilian stock exchange. This general rule is not applicable if such sales are made on a Brazilian stock exchange within five business days of the withdrawal of such Preferred Class A Shares in exchange for Preferred Class A ADRs and the proceeds thereof are remitted abroad within such five-day period or such sales are made under the provisoins of Resoultion No. 2,689/00. In the event that the sale or exchange of Preferred Class A Shares is made on a Brazilian stock exchange and in accordance with the provisions of Resolution 2,689/00 or of Annex V to Resolution No. 1,289/87, any capital gain resulting from such sale or exchange is exempt from withholding income tax in Brazil (except where the sale or exchange was structured to occur when the capital gain resulting therefrom reached an amount certain). The gain realized as a result of a transaction on a Brazilian stock exchange is the difference between the amount in Brazilian currency realized on the sale or exchange and the acquisition cost, without any correction for inflation, of the shares sold. The gain realized as a result of a transaction that occurs other than on a Brazilian stock exchange will be calculated based on the foreign currency amount registered with the Central Bank. There can be no assurance that the current preferential treatment for holders of Preferred Class A ADSs and non-Brazilian holders of Preferred Class A Shares under the provisions of Resolution No. 2,689/00 will continue in the future or that such treatment will not be changed in the future.
Any exercise of preemptive rights relating to the Preferred Class A Shares will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to the Preferred Class A Shares by the Depositary will not be subject to Brazilian taxation.
Interest on equity
Distributions of interest on net worth in respect of the Preferred Class A Shares as an alternative form of payment to shareholders who are either Brazilian residents or non-Brazilian residents, including holders of ADRs, are subject to Brazilian withholding tax at the rate of 15%. Since 1997, the payments are deductible in determining social welfare contributions and income tax payable by the Company as long as the payment of a distribution of interest is approved in the Companys General Meeting, according to the terms of Law 9249/95 and Law 9430/96. The distribution of interest on shareholders equity may be determined by the Board of Directors of the Company alone. No assurance can be given that the Board of Directors of the Company will not determine that future distributions of profits be made by means of interest on shareholders equity instead of by means of dividends.
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Other Brazilian taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of Preferred Class A Shares or Preferred Class A ADRs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of Preferred Class A Shares or Preferred Class A ADRs.
Pursuant to Decree 2,219 of May 2, 1997, the amount in reais resulting from the conversion of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with the investment in the Preferred Class A Shares or Preferred Class A ADRs and those made under the provisions of Resolution No. 2,689/000) is subject to a transaction tax (IOF), although at present the rate of such tax is 0%. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law 8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 25%, but any such increase will only be applicable to transactions occurring after such increase becomes effective.
Pursuant to the Brazilian Constitution (E.C. No. 21/99), the Contribuição Provisória sobre Movimentação Financeira (the CPMF tax) was levied at a rate of 0.38%, in the first twelve months after June 17, 1999, 0.30% from June 2000 until March 17, 2001, and back to 0.38% after that through the present on all fund transfers in connection with financial transactions in Brazil. Payments of dividends on the Preferred Class A Shares (and the Preferred Class A ADSs) are subject to the CPMF tax. However, only the Company is liable for the CPMF tax on its dividends, which are payable without reduction for this tax. There can be no assurance that the Brazilian government will not extend the payment of the CPMF tax beyond that time, or will convert it into a new permanent tax.
Resident in tax haven
The general rules establish that any income or earnings received by a beneficiary resident in a tax haven is subject to income tax at the rate of 25%. A tax haven is a location where no income tax is imposed or where its maximum applicable rate is lower than 20%. Tax benefits granted through the provisions of Resolution No. 2,689/00 are not applicable to residents in a so-called tax haven country. In this case, such investors shall be taxed according to the same rules that are applicable to Brazilian residents. Dividends and capital gains are not affected by tax haven rules. However, the preferential tax treatment applicable to capital gains arising out of sales or exchanges of equity securities that settle through an official stock market and are otherwise effected in accordance with the provisions of Resolution No. 2,689/00 is not applicable if the investor is domiciled or resides in a tax haven.
Registered capital
The amount of an investment in Preferred Class A Shares held by a non-Brazilian holder who qualifies and registers with the CVM under the provisions of Resolution No. 2,689/00 or in ADSs held by the Depositary representing such holder, as the case may be, is eligible for registration with the Central Bank; such registration (the amount so registered is referred to as Registered Capital) allows the remittance outside Brazil of foreign currency, converted at the Commercial Market Rate, acquired with the proceeds of distributions on, and amounts realized with respect to disposition of, such Preferred Class A Shares. The Registered Capital for Preferred Class A Shares purchased in the form of a Preferred Class A ADRs, or purchased in Brazil and deposited with the Depositary in exchange for a Preferred Class A ADS, will be equal to their purchase price (in U.S. dollars) paid by the purchaser. The Registered Capital for Preferred Class A Shares that are withdrawn upon surrender of Preferred Class A ADSs, will be the U.S. dollar equivalent of (1) the average price of the Preferred Class A Shares on the Brazilian stock exchange on which the greatest number of such Preferred Class A Shares was sold on the day of withdrawal, or (2) if no Preferred Class A Shares were sold on such day, the average price of Preferred Shares that were sold in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar value of the Preferred Class A Shares is determined on the basis of the average Commercial Market rates quoted by the Central Bank on such date (or, if the average price of Preferred Class A Shares is determined under clause (2) of the preceding sentence, the average of such average quoted rates on the same fifteen dates used to determine the average price of the Preferred Class A Shares).
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A non-Brazilian holder of Preferred Class A Shares may experience delays in effecting the registration of Registered Capital which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.
U.S. Federal Income Tax Considerations
As used below, a U.S. holder is a beneficial owner of a Preferred Class A Share or Preferred Class A ADS that is, for U.S. federal income tax purposes, (1) an individual citizen or resident of the United States, (2) a partnership or corporation organized under the laws of the United States, any State thereof or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (4) a trust if such trust validly elects to be treated as a United States person for U.S. federal income tax purposes or if (a) a court within the United States is able to exercise primary supervision over its administration and (b) one or more United States persons have the authority to control all of the substantial decisions of such trust or (5) any other person or entity that is subject to U.S. federal income tax on a net income basis in respect of the Preferred Class A Shares or Preferred Class A ADSs (including a nonresident alien individual or foreign corporation whose income with respect to a Preferred Class A Share or Preferred Class A ADS is effectively connected with the conduct of a U.S. trade or business). As used below, a Non-U.S. holder is a beneficial owner of a Preferred Class A or Preferred Class A ADS that is not a U.S. holder.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds Preferred Class A Shares or Preferred Class A ADSs, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner should consult its tax advisor as to its tax consequences.
In general, for U.S. federal income tax purposes, a holder of an ADR evidencing an ADS will be treated as the beneficial owner of the Preferred Class A Shares represented by the applicable ADS. The U.S. Treasury Department has expressed concern that depositaries for ADRs, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders of such receipts or shares. Accordingly, the analysis regarding the availability of a United States foreign tax credit for Brazilian taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of dividends
Subject to the discussion below under Passive Foreign Investment Company Rules, in general, a distribution made with respect to a Preferred Class A Share or Preferred Class A ADS (which for this purpose will include distributions of interest on equity) will, to the extent made from the current or accumulated earnings and profits of the Company, as determined under U.S. federal income tax principles, constitute a dividend to a U.S. holder for U.S. federal income tax purposes. Subject to the discussion below under Passive Foreign Investment Company Rules, with respect to dividends received in taxable years after December 31, 2002 with respect to Preferred Class A Shares that are represented by Preferred Class A ADSs, individuals who are U.S. holders will be taxed on such distributions at the lower rates applicable to long-term capital gains. Subject to the discussion below under Passive Foreign Investment Rules, if a distribution exceeds the amount of the Companys current and accumulated earnings and profits, it will be treated as a non-taxable return of capital to the extent of the U.S. holders tax basis in the Preferred Class A Share or Preferred Class A ADS on which it is paid and thereafter as capital gain. The Company does not
140
maintain calculations of its earnings and profits under U.S. federal income tax principles. As discussed below, the term dividend means a distribution that constitutes a dividend for U.S. federal income tax purposes.
The gross amount of any dividend paid (which will include any amounts withheld in respect of Brazilian taxes) with respect to a Preferred Class A Share or Preferred Class A ADS will be subject to U.S. federal income taxation as foreign source dividend income, which may be relevant in calculating a U.S. holders foreign tax credit limitation, and will not be eligible for the dividends received deduction generally allowed to U.S. corporations. A dividend paid in Brazilian currency will be includible in the income of a U.S. holder at its value in U.S. dollars calculated by reference to the prevailing spot market exchange rate in effect on the day it is received by the U.S. holder or, in the case of a dividend received in respect of Preferred Class A ADSs, on the date the dividend is received by the Depositary, whether or not the dividend is converted into U.S. dollars. Any gain or loss realized on a subsequent conversion or other disposition of the Brazilian currency will be treated as U.S. source ordinary income or loss. In the case of a U.S. holder that is not a United States person, the currency gain or loss will be U.S. source income only if the currency is held by a qualified business unit of the U.S. holder in the United States.
Subject to generally applicable limitations under U.S. federal income tax law, the Brazilian withholding tax will be treated as a foreign income tax eligible for credit against a U.S. holders U.S. federal income tax liability. For purposes of the computation of the foreign tax credit limitation separately for specific categories of income, any dividends generally will constitute foreign source passive income or, in the case of certain holders, financial services income. Alternatively, a U.S. holder may elect not to claim a credit for any of its foreign taxes and deduct all of those taxes in computing taxable income.
Subject to the discussion below under Information Reporting and Backup Withholding, a Non-U.S. Holder of Preferred Class A Shares or Preferred Class A ADSs generally will not be subject to U.S. federal income or withholding tax on dividends received on such shares or ADSs, unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.
Sale or exchange of shares or ADSs
A deposit or withdrawal of Preferred Class A Shares by a holder in exchange for a Preferred Class A ADS that represents such shares will not result in the realization of gain or loss for U.S. federal income tax purposes. A U.S. holder generally will recognize capital gain or loss upon a sale or other exchange of a Preferred Class A Share or Preferred Class A ADS held by the U.S. holder or the Depositary in an amount equal to the difference between the U.S. holders adjusted basis in the Preferred Class A Share or Preferred Class A ADS (determined in U.S. dollars) and the U.S. dollar amount realized on the sale or other exchange. If a Brazilian tax is withheld on the sale or exchange of a share, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale or exchange before deduction of the Brazilian tax. In the case of a non-corporate U.S. holder, the maximum marginal U.S. federal income tax rate applicable to capital gain will be lower than the maximum marginal U.S. federal income tax rate applicable to ordinary income (other than, in the case of taxable years beginning after December 31, 2002, certain dividends) if such holders holding period for such Preferred Class A Share or Preferred Class A ADS exceeds one year. Capital gain or loss, if any, realized by a U.S. holder on the sale or exchange of a Preferred Class A Share or Preferred Class A ADS generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of a disposition of a Preferred Class A Share that is subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in exchange for a Preferred Class A ADS or a Preferred Class A Share that is not registered under the Annex IV regulations, on which a Brazilian capital gains tax is imposed) (See Brazilian Tax Considerations Taxation of Gains), the U.S. holder may not be able to use the foreign tax credit for that Brazilian tax unless it can apply the credit against U.S. tax payable on other income from foreign sources in the appropriate income category, or alternatively, it may take a deduction for the Brazilian tax if it elects to deduct all of its foreign income taxes. In general, any loss will be sourced to the taxpayers residence (as specially defined in Section 865(g) of the Code), subject to certain exceptions that can treat a loss recognized by a U.S. resident in whole or in part as a foreign source loss. The deductibility of capital losses is subject to limitations. The initial tax basis of Preferred Class A Shares or Preferred Class A ADSs to a U.S. holder will be the U.S. dollar value of the real denominated purchase price determined on the date of purchase. If the Preferred Class A Shares or Preferred Class A ADSs are treated as traded on an established securities market, a cash basis U.S. holder, or, if it elects, an accrual basis U.S. holder, will determine the dollar value of the cost of such Preferred Class A Shares or
141
Preferred Class A ADSs by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. The conversion of U.S. dollars to reais and the immediate use of that currency to purchase Preferred Class A Shares or Preferred Class A ADSs generally will not result in taxable gain or loss for a U.S. holder.
With respect to the sale or exchange of Preferred Class A Shares or Preferred Class A ADSs, the amount realized generally will be the U.S. dollar value of the payment received determined on (1) the date of receipt of payment in the case of a cash basis U.S. holder and (2) the date of disposition in the case of an accrual basis U.S. holder. If the Preferred Class A Shares or Preferred Class A ADSs are treated as traded on an established securities market, a cash basis taxpayer, or, if it elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
Subject to the discussion below under Information Reporting and Backup Withholding, a Non-U.S. holder of Preferred Class A Shares or Preferred Class A ADSs generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such shares or ADSs unless (1) such gain is effectively connected with the conduct by such Non-U.S. holder of a trade or business in the United States or (2) in the case of any gain realized by an individual Non-U.S. holder, such holder is present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.
Passive foreign investment company rules
Based upon the nature of its current and projected income, assets and activities, the Company does not expect the Preferred Class A Shares or Preferred Class A ADSs to be considered shares of a passive foreign investment company (PFIC) for U.S. federal income tax purposes for the 2002 taxable year. In general, a foreign corporation is a PFIC if, after applying certain look-through rules, at least 75% of its gross income for the taxable year (or, in general, a preceding taxable year in which the taxpayer owned stock in the corporation) is passive income or if at least 50% of the average value of its gross assets for the taxable year (or, in general, a preceding year in which the taxpayer owned stock in the corporation) produce passive income or are held for the production of passive income. In general, passive income for this purpose includes dividends, interest, rents, royalties, and gains from commodities and securities transactions. The determination of whether the Preferred Class A Shares or Preferred Class A ADSs constitute shares of a PFIC is a factual determination made annually, and therefore the Companys failure to constitute a PFIC at one time is subject to change. The Companys status in future years will depend on its assets and activities in those years. The Company has no reason to believe that its assets or activities will change in a manner that would cause it to be classified as a PFIC, but there can be no assurance that the Company will not be considered a PFIC for any taxable year. Subject to certain exceptions, once a U.S. holders Preferred Class A Shares or Preferred Class A ADSs are treated as shares of a PFIC, they remain shares in a PFIC.
If the Company is treated as a PFIC, contrary to the discussion in Taxation of Dividends and Sale or Exchange of Shares or ADSs above, a U.S. holder of Preferred Class A Shares or Preferred Class A ADSs generally would be subject to imputed interest charges and other disadvantageous tax treatment (including, with respect to dividends received in taxable years after December 31, 2002 with respect to Preferred Class A Shares that are represented by Preferred Class A ADSs, the denial of the taxation of such dividends at the lower rates applicable to long-term capital gains, as discussed above under Taxation of Dividends) with respect to any gain from the sale or exchange of, and certain distributions with respect to, the Preferred Class A Shares or Preferred Class A ADSs.
If the Company is treated as a PFIC, a U.S. holder of Preferred Class A Shares or Preferred Class A ADSs could make a variety of elections that may alleviate the tax consequences referred to above, and one of these elections may be made retroactively. However, it is expected that the conditions necessary for making certain of such elections will not apply in the case of the Preferred Class A Shares or Preferred Class A ADSs. U.S. holders should consult their own tax advisors regarding the tax consequences that would arise if the Company is treated as a PFIC.
Information reporting and backup withholding
United States backup withholding tax and information reporting requirements generally apply to certain payments to certain noncorporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, Preferred Class A Shares or Preferred Class A ADSs made within the United States to a holder of Preferred Class A Shares or Preferred Class A ADSs, other than an exempt recipient, including a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons. A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, Preferred Class A Shares or Preferred Class A ADSs within the United States to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate was 30% for the year 2002 and is 28% for years 2003 through 2010.
142
In the case of such payments made within the United States to a foreign simple trust, a foreign grantor trust or a foreign partnership, other than payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that qualifies as a withholding foreign trust or a withholding foreign partnership within the meaning of certain U.S. Treasury Regulations and payments to a foreign simple trust, a foreign grantor trust or a foreign partnership that are effectively connected with the conduct of a trade or business in the United States, the beneficiaries of the foreign simple trust, the persons treated as the owners of the foreign grantor trust or the partners of the foreign partnership, as the case may be, will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements. Moreover, a payor may rely on a certification provided by a payee that is not a United States person only if such payor does not have actual knowledge or a reason to know that any information or certification stated in such certificate is incorrect.
The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of Preferred Class A Shares or Preferred Class A ADSs. Prospective purchasers should consult their tax advisors concerning the tax consequences of their particular situations.
Documents on Display
Statements contained in this annual report regarding the contents of any contract or other document are not necessarily complete, and where the contract or other document is an exhibit to this annual report, each of these statements is qualified in all respects by the provisions of the actual contract or other documents.
The Company is subject to the information requirements of the Exchange Act, applicable to a foreign private issuer, and accordingly, the Company files or furnishes reports, information statements and other information with the Commission. These reports and other information may be inspected and copied at the public reference room maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of this material also may be obtained by mail from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Electronic filings made through the Electronic Data Gathering, Analysis and Retrieval System (EDGAR) are also publicly available through the Commissions web site on the Internet at http:\\www.sec.gov. These reports and other information also may be inspected and copied at the offices of The New York Stock Exchange, 20 Broad Street, New York, New York 10005.
As a foreign private issuer, the Company is exempt from the proxy requirements of Section 14 of the Exchange Act and from the reporting and short swing profit recovery provisions of Section 16 of the Exchange Act, although the rules of the New York Stock Exchange may require the Company to solicit proxies from its shareholders under some circumstances.
The Company also files financial statements and other periodic reports with the CVM.
Copies of the Companys annual reports on Form 20-F and documents referred to in this annual report and the Companys bylaws are also available for inspection upon request at the Companys headquarters at: Av. Nações Unidas, 4777, São Paulo, SP - CEP 05477-000 Brazil.
143
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Braskem is exposed to a number of market risks arising from its normal business activities. Such market risks principally involve the possibility that changes in commodity prices, currency exchange rates or interest rates will adversely affect the value of its financial assets and liabilities or future cash flows and earnings. Market risk is the potential loss arising from adverse changes in market rate and prices. Braskem enters 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 interest rates. Braskem has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial activities.
Braskem developed a risk management policy as from December 31, 2001 with the following objectives: maintain coverage of principal and interest settlements (consolidated) maturing within 12 months for, at least (i) 60% of Braskems total U.S.-dollar indebtedness that is related to exports (trade finance), excluding Advances on Currency Contracts (ACCs) with a remaining maturity of up to 6 months and Advances on Export Contracts (ACEs) and (ii) 75% of the total debt in U.S. dollars unrelated to exports (non-trade finance). Compliance with this policy varies based upon applicable market conditions, credit availability and cash balances.
To further mitigate its exposure to exchange rate risk, the Company tries, when possible, to borrow for its working capital needs using trade finance loans, which funding is generally available at a lower cost because it is linked to the Companys U.S. dollar exports. The Company cannot assure, however, that, in the future, U.S. dollar revenues that it generates from exports will be in an amount sufficient to cover its U.S. dollar trade finance liabilities.
On December 31, 2002, the Company had swap contracts for foreign currency and interest, with a total notional amount of approximately U.S.$155.8 million. These instruments are intended to reduce the impacts of an eventual devaluation of the real and an increase in international interest rates on U.S. dollar liabilities. In addition, Braskem has U.S. dollar denominated cash equivalents and time deposits, which partially offset the effects of devaluation related to the U.S. dollar debt to the extent of the dollar denominated cash and cash equivalents.
The Companys derivative instruments do not qualify for deferral, hedge, accrual or settlement accounting and are marked-to-market value, with the resulting gains and losses reflected in the statement of operations within financial income and expenses, respectively. See Note 16 to the Consolidated Financial Statements for a discussion of the Companys accounting policies and information on derivative financial instruments.
Interest Rate Risk
The Companys variable interest rate exposure is primarily subject to the variations of (1) LIBOR for U.S. dollar-denominated borrowings and (2) long-term interest rates (the TJLP, which includes an inflation factor and is determined quarterly by the Central Bank), short-term variable domestic interbank interest rates (CDI) and the IGP-M for reais -denominated borrowings. The improvement of economic conditions in Brazil during 2002 due to political uncertainty surrounding Brazils presidential elections resulted in a gradual increase of the interest rates in the fourth quarter, with (1) the short-term domestic CDI rate ranging from 19.05% per annum in January 2002 to 24.09% per annum in December 2002 (average of 19.1% per annum), (2) the TJLP at 10% per annum in January 2002 before decreasing in April through June 2002 and then returning to 10% per annum through December 2002 (averaging 9.88% per annum in 2002) and (3) the IGP-M at approximately 25.3% in 2002.
The table below provides information
about the Companys significant interest-rate sensitive
instruments:
Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(in millions of U.S. dollars)
As of December 31, 2002
Expected Maturity Date
Fair
2003
2004
2005
2006
2007
Thereafter
Total
Value
96.8
96.8
96.8
144
Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity
Average Interest Rate
(in millions of U.S. dollars)
As of December 31, 2002
Expected Maturity Date
Fair
2003
2004
2005
2006
2007
Thereafter
Total
Value
9
%
9
%
29.2
29.2
29.2
27.5
%
27.5
%
169.9
169.9
169.9
106.8
%
106.8
%
7.2
7.2
7.2
4.9
%
4.9
%
303.0
303.0
303.0
220.6
150.5
5.2
5.2
400.4
0.3
782.2
782.2
6.8
%
11.4
%
0.5
%
0.5
%
10
%
6.9
%
9.3
%
150.0
176.8
137.0
68.1
3.7
535.6
535.6
5.9
%
5.9
%
6.1
%
6.5
%
4.9
%
6
%
22.3
16.5
11.3
57.7
0.9
108.7
108.7
3.9
%
3.9
%
3.8
%
3.9
%
3.5
%
3.9
%
15.4
15.1
4.4
34.9
34.9
5.3
%
4.5
%
4.5
%
4.8
%
4.7
4.6
0.6
0.3
0.2
10.4
10.4
413.0
363.5
158.5
131.3
405.2
0.3
1,471.8
1,471.8
2.5
60.9
63.4
63.4
5.3
%
13.3
%
12.9
%
6.6
93.8
100.4
100.4
118.3
%
118.3
%
118.3
%
182.1
182.1
182.1
5
%
5
%
9.1
154.7
182.1
345.9
345.9
136.3
28.8
165.1
165.1
8.8
%
1.5
%
7.6
%
1.7
1.7
1.7
99
%
99
%
138.0
28.8
166.8
166.8
145
Foreign Currency Exchange Rate Risk
Braskem uses the Brazilian real as its functional currency. Its liabilities that are exposed to foreign currency exchange rate risk are denominated in U.S. dollars. To partially offset its risk of devaluation of the Brazilian currency against the dollar, Braskem maintains several derivative contracts. Because the Company borrows in the international markets to support its operations and investments, it is exposed to market risks from changes in foreign exchange and interest rates. Export sales, which generate receivables payable in U.S. dollars, do not cover all of the Companys U.S. dollar liabilities.
From March 1995 through January 1999, the real gradually devalued against the U.S. dollar. In January 1999, the Central Bank abolished the band system and 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 interbank market and has fluctuated considerably. From December 31, 1998 through April 30, 2003, the U.S. dollar appreciated by approximately 139.1% against the real . The Central Bank has only intervened occasionally to control unstable movements in the foreign exchange rate. The Company cannot predict, however, whether the Central Bank will continue to let the real float freely, or if in the future, the real will remain at its present level or devalue further.
The
table below provides information about the Companys significant
foreign currency exposure:
Foreign Currency Exchange Rate Sensitivity Principal (Notional) Amount by
Expected Maturity
(in millions of U.S. dollars)
As of December 31, 2002
Expected Maturity Date
Fair
2003
2004
2005
2006
2007
Thereafter
Total
Value
96.8
96.8
96.8
206.2
206.2
206.2
303.0
303.0
303.0
370.6
327.3
142.2
73.3
404.1
0.3
1,317.8
1,317.8
42.4
36.2
16.3
58.0
1.1
154.0
154.0
413.0
363.5
158.5
131.3
405.2
0.3
1,471.8
1,471.8
9.1
154.7
182.1
345.9
345.9
9.1
154.7
182.1
345.9
345.9
136.3
28.8
165.1
165.1
1.7
1.7
1.7
138.0
28.8
166.8
166.8
146
\
The table below provides information
about the Companys derivative instruments:
As of December 31, 2002
Expected Maturity Date
Fair
2003
2004
2005
2006
2007
Thereafter
Total
Value
20.3
20.3
3.4
%
3.4
%
103.8
%
103.8
%
121.2
14.3
135.5
(1.5
)
LIBOR+0%
LIBOR+0%
LIBOR+0%
4.82
%
4.87
%
4.83
%
47.4
47.4
0.4
3.5
3.5
75.6
75.6
(0.3
)
3.3
3.3
28.2
28.2
0.2
3.9
3.9
31.2
31.2
(4.7
)
3.5
3.5
The Companys foreign currency exposure gives rise to market risks associated with exchange rate movements against the U.S. dollar. Foreign currency-denominated liabilities at December 31, 2002 consisted of debt denominated in U.S. dollars. The Companys foreign currency exposure (short-term debt and long-term debt, including the current portion) was U.S.$1,414.6 million at December 31, 2002 compared to U.S.$1,583.9 million at December 31, 2001. This foreign currency exposure is represented by debt in the form of notes, pre-export finance facilities and working capital loans. The Companys derivative instruments partially protect exposure arising from the U.S. dollar-denominated debt.
Commodity Prices
Although the majority of the Companys revenues are in reais , the Company does not currently hedge its exposure to changes in the prices of naphtha, its principal raw material (which are linked to ARA quotations and the U.S. dollar- real exchange rate), in part because a portion of its sales in 2002 were exports payable in foreign currencies and the prices of its polyethylene, polypropylene and PVC products generally reflect changes in the international market prices of these 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 and the time that the Company can effectively pass on such increased cost in reais to its customers in Brazil. Accordingly, if the real depreciates precipitously against the U.S. dollar in the future, the Company may not immediately be able to pass on all of the corresponding increases in its naphtha costs to its customers in Brazil, which could materially adversely affect its results of operations and financial condition. See Item 3. Key InformationRisk Factors-Risks Relating to the CompanyThe Company may be adversely affected by high naphtha costs.
The discussion regarding Braskems risk management activities includes forward looking statements that involve risks and uncertainties. Actual results could differ materially from those projected due to actual developments in the global financial markets. The methods used by Braskem to analyze risks discussed above should not be considered projections of future events or losses. See Cautionary Statement with Respect to Forward-Looking Statements. Braskem also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk and legal risk, and are not represented in the above analyses.
147
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
148
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
During September 2002, the Company modified its bylaws in order to include a tag-along right for all of the Companys shareholders, including its non-voting preferred shareholders. The Companys bylaws provide that if the controlling shareholder(s) sell(s), assign(s), or otherwise transfer(s) control of the Company at any time, the acquiring party(ies) must agree in writing to make a public tender offer for the remaining shares of the Company at the same price per share paid to the controlling shareholder(s). The public tender offer must be conducted within 30 days of the closing of the sale, assignment or transfer to the acquiring party(ies) of the shares owned by the controlling shareholder(s).
The acquiring party(ies) may disregard the tag-along rights of Braskems minority shareholders only if the transfer of control of the Company occurs as the result of a court ruling or of a final decision by a Brazilian regulatory authority, including, without limitation, CADE, that requires the controlling shareholder(s) of the Company to sell, transfer or exchange all or part of their shares in the Company.
ITEM 15. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Companys financial reports and to other members of the Companys senior management and the Board of Directors.
Within the 90 days prior to the date of filing this Annual Report on Form 20-F, the Company, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company (including its consolidated subsidiaries) in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commissions rules and forms. The Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.
In designing and evaluating the Companys disclosure controls and procedures, the Companys management, including its Chief Executive Officer and its Chief Financial Officer, recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Companys management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
There have been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, nor were any corrective actions required with regard to significant deficiencies and material weaknesses in the Companys internal controls.
149
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company notes that pursuant to Exchange Act Release No. 34-47235, the Company is not required to comply with Item 16A of Form 20-F until the Company files its annual report for the fiscal year ending on or after July 15, 2003. The Company is currently evaluating its compliance with the requirements of Item 16A and expects that it will be able to make the disclosures required by Item 16A not later than the date on which the Company files its annual report for the fiscal year ending on or after July 15, 2003.
ITEM 16B. CODE OF ETHICS
The Company has adopted a code of ethics that applies to members of its Board of Directors, Fiscal Council and Board of Executive Officers, as well as to its other employees, and is posted on the Companys website at http://www.braskem.com.br. None of the information on the Companys website is incorporated into or otherwise made part of this annual report on Form 20-F.
150
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of responding to this item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed as part of this Registration Statement.
ITEM 19. EXHIBITS
(a)
Financial Statements
Financial Statements of Braskem S.A.
Report of PricewaterhouseCoopers Auditores Independentes
F-2
Report of Deloitte Touche Tohmatsu
F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001
F-6
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000
F-8
Consolidated Statements of Changes in Shareholders Equity for the years ended
December 31, 2002, 2001 and 2000
F-9
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
F-12
Notes to the Consolidated Financial Statements
F-14
151
(b)
List of Exhibits
1.01
Bylaws, as amended on April 29, 2003.
2.01
Deposit Agreement, dated as of November 24, 1998, among the Company,
Citibank, N.A. and all holders and beneficial owners of ADSs evidenced by
ADRs issued thereunder.
2.02
The total amount of long-term debt securities of the Company and its
subsidiaries under any one instrument does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated basis. The
Company agrees to furnish copies of any or all such instruments to the
Commission upon request.
3.01
Shareholders Agreement, dated as of July 27, 2001, between Odebrecht
Química and Petroquímica da Bahia S.A. (English translation)
3.02
First Amendment to Shareholders Agreement, dated as of July 29, 2002,
between Odebrecht Química and Petroquímica da Bahia S.A. (English
translation)
3.03
Memorandum of Understanding Regarding Shareholders Agreement, dated as of
July 3, 2001, among Odebrecht Química S.A., Petroquímica da Bahia S.A. and
Petrobras Química S.A. (English translation)
3.04
First Amendment to Memorandum of Understanding Regarding Shareholders
Agreement, dated July 26, 2002, among Odebrecht S.A and Petrobras Química
S.A., acknowledged by Petroquímica da Bahia S.A., Nordeste Química S.A.
and the Company. (English translation)
3.05
Memorandum of Understandings Regarding Shareholders Agreement, dated July
20, 2001, among Odebrecht Química S.A., Petroquímica da Bahia S.A.,
PetrosFundação Petrobras de Seguridade Social and PreviCaixa de
Previdência dos Funcionários do Banco do Brasil. (English translation)
4.01
Naphtha and Gas Oil Purchase and Sale Contract, dated as of June 22,
1978, between Petróleo Brasileiro S.A. and the Company (incorporated by
reference to Exhibit 3.04 to Form 20-FR of Copene Petroquímica do Nordeste
S.A. filed on September 30, 1998).
4.02
First Amendment to Naphtha and Gas Oil Purchase and Sale Contract, dated
as of February 8, 1993, to Naphtha and Gas Oil Purchase and Sale Contract
between Petróleo Brasileiro S.A. and the Company (incorporated by
reference to Exhibit 3.05 to Form 20-FR of Copene Petroquímica do Nordeste
S.A. filed on September 30, 1998).
4.03
Second Amendment to Naphtha and Gas Oil Purchase and Sale Contract, dated
as of February 24, 2003, between Petróleo Brasileiro S.A. and the Company.
(English translation)
4.04
Protocol and Justification of the Operation of Incorporation of OPP
Produtos Petroquímicos S.A. by the Company, dated July 26, 2002. (English
translation)
4.05
Protocol and Justification of the Operation of Incorporation of 52114
Participações S.A. by the Company, dated July 26, 2002. (English
translation)
4.06
Protocol and Justification of the Operation of Incorporation of
Nitrocarbono S.A. by the Company, dated March 10, 2003. (English
translation)
6.01
Statement regarding computation of earnings per share.
8.01
List of subsidiaries.
152
10.01
Certification of Principal Executive Officer, dated June 30, 2003
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
1
10.02
Certification of Principal Financial Officer, dated June 30, 2003
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
1
1
A signed original of this written statement required by Section 906 of
the Sarbanes-Oxley Act of 2002 has been provided by Braskem S.A. and will
be retained by Braskem S.A. and furnished to the Securities and Exchange
Commission or its staff upon request.
153
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report to be signed on its behalf.
Date: June 30, 2003 | ||
BRASKEM S.A. | ||
/s/José Carlos Grubisich Filho | ||
|
||
José Carlos Grubisich Filho | ||
Chief Executive Officer |
154
SECTION 302 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
I, José Carlos Grubisich Filho, Chief Executive Officer of Braskem, certify
that:
155
1.
I have reviewed this annual report on Form 20-F of Braskem S.A.;
2.
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a.
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b.
evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and
c.
presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
a.
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
b.
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6.
The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 30, 2003
/s/José Carlos Grubisich Filho
José Carlos Grubisich Filho
Chief Executive Officer
Table of Contents
SECTION 302 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
I, Paul Elie Altit, Chief Financial Officer of Braskem S.A., certify that:
156
F-1
F-2
F-3
INDEPENDENT AUDITORS REPORT
To the shareholders of Braskem S.A. (formerly Copene Petroquímica do Nordeste
S.A.)
F-4
Deloitte Touche Tohmatsu
Salvador, Brazil
F-5
F-6
The accompanying notes are an integral part of these consolidated financial statements.
F-7
The accompanying notes are an integral part of these consolidated financial statements.
F-8
F-9
F-10
The accompanying notes are an integral part of these consolidated financial statements.
F-11
F-12
The accompanying notes are an integral part of these consolidated financial statements.
F-13
F-14
F-15
F-16
\
F-17
F-18
F-19
F-20
F-21
F-22
F-23
F-24
F-25
F-26
F-27
F-28
F-29
F-30
F-31
F-32
F-33
F-34
F-35
F-36
F-37
F-38
F-39
F-40
F-41
F-42
F-43
F-44
F-45
F-46
F-47
F-48
F-49
F-50
F-51
F-52
In addition, the caustic soda and EDC plants in Bahia and Alagoas and the DMT
and caprolactam plants in Bahia are eligible for partial tax holidays as
follows:
F-53
F-54
F-55
F-56
F-57
F-58
F-59
F-60
F-61
F-62
F-63
F-64
F-65
F-66
F-67
F-68
F-69
F-70
F-71
1.
I have reviewed this annual report on Form 20-F of Braskem S.A.;
2.
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4.
The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a.
designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b.
evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and
c.
presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5.
The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
a.
all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
b.
any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and
6.
The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 30, 2003
/s/Paul Elie Altit
Paul Elie Altit
Chief Financial Officer
Table of Contents
Braskem S.A.
Consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
and Report of Independent Accountants
Table of Contents
Report of Independent Accountants
To the Board of Directors and Shareholders
Braskem S.A.
1
We have audited the accompanying consolidated balance sheet of Braskem
S.A. and its subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, of changes in shareholders equity
and of cash flows for the year then ended. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
2
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
3
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Braskem S.A. and its subsidiaries at December 31, 2002 and the results of
their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United
States of America.
4
We previously audited and reported on the consolidated balance sheet of
OPP Produtos Petroquímicos S.A. and subsidiaries as of December 31, 2001
and the related consolidated statements of operations and of cash flows
for the period from July 25 to December 31, 2001, prior to their
restatement for the 2002 merger with Braskem S.A., which was accounted for
in a manner similar to a pooling of interests. The contribution of OPP
Produtos Petroquímicos S.A. and subsidiaries to net sales and loss
represented 26 percent and 74 percent of the respective restated totals.
Separate financial statements of the other companies included in the 2001
restated consolidated balance sheet and statements of operations and of
cash flows were audited and reported on separately by other auditors. We
also audited the combination of the accompanying consolidated balance
sheet and statements of operations and of cash flows for the year ended
December 31, 2001, after restatement for the merger of OPP Produtos
Petroquímicos S.A. with Braskem S.A.; in our opinion, such consolidated
statements have been properly combined on the basis described in Note
20(a)
of the notes to consolidated financial statements.
Table of Contents
5
As discussed in Note 2(s) to the consolidated financial statements, the
Company discontinued the amortization of goodwill in 2002, in connection
with the implementation of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.
6
As described in Note 5 to the consolidated financial statements, the
indirect subsidiary OPP Química S.A., based on the decision of the
Brazilian Supreme Court, recorded an excise tax gain of US$284,509,000 in
results for the year ended December 31, 2002.
7
As described in Notes 11(e) and 13(b) to the consolidated financial
statements, the Company and certain subsidiaries are involved in
significant legal proceedings involving exemption from the Brazilian
Social Contribution tax and a wage and salary adjustment clause in a
collective labor agreement with the chemical workers union in the state of
Bahia. Based on the opinions of legal counsel and management that losses
in these cases are not probable, no provision for losses has been
established for these proceedings.
8
As described in Note 1 to the consolidated financial statements, the
Company has been involved in a broad corporate reorganization process, as
part of the overall reorganization of the Brazilian petrochemical
industry. The Company and its subsidiaries may undergo further significant
economic and/or corporate changes during this process.
PricewaterhouseCoopers
Salvador, Brazil
Auditores Independentes
June 20, 2003
Table of Contents
1.
We have audited the balance sheet of Copene Petroquímica do Nordeste
S.A. and subsidiaries (the Company) as of December 31, 2001, and the
related statements of income, stockholders equity, and cash flows for
each of the two years then ended. The financial statements as of December
31, 2001 and for the year then ended are not presented herein. These
financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on the financial statements
based on our audits.
2.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
3.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Copene
- Petroquímica do Nordeste S.A. and subsidiaries as of December 31, 2001,
and the results of their operations and their cash flows for the two years
in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
4.
As mentioned in Note 11(e), the Company is discussing the
unconstitutionality of the Social Contribution Tax on profits with Federal
Tax Authorities at the Brazilian Supreme Court.
Table of Contents
5.
As discussed in Note 20(b), the accompanying financial statements as of
December 31, 2001 and for the year then ended have been restated to record
the portions of the Northeast Assets that were purchased by the Company
from the Odebrecht Group at their carry over basis.
Auditores Independentes
June 3, 2002 (except for the restatement described in Note 20(b), for which the
date is June 20, 2003)
Table of Contents
Braskem S.A.
Consolidated balance sheet
Expressed in thousands of U.S. dollars
December 31,
Assets
Note
2002
2001
35,516
109,161
137,960
38,713
239,710
205,544
3
615
95,909
5
182,699
90,685
7
18,690
4
230,603
268,822
36,032
37,770
8
27,854
15,834
44,148
906,830
909,442
6
250,518
404,442
1
(c-iii)
120,084
184,887
7
1,183,651
1,758,554
3
8,341
20,854
17,692
22,490
47,302
41,024
37,456
28,416
11
(c)
61,208
79,753
10,847
15,953
5
191,428
75,911
4
22,553
8,248
19,622
26,575
28,825
64,954
823
21,995
25,882
1,892
39,748
473,871
445,921
2,934,954
3,703,246
Table of Contents
Braskem S.A.
Consolidated balance sheet
Expressed in thousands of U.S. dollars
(continued)
December 31,
Liabilities and shareholders' equity
Note
2002
2001
452,335
248,912
22,709
57,733
16
6,370
12,542
11
1,582
53
110,893
21,033
8
303,074
249,894
9
9,071
11,308
8
413,039
578,776
761
3
75,173
300,257
78,039
28,488
39,161
1,501,534
1,519,669
8
1,058,724
1,216,047
9
336,859
204,118
3
1,863
16,522
12
10,502
10
209,375
194,869
11
16,914
23,766
51,966
9,194
1,686,203
1,664,516
13
14
109,602
323,612
15
3,264,000 thousand shares authorized; class A shares -
2,160,764 thousand issued and 2,106, 144 thousand outstanding at
December 31,2002 (2001 - 1,134,265 thousand issued and 1,079,645
thousand outstanding); class B shares - 11,458 thousand shares issued
and outstanding at December 31, 2002 and 2001
314,319
302,004
1,836,000 thousand shares authorized;
1,226,091 thousand shares issued and outstanding at December 31, 2002,
646,693 thousand shares issued and outstanding at December 31, 2001
153,926
146,976
(15,412
)
(15,412
)
(609,232
)
135,750
202,341
350,032
(408,327
)
(723,901
)
(362,385
)
195,449
2,934,954
3,703,246
Table of Contents
Braskem S.A.
Consolidated statement of operations
Expressed in thousands of U.S. dollars, except earnings (losses) per thousand shares
Year ended December 31,
Note
2002
2001
2000
2,411,127
2,060,136
1,718,500
18
536,375
198,752
167,665
2,947,502
2,258,888
1,886,165
(556,386
)
(486,997
)
(331,065
)
2,391,116
1,771,891
1,555,100
(1,900,987
)
(1,447,207
)
(1,252,357
)
490,129
324,684
302,743
(252,475
)
(80,632
)
(77,035
)
5
284,509
522,163
244,052
225,708
167,854
80,448
94,869
(1,159,842
)
(294,593
)
(134,000
)
(57,281
)
(26,312
)
(2,494
)
(527,106
)
3,595
184,083
11
(25,460
)
13,872
(303
)
5,038
460
(2,634
)
(547,528
)
17,927
181,146
6
22,467
(6,090
)
6,889
14
65,024
(63,848
)
15
(460,037
)
(52,011
)
188,050
1,767
(460,037
)
(50,244
)
188,050
(383.74
)
(59.00
)
106.10
2.00
19
(383.74
)
(57.00
)
106.10
Table of Contents
Braskem S.A.
Consolidated statement of changes in shareholders equity (deficit)
Expressed in thousands of shares and thousands of U.S. dollars, except per share amounts
Year ended December 31,
2002
2001
2000
Shares
US$
Shares
US$
Shares
US$
2,083,457
284,795
1,134,265
166,962
1,134,265
166,898
64
2,083,457
284,795
1,134,265
166,962
1,134,265
166,962
77,307
12,315
949,192
117,833
2,160,764
297,110
2,083,457
284,795
1,134,265
166,962
11,458
17,209
11,458
17,209
11,458
17,209
2,172,222
314,319
2,094,915
302,004
1,145,723
184,171
1,182,456
146,976
646,693
80,465
646,693
80,465
43,635
6,950
535,763
66,511
1,226,091
153,926
1,182,456
146,976
646,693
80,465
(54,620
)
(15,412
)
(54,620
)
(15,412
)
(55,520
)
(15,665
)
900
253
(54,620
)
(15,412
)
(54,620
)
(15,412
)
(54,620
)
(15,412
)
Table of Contents
Braskem S.A.
Consolidated statement of changes in shareholders equity (deficit)
Expressed in thousands of U.S. dollars, except per share amounts
(continued)
Year ended December 31,
2002
2001
2000
42,098
49,956
48,241
(42,098
)
(7,858
)
1,715
42,098
49,956
307,934
350,593
342,183
(105,593
)
(42,659
)
8,410
202,341
307,934
350,593
202,341
350,032
400,549
135,750
1,217,720
1,104,366
(460,037
)
(50,244
)
188,050
(4,539
)
(25,183
)
(40,241
)
(48
)
(105
)
(325
)
(13,870
)
(24,109
)
(149,367
)
(577,821
)
(428,049
)
(315,956
)
147,691
50,517
(10,125
)
59
104
(609,232
)
135,750
1,217,720
Table of Contents
Braskem S.A.
Consolidated statement of changes in shareholders equity (deficit)
Expressed in thousands of U.S. dollars, except per share amounts
(continued)
Year ended December 31,
2002
2001
2000
(723,901
)
(695,817
)
(582,889
)
326,076
(28,084
)
(112,928
)
(397,825
)
(723,901
)
(695,817
)
(10,502
)
(408,327
)
(723,901
)
(695,817
)
(460,037
)
(50,244
)
188,050
326,076
(28,084
)
(112,928
)
(10,502
)
(144,463
)
(78,328
)
75,122
Table of Contents
Braskem S.A.
Consolidated statement of cash flow
Expressed in thousands of U.S. dollars
Year ended December 31,
Cash flows from operating activities
2002
2001
2000
(460,037
)
(50,244
)
188,050
61,956
54,165
51,596
17,222
5,001
4,376
8,852
10,861
5,557
(22,467
)
6,090
(6,889
)
43,556
5,150
(379
)
(5,038
)
(460
)
2,634
long-term debt, net
786,601
(1,476
)
(28,834
)
(12,383
)
(65,024
)
63,848
(15
)
4,574
(259
)
368
(135,969
)
93,828
(27,240
)
(315,903
)
(54,900
)
(5,979
)
(77,265
)
590
(20,059
)
(30,534
)
(23,182
)
(9,204
)
(33,696
)
(12,321
)
(9,798
)
391,567
47,942
(5,022
)
102,290
(6,259
)
135
(11,829
)
12,542
9,105
(29,394
)
51,890
56,711
23,136
77,584
32,185
(41,498
)
4,175
429,620
124,352
166,608
(113,448
)
437,061
(25,996
)
(115,464
)
(146,275
)
(58,426
)
(3,433
)
534
(6,376
)
(13
)
(590
)
7,130
27,569
18,230
(584,286
)
147,620
14,366
(156
)
301
(217,238
)
(118,523
)
(65,891
)
Table of Contents
Braskem S.A.
Consolidated statements of cash flow
Expressed in thousand of U.S. dollars
(continued)
Year ended December 31,
2002
2001
2000
675,856
636,697
53,816
(1,469,232
)
(417,420
)
(51,267
)
778,485
627,292
103,381
(500
)
(593,571
)
(168,874
)
(31,386
)
246,987
227,586
(382,559
)
(371,771
)
(10,719
)
(39,928
)
(65,790
)
4,140
17,688
(21,428
)
317
(2,179
)
4,633
(191,107
)
91,206
(149,845
)
(94,920
)
(6,351
)
(3,308
)
(73,645
)
90,687
(52,436
)
109,161
18,474
70,910
35,516
109,161
18,474
(274,841
)
(174,370
)
(66,132
)
(154
)
(329
)
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
1 Operations
(a)
Braskem S.A. (Braskem or the Company) is a corporation organized
under the laws of Brazil for the purpose of manufacturing, trading,
importing and exporting chemical and petrochemical products and fuels, as
well as producing and supplying steam, water, compressed air and electric
power to companies operating in the Camaçari Petrochemical Complex in
Bahia, Brazil, and the rendering of services to those companies. Braskem
is the new corporate name of Copene Petroquímica do Nordeste S.A.
(Copene). The current organizational structure of Braskem is the result
of one of the most significant corporate restructurings undertaken in
Brazil, integrating six major Brazilian petrochemical companies:
Copene;
OPP Química S.A. (OPP Química); Trikem S.A. (Trikem); Proppet S.A.
(Proppet); Nitrocarbono S.A. (Nitrocarbono) and Polialden Petroquímica
S.A. (Polialden). Substantially all of Braskems operations are located
in Brazil.
Braskems business operations are organized into four business segments and are
managed on that basis:
I.
Basic Petrochemicals
- manufacture of basic petrochemical products such
as ethylene, propylene, benzene, para-xylene, butadiene and others, the
manufacture of fuel such as automotive gasoline and the production of
utility products such as steam, demineralized water, compressed air and
electric energy for its own consumption and for sale to other companies in
the Camaçari Petrochemical Complex. This segment operates five industrial
units in Camaçari. This segment depends largely on the supply of naphtha
by Petróleo Brasileiro S.A. Petrobras.
II.
Polyolefins
- manufacture of polyethylene and polypropylene. This
segment operates four industrial units which produce polythylene
(two in Camaçari and two in the Southern Petrochemical Complex in
the Brazilian state of Rio Grande do Sul) and three industrial
units which produce polypropylene in the Southern Complex. This
segments facilities in the Southern Petrochemical Complex depend
on the supply of raw materials by COPESUL Companhia
Petroquímica do Sul (Copesul).
III.
Vinyls
- manufacture of caustic soda, chlorine, ethylene
dichloride (EDC) and polyvinylchloride (PVC). This segment
manufactures caustic soda and chlorine in two industrial units
(Camaçari and Maceió in the Brazilian state of Alagoas), EDC in
one industrial unit (Maceió) and PVC in three industrial units
(Camaçari, Marechal Deodoro in Alagoas, and São Paulo).
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
IV.
Business Development
- primarily the manufacture of dimethyl
terephthalate (DMT), polyester terephthalate (PET) resins, and
intermediary products including caprolactam, cyclohexane,
cylohexanone and ammonium sulfate. This segment operates two
plants in the Camaçari Complex.
(b)
The Odebrecht and Mariani Groups, through Nova Camaçari Participações
S.A. (Nova Camaçari), were winners of the auction of the so-called
Econômico S.A. Empreendimentos (ESAE) Assets, held in the city of São
Paulo on July 25, 2001. As a result, on a combined basis, the Odebrecht
and Mariani Groups acquired a controlling interest of Nordeste Química
S.A. (Norquisa), which, in turn, was the controlling shareholder of the
Company.
Additionally in July 2001, the Company acquired 100% share participation in
Copene Participações S.A. (formerly known as Conepar Companhia Nordeste de
Participações (Conepar)) which has 42.64% share participation in Polialden,
and 30.99% share participation in Politeno Indústria e Comércio S.A.
(Politeno). For further details, see Note 1(c-i).
Polialdens main objective is
to produce and sell high-density polyethylene,
while Politeno manufactures and sells low density polyethylene,
linear low-density polyethylene and high-density polyethylene. These companies are part of
the second generation companies of the Camaçari Petrochemical Complex.
In August 2002, Braskem issued new shares of stock to the Odebrecht and Mariani
Groups in exchange for their holdings in OPP Produtos Petroquímicos S.A. (OPP
PP) and 52114 Participações S.A. (52114), respectively.
The principal assets of OPP PP included 81.3% of the capital stock and 100% of
the voting stock of OPP Química, a manufacturer of polyethylene and
polypropylene. OPP Química also held 36.3% of the capital stock and 65.9% of
the voting stock of Trikem, a manufacturer of caustic soda, chlorine, EDC and
PVC, and 29.5% of the capital stock and voting stock of Copesul, a company that
produces basic petrochemicals for the Southern Petrochemical Complex.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The principal asset of 52114 was
92.29% of the capital stock of Nitrocarbono, a manufacturer of caprolactam, ammonium sulfate and
caprolactam
by-products.
For further details on the OPP PP
and 52114 acquisitions, see Note 1(c-v).
As of December 31, 2002, Braskem had negative working capital in the amount of
US$ 594,704 and shareholders deficit of
US$ 328,833. The consolidated balance
sheet includes US$ 54,559 related to advances on export contracts and advances
from foreign customers that will be amortized with future exports.
Approximately 70% of Braskems loans are indexed to the U.S. dollar exchange
rate, which closed at R$ 3.5333 on December 31, 2002 but has since declined. To
reduce the demand for working capital, the Companys management plans to depend
on: 1) operating cash flows; 2) the extension of the payment dates of its main
supplier obligations; 3) new funding backed by export flows; and 4) the
extension of the maturity profile of its debts through new long-term
borrowings, including transactions in the negotiation phase.
(c)
Corporate restructuring
(i)
Auction of ESAE assets
The Odebrecht and Mariani Groups, through Nova Camaçari, were the winners of
the auction of the so-called ESAE Assets held in the city of São Paulo on July
25, 2001. As a result, the Odebrecht and Mariani Groups acquired control of
Norquisa, which, in turn, was the Companys parent company.
In order to maximize the value of the ESAE Assets in the auction, the Brazilian
Central Bank, as Liquidator of Banco Econômico (ESAEs controlling
shareholders), structured the so-called Protocol Group (Econômico, Mariani and
Odebrecht Groups) to sell the ESAE Assets jointly with a block of assets of the
members of the Protocol Group, which included their respective shareholdings in
Norquisa. Before July 2001, the Brazilian Central Bank announced two auctions
for the sale of the package of shareholdings, in December 2000 and March 2001,
both of which were inconclusive.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The 3rd auction had as its objective the sale of 100% of the ESAE Assets for
the minimum price of R$ 785,000 thousand (equivalent to US$ 314,364). The
winner of the 3rd auction, upon buying ESAE, was obliged to respect the
tag-along rights of the remaining members of the Protocol Group and the
shareholders agreement of Copene Participações S.A. As a result, under the
rules of the 3rd auction, Nova Camaçari acquired, through the exercise of the
tag-along right of sale, 31.92% and 11.76% of the capital of Copene
Participações S.A., which was held indirectly by the Odebrecht and Mariani
Groups and by BNDES Participações S.A. (BNDESPAR), respectively, and became
the holder of 100% of Copene Participações capital. Furthermore, through the
exercise of the tag-along rights held by companies controlled by the Odebrecht
and Mariani Groups, Nova Camaçari acquired 100% of the capital of Proppet.
Copene Participações, in turn, controls Polialden (66.67% of voting capital and
42.64% of total capital) and has a significant shareholding in Politeno (35% of
voting capital and 30.99% of total capital), both of which are
second-generation operational companies which produce thermoplastic resins.
(ii)
Acquisition of Nova Camaçari by the Company
Based on the prior authorization by the Companys Board of Directors on July
24, 2001, the Company acquired Nova Camaçari after the 3rd auction for the
amount of US$ 40.00 (forty dollars). With this transaction, Braskem assumed
assets which Nova Camaçari had previously acquired in the context of the ESAE
Auction, as well as the respective liabilities, in the amount of US$ 573,463.
The amount paid for the acquisition of those investments is supported by the
economic and financial appraisal reports of independent experts.
The purchase of these assets
(Northeast Assets) by the Company was
pre-approved by the Board of Directors on July 24, 2001. The terms of approval
stipulated that, after the Company acquired Nova Camaçari, a first class
investment bank would independently appraise the cost of Nova Camaçari for the
purposes of adjusting the price paid by the Company, if applicable. The
selected bank prepared its appraisal using the same projections of resin and
raw material prices and the same macroeconomic indicators underlying the
formulation of the discount rate used in the independent appraisals of Nova
Camaçari. The remaining assumptions and the methodology used to obtain the
discount rate were selected by the bank.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The result of this appraisal was compatible with the other appraisals and was
approved during the Companys Board of Directors meeting on December 18, 2001.
As required by law, the market concentration notice relating to the change in
control of Copene (currently Braskem) was filed on a timely basis with the
antitrust authorities. Those authorities have imposed no restrictions on the
operations or decisions of the Company or its subsidiaries. The final decision
of the Administrative Economic Defense Council has not been issued, but the
opinions of the ministries of Finance and Justice are favorable.
(iii)
Accounting considerations
The transactions above have been accounted for by Braskem under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 141 and, accordingly, the consolidated financial statements of Braskem
as of and for the year ended December 31, 2001 include the results of
operations and cash flows related to Nova Camaçari, Intercapital Comércio e
Participações Ltda. (Intercapital), ESAE, Proppet, Conepar, Politeno and
Polialden (the Northeast Assets) from July 27, 2001 to December 31, 2001.
The acquisition was accounted for using the purchase method with the assets
acquired and liabilities assumed from third parties recorded at fair value. The
portions of the net assets which were already held by the Odebrecht Group were
maintained at their existing book values, and the excess of the proportional
amount of the purchase price over these book values has been considered a
distribution to the Odebrecht Group (Note 17). At the acquisition date, the
transaction resulted in goodwill of US$ 319,122. Since Nova Camaçari, ESAE,
Intercapital and Conepar are holding companies without any operations, the
purchase price relates to the operational assets acquired of Politeno,
Polialden and Proppet and liabilities assumed of all companies. The purchase
price allocation is shown as follows:
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Politeno
Polialden
Proppet
Holdings
Total
33,139
68,723
15,463
5,057
122,382
11,432
940
789
2,020
15,181
41,620
23,910
82,936
5
148,471
5,899
2,526
3,464
224
12,113
92,090
96,099
102,652
7,306
298,147
20,793
12,259
56,313
19,623
108,988
4,845
4,336
54,184
20,820
84,185
25,638
16,595
110,497
40,443
193,173
66,452
79,504
(7,845
)
(33,137
)
104,974
319,122
149,367
573,463
The goodwill has been allocated between Politeno and Polialden based on their
respective estimated fair values on the acquisition date.
The goodwill paid is based on the future profitability of the investments in
the companies acquired and in the expected operational and tax synergy of the
integration of the second-generation companies with the Company. The Company
evaluated the existence of any other intangible assets as defined by
SFAS No. 141,
and concluded that there are no other relevant intangible assets that should
have recognized in the accompanying consolidated financial statements.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The changes in the carrying amount of goodwill, including goodwill on equity investments, for the year ended December 31,
2002 and 2001, are as follows:
5,044
319,122
13,842
(3,326
)
14,430
349,112
(118,431
)
(2,125
)
228,556
The goodwill balance as of December 31, 2002 and 2001, has been recorded in the
following business segments:
December 31,
2002
2001
2,035
115,532
175,771
511
929
4,041
6,152
120,084
184,887
108,472
164,225
228,556
349,112
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(iv)
Funding of the purchase price
The immediate principal funding of the payment by Nova Camaçari of the
consideration for the assets acquired in the auction or otherwise in connection
with the auction of the ESAE Assets was through bridge loans to Nova Camaçari
from a syndicate of banks in the amount of US$ 481,103. This bridge loan was
repaid on December 28, 2001 and was substituted on the same date by the issue
of debentures, in the amount of US$ 269,350 and also by Prepaid Export
Financing in the amount of US$ 250,000.
The remaining funds, US$ 92,360, were obtained, through a Private Financing
Instrument, from companies within the controlling groups of Nova Camaçari, with
remuneration based on the same terms as those of the Bridge Loan, with interest
at the lower of 25.16% per year or 108.5% of the interbank certificate of
deposit (CDI) rate. As of December 31, 2001 the outstanding balance related to
these related parties loans is US$ 62,580 and is presented as current
liabilities.
(v)
Acquisitions of OPP PP and 52114
As described in Note 1(b), in August 2002 the Company acquired OPP PP and 52114
from the Odebrecht and Mariani Groups in exchange for 579,397,986 newly issued
common shares and 1,026,498,803 newly issued class A
preferred shares.
Because Braskem and OPP PP were both indirectly controlled by the Odebrecht
Group prior to the acquisition of OPP PP by Braskem, the acquisition was
accounted for in a manner similar to a pooling of interests. All assets and
liabilities of OPP PP and its subsidiaries have been included in Braskems
consolidated financial statements at their existing carrying values.
Additionally, Braskems consolidated financial statements for the year ended
December 31, 2001 have been retroactively restated to include OPP PP and its
subsidiaries as from the date on which common control first existed, July 25,
2001.
Although the terms of the exchange of Braskem and OPP PP shares were based on
the appraised economic value of each company, the transaction is recorded at
the U.S. GAAP book value of OPP PPs consolidated net assets as of July 25, 2001
as measured under
U.S. GAAP. As of that date, OPP PPs consolidated liabilities
exceeded its assets by US$ 393,477, and the issuance of Braskem shares to the
Odebrecht Group was therefore considered to be a distribution in that amount.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The Companys unaudited consolidated results of operations for the acquisition
of the Northeast Assets and the OPP PP transaction, assuming that they had
occurred at the beginning of 2001, are: net revenues of US$ 2,401,450, loss of
US$ 320,695, and basic and diluted loss per thousand shares of US$ 0.10. The
pro forma results of operations are for information purposes and are not
necessarily indicative of the Companys actual consolidated results of
operations that would have occurred had the acquisition of the Northeast Assets
and the OPP PP transaction taken place at the beginning of 2001.
The acquisition of 52114 in
exchange for company shares was accounted for using the purchase method with the
assets acquired and liabilities assumed recorded at fair value. The
purchase price of U.S.$6,950 was based on the fair value of Company
shares issued. The purchase
price allocation resulted in zero goodwill. As described in
Note 1(b), principal asset of 52114 was a 92.29% shareholding in
Nitrocarbono. The pro forma results of operations
for the 52114 acquisition, assuming that it had occurred at the beginning of
2001, would not be materially different from reported results.
2
Summary of significant accounting policies
(a)
Basis of presentation
The following aspects affect the comparability of the financial statements
between years:
Main aspects
Note
Corporate restructuring
Note 1(c)
Merger of OPP PP, with a base date of July 25, 2001
Note 1(c - v)
Recognition of the IPI credit on input materials with zero rate
Note 5
(i)
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America (U.S. GAAP), which differ in certain respects from the
accounting principles applied by the Company and its affiliates in their
financial statements prepared in accordance with accounting principles
prescribed by Brazilian Corporation Law (Corporation Law) or for other
statutory purposes in Brazil.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(ii)
Shareholders equity included in these financial statements differs from
that included in the financial statements prepared in accordance with
Corporation Law or for other statutory purposes in Brazil, principally as
a result of (i) differences between the United States dollar and the
indexes mandated over the years for indexation of such financial
statements and (ii) other adjustments made to reflect the requirements of
U.S. GAAP. As from January 1, 1996, financial statements prepared under
the Brazilian Corporation Law are no longer subject to indexation.
(b)
Remeasurement of financial statements
Although the Company transacts the majority of its business in Brazilian Reais
(R$), it has selected the United States dollar as its reporting currency. The
U.S. dollar amounts for all years presented herein have been converted from
Brazilian Reais amounts in accordance with the criteria set forth in U.S.
accounting standards (SFAS No.
52, Foreign Currency Translation). This conversion should not be construed as
representing that the amounts in Brazilian Reais actually represent or have
been, or could be, converted into U.S. dollars.
Management of the Company has concluded that the Brazilian economy is no longer
highly inflationary as from January 1, 1998, as the increase in the general
price index has been measured at less than 100% over the last three years. The
Company has adopted the Brazilian Real as its functional currency, as from
January 1, 1998. Upon effecting this substitution, the deferred tax asset
increased through a credit to cumulative other comprehensive income (loss) in
shareholders equity.
(i)
Criteria adopted through December 31, 1997
Property, plant and equipment, accumulated depreciation, inventory, certain other
nonmonetary assets and shareholders equity were remeasured at historical rates of
exchange, and the remaining assets and liabilities denominated in Brazilian Reais were
remeasured at period-end rates (R$1.1164 to US$1.00 at December 31, 1997).
Statement of operations accounts were remeasured at the average rate prevailing in the
month of the charge or credit to income, except those relating to assets remeasured at
historical rates, which were calculated based on the assets U.S. dollar values.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Gains and losses resulting from the remeasurement of the financial statements were
included in results of the year.
Assets and liabilities denominated in foreign currencies were translated to U.S. dollars
at the official exchange rates reported by the Brazilian Central Bank at each balance
sheet date, and resulting gains and losses were included in results for the year as
foreign currency transaction gains or losses.
(ii)
Criteria adopted as from January 1, 1998
Property, plant and equipment, accumulated depreciation, inventory, and certain other
nonmonetary assets were converted from historical dollars to the functional currency
(Brazilian Reais) as of January 1, 1998 using the exchange rate in effect at that date
(R$1.1164 to US$1.00) and have been maintained in Brazilian Reais thereafter.
All assets and liabilities are translated from the functional currency to the reporting
currency using the official exchange rates reported by the Brazilian Central Bank at the
balance sheet date (R$3.5333 and R$2.3204 to US$1.00 at December 31, 2002 and 2001,
respectively).
Revenue, expenses and gains and losses are translated from the functional currency to
the reporting currency using the monthly weighted-average exchange rates for the period.
Shareholders equity transactions are recorded at historical exchange rates.
Translation gains and losses are recorded in cumulative translation adjustment, a
component of cumulative other comprehensive income (loss) in shareholders equity.
(c)
Basis of consolidation
(i)
Consolidation of subsidiaries
All subsidiaries in which the Company directly or indirectly controls the
voting capital have been consolidated.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
In the consolidated financial statements, the intercompany assets, liabilities,
income, expenses and unrealized gains arising from transactions between
consolidated companies were eliminated. Minority interest in the equity and in
the results of subsidiaries has been segregated in the consolidated balance
sheet and statement of operations, respectively.
(ii)
Equity accounting
Investments in companies in which the Company owns 20% to 50% of the voting
capital are accounted for using the equity method of accounting (Note 6). The
Companys principal equity method investees include Copesul, Politeno, Cetrel S.A. Empresa
de Proteção Ambiental (Cetrel), NORCELL S.A.
(Norcell), Petroflex Indústria e Comércio S.A.
(Petroflex) and
Codeverde Companhia de Desenvolvimento Rio Verde
(Codeverde).
(d)
Foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into United States dollars at the official exchange rates reported
by the Brazilian Central Bank at each balance sheet date. Translation gains and
losses of those assets and liabilities are included in the consolidated balance
sheet as cumulative other comprehensive loss.
(e)
Cash and cash equivalents
Cash and cash equivalents are carried at cost plus accrued interest. Cash
equivalents consist principally of deposits having a ready market and an
original maturity of 90 days or less.
(f)
Trade accounts receivable
Trade accounts receivable are stated at estimated realizable values. An
allowance for doubtful accounts is provided in an amount considered by
management to be sufficient to meet probable future losses related to
uncollectible accounts and includes the entire amount of receivables in
litigation. The balance of the allowance was US$ 35,278 and US$ 16,611 at
December 31, 2002 and 2001, respectively.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(g)
Inventories
Inventories are stated at the lower of the average cost of purchase or
production and replacement or realizable values. Allowances for slow moving or
obsolete inventories are recorded when considered appropriate. Imports in
transit are stated at the accumulated cost of each import. The method of
determining cost is used consistently from year to year.
(h)
Intangible assets
Intangible assets, representing primarily production technology purchased from
third parties, are recorded at cost and are being amortized over a period of 5
- 10 years on a straight-line basis.
(i)
Property, plant and equipment
Property, plant and equipment are recorded at cost, including capitalized
interest incurred during the period of construction of major new facilities.
Depreciation is computed on a straight-line basis over the useful lives of the
assets as follows:
Annual
depreciation
rates (%)
2.00 to 10.00
1.30 to 10.00
2.27 to 20.00
Up to 20
The useful lives of assets are
based on management estimates. Changes in the estimated useful lives
are reflected on a prospective basis, and the depreciation rates are
adjusted to those necessary to depreciate the remaining book value
over the remaining estimated life. The depreciation rates listed
above are stated as a percentage of the original cost and reflect
these changes in estimates.
The Company evaluates its property, plant and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of such assets is measured by a
comparison of the carrying amount of the assets to future undiscounted net cash
flows expected to generated by the assets. If an asset is considered to be
impaired, the impairment to be recognized is measured as the excess of the
carrying amount of the assets over the fair value of the assets. In 2002 the
subsidiary Polialden recognized an impairment loss of US$1,566 relating to the
abandonment of its project to construct a polypropylene unit.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(j)
Plant maintenance
Routine maintenance and repair costs are expensed as incurred.
Planned major maintenance of the production facilities occurs every three to
five years, depending on the facility. Expenditures that extend the useful
life or improve the capacity or efficiency of the production facilities,
including materials and services, are recorded in deferred charges and
amortized over the expected period of benefit, generally three to five years.
Amortization of deferred charges amounted to US$ 16,185 in 2002, US$ 10,346 in
2001 and US$ 7,519 in 2000.
(k)
Goodwill
Goodwill represents costs in excess of fair values assigned to the underlying
net assets of companies acquired from third parties. Until December 31, 2001
the goodwill was amortized using the straight-line method over 10 years.
Goodwill generated after July 1, 2001 is not being amortized in 2001, and all
goodwill amortization was discontinued on January 1, 2002. Goodwill is subject
to annual impairment analysis, however, as determined by SFAS No. 142
Goodwill and Other Intangible Assets (Note 2(s)). Amortization of goodwill
is generally deductible for Brazilian income tax purposes.
(l)
Revenues and expenses
Revenues are recognized when: (i) the products have been transferred to the
customer and the risk of ownership has passed to the customer; (ii) persuasive
evidence of the basis of the sale exists; (iii) the price is fixed or
determinable; and (iv) collectibility is reasonably assured. Expenses and costs
are recognized on the accrual basis.
Shipping and handling costs are reported within selling, general and
administrative expenses and amounted to US$ 51,183, US$ 23,059 and US$ 6,635 in
the years ended December 31, 2002, 2001 and 2000. If these costs had been
classified in cost of sales, gross profit would have been US$ 438,946, US$
301,625 and US$ 296,108 in the years ended December 31, 2002, 2001 and 2000.
Advertising costs are expensed when incurred and were not significant in the
years ended December 31, 2002, 2001 and 2000.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(m)
Compensated absences
The liability for future compensation for employee vacations is fully accrued
as they are earned.
(n)
Income taxes
Income taxes in Brazil comprise Federal Income Tax and Social Contribution, a
federal tax based on income.
For the purposes of these financial statements, Braskem applied SFAS No. 109,
Accounting for Income Taxes for all periods presented.
A valuation allowance is provided to reduce or eliminate net deferred tax
assets when realization is not yet deemed more likely than not; the valuation
allowance is adjusted or reversed when management considers that realization is
reasonably assured.
(o)
Research and development
Research and development costs are expensed as incurred and recorded in the
statement of operations within selling, general and administrative expense.
Expenditure on research and development was US$ 5,682, US$ 4,097 and US$ 2,319,
for the years ended December 31, 2002, 2001 and 2000, respectively.
(p)
Financial instruments
Braskem and its subsidiaries utilize certain derivative instruments to manage
their exposure to fluctuations in the Brazilian Real/ U.S. dollar exchange
rate. Until December 31, 2000, the derivatives were recorded at spot market
rates prevailing at the balance sheet date with gains/loss recorded as net
financial expenses. Starting January 1, 2001, derivatives are recorded at fair
value, as determined by SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities (Note 16(b)).
Braskem calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available for
various types of financial instruments (such as forwards, options and swaps),
Braskem uses standard pricing models with market-based inputs, which take into
account the present value of estimated future cash flows.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(q)
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used for, but
not limited to: fair values of assets and liabilities of acquired companies,
accounting for allowance for doubtful accounts, depreciation and amortization,
asset impairments, depreciable lives of assets, useful lives of intangible
assets, tax valuation allowances and contingencies.
(r)
Reclassifications
Certain amounts in the financial statements for prior years have been
reclassified to conform to the current year presentation.
(s)
Accounting change Goodwill and other intangible assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 no longer permits the amortization of
goodwill and indefinite-lived intangible assets. Instead, these assets must be
reviewed annually (or more frequently under various conditions) for impairment
in accordance with this statement. This impairment test uses a fair value
approach rather than the undiscounted cash flows approach. The goodwill
impairment test under SFAS No. 142 requires a two-step approach, which is
performed at the reporting unit level, as defined in SFAS No. 142. Step one
identifies potential impairments by comparing the fair value of the reporting
unit to its carrying amount. Step two, which is only performed if there is a
potential impairment, compares the carrying amount of the reporting units
goodwill to its implied value, as defined in SFAS No. 142.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
If the carrying amount of the reporting units goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recognized for an amount
equal to that excess. The amortization of goodwill included in investments in
affiliates and joint venture is no longer recorded, in accordance with the new
rules. Intangible assets that do not have indefinite lives are amortized over
their useful lives and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
In accordance with SFAS No. 142, effective January 1, 2002, the Company ceased
amortizing existing goodwill, including goodwill recorded on equity
investments.
The Company performs the impairment test annually on December 31. The initial
application of the impairment test did not result in an impairment charge.
The following table presents the
impact of SFAS No. 142 on reported net income
(loss) had the standard been in effect in prior periods:
Years
ended December 31,
2001
2000
(50,244
)
188,050
3,326
2,414
(46,918
)
190,464
(53.22
)
109.84
(t)
Environmental matters
Accruals for environmental matters are recorded when it is probable that the
liability has been incurred and the amount of the liability can be reasonably
estimated, based on current law and existing technologies. Environmental costs
are capitalized if the costs extend the life of the property, increase its
capacity, and/ or mitigate or prevent contamination from future operations.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(u)
Recently issued accounting pronouncements
In 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
Braskem will adopt SFAS No. 143 on January 1, 2003. The provisions of SFAS No.
143 require companies to record an asset and related liability for the costs
associated with the retirement of a long-lived tangible asset if a legal
liability to retire the asset exists. The Company has evaluated this new
pronouncement and does not expect that it will have a significant impact on the
Companys financial condition, liquidity or results of operations.
SFAS No. 145 addresses financial accounting and reporting for extinguishment of
debt. It supersedes SFAS No. 4, Reporting Gains and Losses from Extinguishment
of Debt; SFAS No. 44, Accounting for Intangible Assets of Motor Carriers
and SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS No. 145 also amends certain paragraphs of SFAS No. 13,
Accounting for Leases. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. The Company has evaluated this new pronouncement and does
not expect that it will have a significant impact on the Companys financial
condition, liquidity or results of operations.
In 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The initial recognition and measurement provisions of
FIN No. 45 apply on a prospective basis to guarantees issued or modified after
December 31, 2002. As required, Braskem adopted the disclosure requirements of
the Interpretation as of December 31, 2002 (see Note 13(c)). Braskem will
apply the initial recognition and measurement provisions on a prospective basis
effective January 1, 2003. The Interpretation modifies existing disclosure
requirements for most guarantees and requires that at the time a company issues
a guarantee, the Company must recognize an initial liability for the fair value
of the obligation it assumes under that guarantee. The Company has evaluated
this new pronouncement and does not expect that it will have a significant
impact on the Companys financial condition, liquidity or results of
operations.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which nullifies EITF Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. This statement, which is effective for exit or disposal
activities initiated after December 31, 2002, will change the measurement and
timing of costs associated with exit and disposal activities undertaken by the
Company. The Company has evaluated this new pronouncement and does not expect
that it will have a significant impact on the Companys financial condition,
liquidity or results of operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or in which equity investors do not bear the residual
economic risks. The interpretation applies to variable interest entities
(VIEs) created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. It applies in the fiscal year or interim
period beginning after June 15, 2003, to VIEs in which an enterprise holds a
variable interest that was acquired before February 1, 2003. In financial
statements issued after January 31, 2003, the interpretation also requires an
enterprise to disclose the nature, purpose, size and activities of VIEs which
are reasonably possible to be within the scope of FIN No. 46, together with the
enterprises maximum exposure to loss with respect to these entities. Braskem
is in the process of evaluating this new pronouncement and does not currently
expect that it will have a significant impact on the Companys financial
condition, liquidity or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities. This Statement is effective
for contracts entered into or modified after June 30, 2003. The Company has
evaluated this new pronouncement and does not expect that it will have a
significant impact on the Companys financial condition, liquidity or results
of operations.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
In May 2003, the FASB issued SFAS No. 150, Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003. Braskem is in the process of evaluating this new pronouncement and does
not currently expect that it will have a significant impact on the Companys
financial condition, liquidity or results of operations.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
3
Related parties
The balances with and the amount of the transactions to and from related
parties are as follows:
December 31, 2002
Other non
current
Current
Long-term
Current assets
assets
liabilities
liabilities
Receivables
Receivables
from
from
Advances
Accounts
Advances to
related
related
from
Related
Affiliates
receivable
suppliers
parties
parties
customers
Loans
Suppliers
Other
parties
5,290
1,705
1,408
2
503
41
143
77
518
1,363
1,330
140,355
72,840
246
18
6
500
22
6,966
39,522
6,370
40
45
14,121
14,394
4,644
297
7
615
690
110
15,795
503
615
8,341
5,290
75,173
186,117
20,491
1,863
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
December 31, 2001
Other non
current
Long-term
Current assets
assets
Current liabilities
liabilities
Advances
Advances
Accounts
Advances to
for capital
from
receivable
suppliers
Loans
increase
Loans
Loans
customers
Suppliers
Loans
2,675
5,828
87
5,203
1,192
1,124
5
3,101
134
86,511
40,385
1,885
1,917
543
789
2,119
94,165
228,083
3,207
4,939
9,448
41,616
10,597
705
1,716
3,801
5,314
10,203
4,490
8,597
23,999
552
79
45
32,868
5,203
95,909
134
20,854
300,257
2,675
130,632
16,522
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Year ended December 31, 2002
Year ended December 31, 2001
Year ended December 31, 2000
Sales of
Purchases
Sales of
Purchases
Sales of
petrochemical
of
Financial
petrochemical
of
Financial
petrochemical
Purchases
Financial
products,
materials
income
products,
materials
income
products,
of materials
income
services
and
(expense)
services
and
(expense)
services
and
(expense)
and utilities
services
net
and utilities
services
net
and utilities
services
net
21,450
43,604
(2,743
)
36
4,602
122
2,284
32
1,776
63,226
73,986
10,915
408,367
11,664
418,770
19,996
9,869
79,168
94,466
28,345
76,900
133,576
113,487
121,478
1,196
890
473
20,310
187
632
24,676
(1,718
)
756
722,908
167,858
23,475
1,245,980
2,265
47,961
1,222,765
(4,657
)
74,001
1,242
75,491
1,478
79,832
1,665
54,049
99,892
90,257
121,323
181,720
207,292
227,873
23,046
(323
)
6,252
4,286
13,492
10,869
182,735
1,672
8,448
309,818
1,156,763
169,100
800,509
1,697,213
864
1,289,031
1,250,889
3,738
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(a)
Trade accounts receivable and suppliers include the balances of
transactions with related parties that result mainly from purchases and
sales of goods and services, which were realized using prices and terms
equivalent to the average terms and prices practiced in transactions with
third parties.
(b)
The balance of the loan from Copesul International Trading Inc. arises
from a specific arrangement negotiated with OPP Química and its subsidiary
Lantana, with rates equivalent to the market rates. Besides the US dollar
exchange variation, the average annual financial charges correspond to
7.76% to 8.25%.
(c)
The balance of the loan from Borealis OPP S.A. is subject to monthly
interest of 2.4%.
(d)
The balance of the loan to Petrobras -Petróleo Brasileiro S.A. is subject
to interest equal to the Long-Term Interest Rate (TJLP) plus 2% per annum.
(e)
The balances of the loans from CBP Companhia Brasileira de Poliuretanos
and Pronor Petroquímica S.A. are subject to interest equal to 108.5% of
the interbank certificate of deposit (CDI) rate.
(f)
The balance of the loan payable to Odebrecht S.A. is subject to interest
of 20.75% per annum.
The price of ethylene purchased from Copesul results from a process that shares
the margin with the second generation companies of the petrochemical sector.
This process consists of apportioning the gross margin in proportion to the
return on investments. The prices practiced for the other products are
established based on various market factors, including international ones.
The price of naphtha, the main raw material of Braskem supplied by Petrobras,
is negotiated between Petrobras and the petrochemical companies, using as a
reference the price practiced in the European market. Braskem is also importing
naphtha at a volume equivalent to 30% of its consumption. The price reference
is the international market (ARA).
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
4 Inventories
December 31,
2002
2001
106,343
123,740
7,727
2,835
40,081
38,268
52,599
47,950
27,032
43,555
19,374
20,722
253,156
277,070
(22,553
)
(8,248
)
230,603
268,822
(*)
Based on turnover and detailed analysis, part of the inventory of spare
parts, maintenance supplies and others has been reclassified to long-term,
and an allowance for obsolescence of US$ 3,270 has been recorded in 2002.
No allowance was recorded at December 31, 2001.
5 Taxes recoverable
Taxes recoverable includes US$ 67,541 in current assets and US$ 148,842 in
noncurrent assets relating to a December 2002 Federal Supreme Court decision
which awarded the subsidiary OPP Química a federal excise tax (IPI) credit for
past purchases of materials with a 0% IPI rate. The total amount of the gain
from this decision was US$ 284,509, including approximately US$ 75,000 which
had already been offset against taxes payable in prior years. The tax
authorities have filed appeals to the Federal Supreme Court requesting
clarification of the calculation of the credit but not challenging its
existence.
This court decision affects only the OPP Química facility in the state of Rio
Grande do Sul. Several of the Companys subsidiaries have filed claims for the
same IPI credit at other facilities, but the disputed amounts will not be
recognized as gains before final decisions are issued by the courts.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
6
Investments
The Companys investments in associated companies accounted for by the equity
method consist primarily of its shareholdings in Copesul, Politeno,
Cetrel,
Codeverde, Norcell and Petroflex. Summarized financial information of these
companies was as follows:
Shareholding
Shareholding in voting
in total capital (%)
capital (%)
Equity
in earnings of affiliates
Investment
2002
2001
2002
2001
2002
2001
2000
2002
2001
29.46
29.46
29.46
29.46
8,693
2,332
63,748
83,224
30.99
30.99
35.00
35.00
5,834
3,956
41,080
69,963
35.57
36.35
35.57
36.35
(517
)
(1,188
)
(1,055
)
6,651
6,009
35.42
35.39
35.42
35.39
(109
)
(112
)
(101
)
5,379
76.52
88.42
86.15
50.00
(475
)
841
9,811
13,684
48,251
20.12
20.12
20.14
20.14
2,068
859
(1,766
)
7,472
8,233
(185
)
(671
)
9,410
18,450
15,309
6,017
6,889
142,045
239,509
7,158
(12,107
)
108,473
164,933
22,467
(6,090
)
6,889
250,518
404,442
(*)
Recorded as an investment as from July 25, 2001.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Copesul is engaged in the manufacture, trade, import and export of basic
petrochemical products and the production and supply of assets, such as steam,
water, compressed air, electrical energy to the companies in the Southern
Petrochemical Complex in the state of Rio Grande do Sul, as well as providing
several services to these companies.
Politeno is engaged in the manufacture, processing, direct or indirect trade,
consignment, export, import and transportation of polyethylene, as well as the
participation in other companies. The main raw material for all of its products
is ethylene, which is currently provided by Braskem.
Cetrel provides environmental protection and waste treatment services to
companies in the Camaçari Petrochemical Complex.
Codeverde is a holding company for real estate in the state of Bahia.
Norcell is engaged in forestation activities. Although Braskem owns more than
50% of the voting shares, the terms of the Shareholders Agreement with Riocell
S.A. grant significant participating rights to Riocell. As a result, Braskem
does not have unilateral control over Norcell, and the investment is recorded
on the equity method.
Petroflex is a manufacturer of synthetic rubber.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Copesuls financial statements are summarized below:
December 31,
2002
2001
542,538
407,622
337,983
579,485
61,040
83,479
941,561
1,070,586
500,042
369,242
225,129
418,847
216,390
282,497
941,561
1,070,586
Years ended December 31,
2002
2001
967,346
1,042,174
(782,113
)
(889,545
)
185,233
152,629
(30,020
)
(40,755
)
(104,443
)
(135,372
)
4,723
8,599
55,493
(14,899
)
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Reconciliation to investment balance and equity in earnings (loss):
December
31,
2002
2001
63,748
83,224
2,674
4,780
(947
)
66,422
87,057
Years
ended December 31,
2002
2001
8,693
3,257
(925
)
8,693
2,332
Goodwill relating to the
acquisition of the Companys original equity interest in
Copesul in May 1992, was amortized until December 31, 2001. Effective January
1, 2002, goodwill is no longer amortized.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
7
Property, plant and equipment
December 31, 2002
December 31, 2001
Accumulated
Accumulated
Cost
depreciation
Net
Cost
depreciation
Net
8,025
8,025
12,083
12,083
189,784
(66,887
)
122,897
279,162
(98,319
)
180,843
1,422,036
(491,265
)
930,771
1,971,139
(677,174
)
1,293,965
8,333
(7,951
)
382
48,423
(24,125
)
24,298
3,038
(2,447
)
591
3,257
(2,476
)
781
21,712
(14,983
)
6,729
5,796
(4,296
)
1,500
40,761
(16,606
)
24,155
57,750
(28,944
)
28,806
90,101
90,101
216,278
216,278
1,783,790
(600,139
)
1,183,651
2,593,888
(835,334
)
1,758,554
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
8 Debt
December 31,
Annual financial charges
2002
2001
US$ exchange variation + interest of 11.5%
27,978
14,478
US$ exchange variation + interest of 11.0%
55,718
101,925
US$ exchange variation + interest of 9.0%
150,188
150,225
US$ exchange variation + interest of 10.6%
261,806
328,071
US$ exchange variation + interest from 3.8% to 12.0%
88,015
575,670
266,891
16,315
564,027
397,169
180,052
246,693
824
160,191
Fixed interest from 3.9% to 10.8% + indexed monetary
restatement (TJLP, TR and UMBNDES)
76,246
13,361
TJLP + interest of 4.0% or IGP-M + interest of 4.5%
85,205
40,619
17,887
1,774,837
2,044,717
(303,074
)
(249,894
)
1,471,763
1,794,823
(413,039
)
(578,776
)
1,058,724
1,216,047
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The weighted average interest rates on short-term debt as of December 31, 2002
were 17.33% per annum for Brazilian currency debt and 9.04% per annum for US
dollar debt.
The long-term amounts mature as follows:
December 31,
2002
363,511
158,501
131,279
405,233
200
1,058,724
Loans related to the acquisition of fixed assets are backed by pledges of
property, plant and equipment, shares of stock and letters of guarantee from
management and shareholders. Certain working capital financing is backed by
letters of credit and bank guarantees. Shares of OPP have been pledged as
collateral for debt totaling US$ 34,861 at December 31, 2002. Shares of
Polialden and Politeno have been pledged as collateral for debt totaling US$
12,388 at December 31, 2002.
(a)
Foreign notes payable (Eurobonds)
(i)
Issued by the Company
In June 1997, Copene issued Eurobonds amounting to US$ 150,000 falling due in
ten years and bearing annual interest of 9% to be paid semiannually in the
months of June and December, commencing in December 1997.
(ii)
Eurobonds issued by OPP Petroquímica and Trikem
In February 1996, OPP Petroquímica (merged into OPP Química in December 2000)
issued Eurobonds in the amount of US$ 125,000 falling due at February 22, 2004
and bearing annual interest of 11.5% to be paid semiannually in the months of
February and August in each year, commencing in August 1996.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
In October 1996, OPP Petroquímica issued Eurobonds in the amount of US$ 100,000
falling due at October 29, 2004 and bearing annual interest of 11% payable
semiannually in April and October of each year, commencing in April 1997.
Up to December 2002, the subsidiary Lantana had reacquired US$ 180,000 of the
OPP Petroquímica notes, and had resold US$ 37,000.
In July 1997, Trikem issued Eurobonds in the amount of US$ 250,000, falling due
on July 24, 2007 and with annual interest of 10.625% payable semiannually in
January and July of each year, commencing in January 1998. These notes grant
exclusively to Trikem the right to repurchase the Eurobonds on July 24 of each
year as from July 2002.
(b)
Long-term financing
(i)
Foreign currency
In December 2001, the Company obtained funds in the amount of US$ 250,000 for
the prepayment of exports, which funds were directed to partial payment of the
shares acquired in the auction of the ESAE Assets mentioned in Note
1(c-i).
This loan was placed in two tranches and structured by a pool of banks led by
ABN AMRO Real S.A. and Citibank S.A. The first tranche, in the amount of US$
80,000, has a settlement term up to December 2004 and is subject to interest of
3.75% per annum plus semiannual Libor, payable semiannually. The second
tranche, in the amount of US$ 170,000, has a settlement term up to 2006 and is
subject to interest of 4.75% per annum plus semiannual Libor, payable
semiannually. Amortization of the principal is linked with the Companys
exports and scheduled up to their related maturities. The debt balance, at
December 31, 2002, is US$ 250,047.
(ii)
Local currency
BNDES
Local currency fixed capital loans include to various loans related to the
expansion of the production capacity (including polyester Proppet),
environmental projects, operation control centers, laboratory and waste
treatment station. These loans bear annual charges from 3.9% to 5%, plus the
Long-term Interest Rate (TJLP) disclosed by the Brazilian Central Bank. The
principal and charges are payable monthly up to July 2007.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The consolidated financial statements also include the financings obtained by
Copene Participações from BNDES for the purchase of shares in the privatization
of Polialden and Politeno, at the restated amount of US$ 12,388 (US$ 21,406 at
December 31, 2001). The balances are subject to the Referential Rate (TR) and
annual interest of 6.5% and are amortized semiannually in 20 installments from
February 1997 to August 2006. These loans are guaranteed by the shares
themselves and the surety of ESAE.
(c)
Working capital
(i)
Foreign currency
In the parent company, loans for working capital in foreign currency, in the
amount of US$ 168,265, refer to financings of imports of raw material (US$
13,614) and prepayments of export (US$ 154,651). These loans will be settled in
various dates up to June 2006, through a link with future Company exports.
In June 2000, OPP Petroquímica received an advance from a foreign customer
(prepayment of export) in the amount of US$ 75,300. In addition to the foreign
exchange variation, the advance is subject to annual interest of 1.75% over
semiannual LIBOR. The maximum term for shipment is December 2003, and the
current debt balance is US$ 49,676 thousand.
In December 2002, OPP Química received an advance from foreign customers
(prepayment of export), in the amount of US$ 97,200. In addition to the
exchange variation, the advance is subject to annual interest of 3.75% over
semiannual LIBOR. This contract is backed by a surety bond and will be paid
through partial semiannual shipments from June 2003 to June 2006. The current
debt balance is US$ 97,406.
Other financings in foreign currency of the subsidiary company OPP Química, in
the amount of US$ 196,000, are subject to the exchange rate variation and
annual average interest of 8.83%. These financings are backed by promissory
notes guaranteed by the directorate of OPP Química and ODEQUI.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(ii)
Local currency
In December 2002, Unibanco S.A. granted a loan for working capital in the
amount of R$ 150,000 thousand, falling due in January 2003 and bearing interest
of 100% of the CDI plus an annual spread of 0.25%, payable upon final maturity.
This contract is backed by a pledge of trade notes and sureties from the
directorate. At December 31, 2002, the debt balance of this loan amounts to US$
42,946.
Other local currency working capital loans of Braskem and its subsidiaries
refer to working capital loans and guaranteed account loans from various
financial institutions, which are backed by pledges of trade notes and sureties
from the directorate.
(d)
The amounts recorded in current assets and long-term receivables as
prepayment of financings correspond to the remittance of financial funds
made by CPC Cayman and Lantana for an advanced settlement of the
prepayment of exports, which are presented in short and long-term
liabilities at their gross amounts, without deducting these prepayments.
9
Debentures
December 31,
2002
2001
100,444
151,595
63,362
63,831
182,124
345,930
215,426
(9,071
)
(11,308
)
336,859
204,118
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
10
Taxes and contributions payable Long-term liabilities
This balance comprises primarily taxes which Braskem and its subsidiaries are
challenging in the judicial system. Although management, supported by its legal
advisors, believes that the outcome of these lawsuits will be favorable to the
subsidiaries, the questioned amounts are accrued as liabilities and updated for
the variation in the SELIC interest rate. These liabilities will be reversed
when Braskem and its subsidiaries receive a final favorable decision on the
specific cases.
11
Income tax and social contribution on net income
(a)
Tax rates
Income taxes in Brazil include Federal Income Tax and Social Contribution on
Net Income (CSL). There is no state or local income taxes in Brazil. The
statutory rates applicable in each period were as follows (in percentages):
February to
2002
2001
January, 2000
December, 2000
25.00
25.00
25.00
25.00
9.00
9.00
12.00
9.00
34.00
34.00
37.00
34.00
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(b)
Income tax reconciliation
Year ended December 31,
2002
2001
2000
(527,106
)
3,595
184,083
179,216
(1,222
)
(62,588
)
4,867
(74,770
)
(36,305
)
6,255
16,285
250
1,574
41,313
(166,720
)
81,342
1,648
(1,730
)
1,153
405
(20,422
)
14,332
(2,937
)
(i)
Braskem and its subsidiaries OPP Química and Trikem, have obtained
judicial orders exempting them from the CSL (Note 11(e)).
(ii)
Certain of the production facilities have qualified for income tax
incentives which provide full or partial exemptions from income tax on
exploration profit for a fixed period of time (Note 11(d)).
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(c)
Deferred income tax
Deferred tax assets (liabilities) are comprised of the following:
December 31,
2002
2001
133,760
133,628
(15,776
)
1,089
28,520
32,791
183
653
138,960
92,490
285,647
260,651
(2,914
)
(4,691
)
(1,379
)
(2,393
)
(2,619
)
(8,369
)
(23,441
)
(13,676
)
(32,130
)
(227,677
)
(172,534
)
44,294
55,987
61,208
79,753
(16,914
)
(23,766
)
44,294
55,987
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
At December 31, 2002, Braskem and its subsidiaries have tax loss carryforwards
totaling US$ 535,040, of which US$ 3,129 have been used as the basis for
recognizing net deferred tax assets and the remainder have a full valuation
allowance. These tax loss carryforwards do not expire, but their utilization is
limited to 30% of the taxable income in a subsequent year, and the balances are
not indexed to inflation or exchange rates. Tax loss carryforwards are also
lost if a corporate entity is extinguished such as through a merger.
Furthermore, the net incremental benefit of these tax losses is limited in the
medium term, since several industrial units are already benefited by income tax
exemptions and reduced income tax rates, as described below.
(d)
Corporate income tax holidays
The Brazilian Federal government offers full or partial income tax holidays to
companies which construct or expand facilities in northeastern Brazil. Several
of the plants operated by Braskem and its subsidiaries have been granted such
tax holidays, as summarized below:
%exemption
or reduction in
Expiration
Location
Product
income tax rate
date
Camaçari
Basic petrochemicals and utilities
75
%
2011
Camaçari
Polyethylene
75
%
2011
Camaçari
PVC
100
%
2004
Marechal Deodoro
PVC
100
%
2008
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
% reduction
in income
Period
tax rate
37.5
%
25.0
%
12.5
%
The benefit of the tax holiday may not be distributed to stockholders and is
recorded in a capital reserve (appropriated retained earnings), which can only
be used to increase capital or absorb losses.
(e)
Social contribution
The subsidiary OPP Química obtained a final court decision which exempted it
from the social contribution.
In 1992, Braskem and the current subsidiaries Trikem and Polialden also
received final favorable decisions exempting them from the social contribution,
but the government filed actions to rescind those decisions. In 1997, the
Superior Court of Justice (STJ) overturned the 1992 decision. Since then the
companies have filed several appeals to reverse this unfavorable decision.
Based on the opinion of legal counsel, the appeals should be successful in
maintaining the companies exemption. If, however, the appeals are not
successful, legal counsel has indicated that the loss of the exemption will be
effective only as from the date of a final unfavorable decision and may not be
applied retroactively. For this reason, no liability has been recorded. If a
retroactive claim were made by the government, the exposure to Braskem and its
subsidiaries would be approximately US$ 67,500, including interest but
excluding fines.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
12
Pension plan
(a)
ODEPREV Odebrecht Previdência
Several of the Companys subsidiaries are sponsors of a defined contribution
pension plan founded by the Odebrecht Group. The consolidated contribution for
the year ended December 31, 2002 was US$ 289.
(b)
Fundação Petrobras de Seguridade Social PETROS
Braskem and its subsidiary Trikem sponsor a defined benefit plan for their
employees. The plan is managed by the Fundação Petrobras de Seguridade Social
(PETROS). Its main objectives are to complement retirement benefits provided
by the government and to implement social assistance programs supported by the
sponsoring companies. The sponsoring companies and their employees pay monthly
contributions to PETROS based on their employees remuneration.
Financial and actuarial information for the pension plan, as provided by the
independent actuary, are provided below:
2002
2001
2000
1,701
1,927
1,679
4,354
5,370
5,437
6,055
7,297
7,116
(15,377
)
(10,039
)
(11,035
)
12,194
5,939
6,647
(3,183
)
(4,100
)
(4,388
)
(620
)
(727
)
(929
)
1,703
(1,085
)
(1,568
)
(1,290
)
2,870
902
509
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
2002
2001
2000
13
13
13
9
9.3
9.3
13
13
13
(68,328
)
(91,668
)
(89,504
)
55,942
68,503
95,400
(12,386
)
(23,165
)
5,896
(514
)
(1,565
)
(2,786
)
12,715
30,724
23,747
(185
)
5,994
26,857
91,668
89,504
90,619
1,701
1,927
1,679
4,354
5,370
5,437
8,697
16,652
6,939
(4,954
)
(6,470
)
(7,323
)
(33,138
)
(15,315
)
(7,847
)
68,328
91,668
89,504
68,503
95,400
96,310
15,377
10,039
11,035
1,698
1,907
2,026
1,085
1,568
1,290
(4,954
)
(6,470
)
(7,323
)
(18,893
)
(25,767
)
(15,048
)
(7,938
)
55,942
68,503
95,400
In 2002 Braskem recognized a minimum pension liability of US$ 10,502,
representing the difference between the accumulated benefit obligation and the
fair value of plan assets. This liability was substantially recognized through
a charge to a shareholders equity account.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(c)
PREVINOR Associação de Previdência Privada
Braskem and its subsidiaries
Polialden and Nitrocarbono sponsor defined benefit and defined
contribution plans which are managed by PREVINOR
Associação de Previdência Privada. Contributions to
the defined contribution plans totaled US$ 308 in the year ended
December 31, 2002 (US$ 150 in 2002).
Financial and actuarial
information for the defined benefit pension plans, as provided by the
independent actuary, are provided below:
2002
2001
19
8
564
237
583
245
(457
)
(776
)
(364
)
369
(821
)
(407
)
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
2002
2001
(71
)
(80
)
35
10
(274
)
(232
)
12.4
12.4
7.1
7.1
17.1
17.1
(4,129
)
(5,503
)
4,490
5,679
361
176
(705
)
(1,045
)
833
1,104
489
235
5,503
4,662
19
8
564
237
(273
)
734
(122
)
(138
)
406
(1,968
)
4,129
5,503
5,679
5,788
457
38
5
1
(122
)
(138
)
(10
)
550
(2,079
)
4,490
5,679
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
13
Commitments and contingencies
(a)
Commitments
Purchase commitments
Braskem and its subsidiaries have electric power purchase contracts for the
consumption of energy by its industrial plants located in the states of Alagoas
and Bahia. The minimum annual commitment under these contracts is approximately
US$ 17,000 and the contracts extend for five years.
The Company purchases ethylene and propylene for its units in the Southern
Petrochemical Complex from Copesul under a long-term contract through 2014.
The minimum annual purchase commitment is 268,200 metric tons of ethylene and
262,200 metric tons of propylene. If the minimum is not purchased the Company
must pay for the unpurchased amount at 40% of the current price. Based on 40%
of the December 31, 2002 prices, this minimum commitment is US$ 93,401 per
year.
(b)
Contingencies
Braskem and its subsidiaries are defendants in various civil and labor cases.
Based on the advice of its legal counsel, management has established
liabilities for those cases in which an unfavorable outcome is probable.
Descriptions of the more significant cases follow.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(i)
Collective labor agreement
The chemical workers union in the Camaçari region (SINDIQUÍMICA) and the
syndicate of chemical manufacturers in the same region (SINPEQ) are disputing
in the courts whether the wage and salary indexation clause in their collective
labor agreement was overruled by a 1990 economic policy law which restricted
wage and salary increases. Braskem, Trikem, Polialden, Nitrocarbono and
Politeno operated plants in the region in 1990 and are members of SINPEQ. The
union is requesting that salaries and wages be adjusted retroactively and
cumulatively since 1990.
The most recent ruling, in December 2002, was favorable to SINPEQ and
established that the economic policy law overruled the collective labor
agreement. Nevertheless, the decision is still subject to appeal.
Management, based on the opinion of its legal advisers, believes that the
SINPEQ position will prevail. As a result, no loss has been accrued for this
contingency.
(ii)
Polialden preferred shareholders
Banco Fator, as the administrator of Fundo Fator Sinergia, a mutual fund, filed
a Declaratory Action to obtain a ruling that the preferred shares of Polialden
do not have fixed dividends and therefore are entitled to participate in the
distribution of profits on the same basis as common shareholders. Polialden
management, supported by the decision of the Brazilian Securities Commission
(CVM) and the opinion of its legal advisors, understands that no additional
dividend for preferred shares is due, and Polialden is contesting the lawsuit,
which is pending judgement.
Jurisprudence in similar cases is generally favorable to Polialden. However, in
August 2001, contrary to the opinion about the matter issued by the CVM in
August 2000, as well as opinions of renowned jurists, the 4th Panel of the
Higher Court of Justice (STJ) decided, in a Special Appeal of a shareholder, to
grant the plaintiff participation in the payment of dividends on an equal basis
with common shares. This decision is not the final decision and is being
appealed by Polialden. On July 28, 2002, Polialden made a judicial deposit to
cover its exposure (US$ 1,603) to possible losses from the lawsuit.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(iii)
Civil litigation of OPP Química and Trikem
The subsidiaries OPP Química and Trikem have civil claims about various
matters, which amount to approximately US$ 71,300. Management and its internal
legal advisors, supported by recent opinions of its external legal advisors,
believe that losses on these claims are not probable, and no liability has been
recorded.
(c)
Guarantees
In the ordinary course of business, the Company and its subsidiaries provide
guarantees to financial institutions which provide financing to certain
customers. At December 31, 2002, the nominal value of the guaranteed customer
balances was US$ 122,164.
14
Minority interest
Minority interest relates to the interest of minority shareholders in the
capital of Trikem, Companhia Alagoas Industrial CINAL, CPP Companhia
Petroquímica Paulista, Polialden, Copene Monômeros Especiais S.A., Tegal
Terminal de Gases Ltda and Nitrocarbono S.A..
15
Shareholders equity
(a)
Capital
Preferred shares are not convertible into common shares and do not carry voting
rights, but they have priority to a minimum non-cumulative annual dividend of
6%, depending on the availability of income for distribution. Only the
preferred A shares have equal participation with the common shares in the
remaining income, and this right exists only after the payment of dividends to
the holders of preferred shares. The preferred A shares also have equal
rights with the common shares to receive distributions of shares arising from
the capitalization of other reserves.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Shares subscribed through the Northeast Investment Fund (FINOR) tax incentives
(preferred B shares) do not have preferential rights in the event of new
share subscriptions. Subsequent to the expiration of the period of
non-transferability as foreseen in special legislation, these shares may be
converted into preferred A shares at any time, at the ratio of two preferred
B shares for one preferred A share.
In the event of dissolution of the
Company, the preferred A and B shares
have priority to capital reimbursement.
(b)
Dividends
Shareholders have the right to a mandatory minimum dividend of 25% of net
income, computed in accordance with the terms of the Brazilian Corporate Law
and payable in Brazilian Reais.
As described in the Memoranda of Understanding for Shareholders Agreements
signed by (i) Odebrecht Química S.A., Petroquímica da Bahia S.A., Fundação
Petrobras de Seguridade Social PETROS and Previ Caixa de Previdência dos
Funcionários do Banco do Brasil and (ii) Odebrecht Química S.A., Petroquímica
da Bahia S.A. and Petrobras Química S.A. Petroquisa, on July 20 and July 3,
2001, respectively, Braskem must distribute dividends in a percentage not less
than 50% of available net income of each year, as long as remaining reserves
are sufficient to maintain efficient operations and development of the
Companys business.
According to the terms agreed in the Particular Instrument of Re-Ratification
of a Particular Deed of Issue of Non-convertible Debentures with Floating
Guarantee of the Tenth Issue and in the Export Prepayment Credit Agreement, the
payment of dividends, interest on own capital or any other participation in
profits is limited to at most 50% of net income for the year or 6% of the unit
value of the preferred A and B shares, whichever is higher.
In accordance with the Companys statutes, Braskem may pay interest on its own
capital to its shareholders, within the terms of Article 9, paragraph 7, of Law
9249/1995. Interest, when paid or credited, will be considered as part of the
priority dividend on preferred shares as well as part of the minimum dividend
requirement.
(c)
Shares held in treasury
On December 31, 2002, Braskem
held in treasury 54,620 thousand class A
preferred shares at the total cost of US$ 15,412.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(d)
American Depositary Receipt (ADR) Program
On October 20, 1998, the Company obtained a Level II registration with the
Securities and Exchange Commission (SEC) and, on December 21, 1998, started
trading American Depositary Receipts (ADRs) on the New York Stock Exchange
(NYSE), as follows:
Ø
Type of shares: preferred class A
Ø
Each ADR represents 50 (fifty) preferred A shares
Ø
The shares are negotiated as ADRs under the symbol BAK at the NYSE
Ø
Depositary Bank overseas: Citibank N.A. New York branch
Ø
Custodian Bank in Brazil: Banco Itaú S.A.
16
Financial instruments
Braskem and its subsidiary companies engage in transactions involving financial
instruments to manage the financial requirements of their operations, to
supplement cash flow requirements, to guarantee the supply of raw materials and
to hedge their U.S. dollar denominated debt. Risk management is carried out by
adopting financial market mechanisms which reduce the exposure of the Companys
assets and liabilities, protecting its equity.
The net book values of the financial assets and liabilities of Braskem and its
subsidiaries at December 31, 2002 are equivalent to their approximate market
values. The main financial instruments are comprised of the following accounts:
(a)
Investments
The market values of the investments in the associated companies Copesul and
Petroflex, the shares of which are traded in the stock exchange, were estimated
based on the final market quotations on the São Paulo Stock Exchange, where
most of the shares are traded. This estimate does not necessarily reflect the
realizable value of a representative lot of shares.
At December 31, 2002, the market value of these shares held by Braskem and its
subsidiaries is US$ 55,111 for Copesul and US$ 4,836 for Petroflex. At May 31,
2003, these market values were US$ 108,936 for Copesul and US$ 10,665 for
Petroflex. No allowance for loss on these investments has been recorded
because, based on projected cash flow analyses and independent valuation
studies, the decline in the value of these investees is believed to be
temporary.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
(b)
Derivatives
Since Braskem operates in the international market, where it obtains funding
for its operations and investments, it is exposed to market risks related to
variations of foreign currency exchange rates and international interest rates.
Braskem developed a risk management policy as from December 31, 2001 with the
following objectives: maintain coverage of principal and interest settlements
(consolidated) maturing within 12 months for, at least (i) 60% of Braskems
total U.S.-dollar indebtedness that is related to exports (trade finance),
excluding Advances on Currency Contracts (ACCs) with a remaining maturity of up
to 6 months and Advances on Export Contracts (ACEs) and (ii) 75% of the total
debt in U.S. dollars unrelated to exports (non-trade finance). Compliance with
this policy varies based upon applicable market conditions, credit availability
and cash balances.
Braskem uses various kinds of currency risk management instruments, some of
them using available cash. The most common transaction using available cash
adopted by Braskem involves foreign currency cash investments (certificates of
deposit, international funds, time deposits and overnight funds) and options.
The most common foreign currency risk management instruments without using
available cash are swap contracts (exchange of U.S. dollar variation for
Interbank Deposit Certificate (CDI) rate) and forwards.
Effective January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. The Companys
contracts did not meet the criteria to qualify as the hedge of an exposure to
foreign currency or interest rate risk. Therefore, the Company has accounted
for the derivative transactions by calculating the unrealized gain or loss at
the balance sheet date and changes in the fair value of all derivatives are now
being recorded in current operations.
Until the adoption of SFAS No. 133, the derivative instruments would be accounted
for as a no hedging designation instrument, and any gain or loss thereon
would be recognized currently in earnings at the settlement amount at each
closing date. As a result of adopting SFAS 133 as of January 1, 2001, the
Company recorded a net asset of US$ 1,767 (net of income tax effects of US$
589), reflecting the net fair value on such date of its derivative
financial instruments and the contra-entry is presented as Cumulative effect of a change
in accounting principle in the statement of operations for the year ended
December 31, 2001.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
On December 31, 2002, Braskem and its direct and indirect subsidiaries had
swap, forward and option contracts for foreign currency and interest, with a
total notional amount of US$ 154,915, falling due between January 2, 2003 and
June 1, 2004. These instruments are intended to reduce the impacts of an
eventual devaluation of the Brazilian real and an increase in international
interest rates on U.S. dollar liabilities.
At December 31, 2002, the fair value of derivative instruments in an asset
position was US$ 391 (2001 US$ 5,214), and the fair value of derivative
instruments in a liability position was US$ 6,370 (2001 US$ 12,542). These
amounts are recorded in the balance sheet as other current assets and fair
market value of derivative financial instruments (current liability),
respectively.
17
Major non-cash investing and financing transactions
The following non-cash transactions were excluded from the statement of cash
flows:
(a)
The corporate reorganization transactions involving companies under
common control, as described in Note 1(b).
(b)
The acquisitions of OPP PP and 52114 in exchange for Braskem shares, as
described in Note 1(c-v).
(c)
The distributions by OPP PP included in the statement of changes in
stockholders equity, which were primarily made through debits to the
intercompany loan accounts involving the Odebrecht Group.
18
Business segments
The Company has four identifiable reportable segments, as more fully described in Note 1(a):
Ø
Basic Petrochemicals
Ø
Polyolefins
Ø
Vinyls
Ø
Business Development
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The accounting policies underlying the financial information provided for the
segments are based on accounting principles determined by Brazilian Corporate
Legislation. Management of the Company evaluates segment performance
information generated from the statutory accounting records. Intersegment
transactions are recorded at their statutory amounts.
The local currency information related to the statement of operations data has
been translated to U.S. dollars, for convenience purposes, at the average rate
for each period presented. The information at the balance sheet date has been
translated to U.S. dollars at the respective year-end exchange rates.
Braskem prepared a reconciliation of segment information to its consolidated
financial statements and restated prior period segment information as
practicable.
December 31,
2002
2001
757,231
1,859,121
1,174,213
1,157,998
650,906
927,881
94,556
77,170
908,369
342,619
(650,321
)
(661,543
)
2,934,954
3,703,246
717,729
529,611
114,258
195,819
6,110
10,141
563
190,114
12,042
(778,556
)
(343,171
)
250,518
404,442
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Years ended December 31,
2002
2001
2000
1,127,142
1,330,987
1,568,713
873,748
341,364
403,930
153,864
92,506
28,368
(106,210
)
(82,692
)
(13,613
)
2,391,116
1,771,891
1,555,100
84,348
132,255
218,335
312,667
52,570
18,739
23,574
5,721
3,208
100,688
32,445
7,373
522,163
244,052
225,708
22,467
(6,090
)
6,889
65,024
(63,848
)
15
(20,422
)
14,332
(2,937
)
(991,988
)
(214,145
)
(39,131
)
(57,281
)
(26,312
)
(2,494
)
1,767
(460,037
)
(50,244
)
188,050
(40,768
)
(44,958
)
(58,050
)
(14,639
)
(7,757
)
(15,130
)
(4,904
)
(460
)
(1,432
)
9,041
4,886
6,454
(61,956
)
(54,165
)
(51,596
)
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Information on the geographical composition of the Companys sales is as
follows:
Years ended December 31,
2002
2001
2000
1,854,741
1,573,139
1,387,435
536,375
198,752
167,665
2,391,116
1,771,891
1,555,100
Exports from Brazil (classified by geographic destination)
Years ended December 31,
2002
2001
2000
313,371
130,834
131,532
102,196
33,623
91,160
22,632
34,929
29,648
11,663
1,204
536,375
198,752
167,665
19
Earnings per share
The following table provides a reconciliation of the numerators and
denominators used in computing earnings per share and the allocation of
distributed and undistributed income between common and preferred stockholders
under the two-class method of computing earnings per share as required by SFAS
No. 128.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
Weighted average
Per thousand
Net income
number of shares
shares (whole US
(loss)
(thousands)
dollars)
(460,037
)
1,198,834
(383.74
)
(50,244
)
881,548
(57.00
)
188,050
(29,865
)
(257
)
157,928
(6,915
)
96,239
(15
)
68,617
646,693
106.10
0.03
68,617
646,693
106.10
Basic and diluted earnings per share are the same in 2002 and 2001 because the
effects of conversion of convertible debentures (Note 9) would be antidilutive.
No dilutive securities existed in 2000.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
20
Restatement of 2001 consolidated financial statements
(a)
As described in Note 1(c-v), the Companys consolidated financial
statements have been retroactively restated to include OPP PP and its
subsidiaries as from July 25, 2001, the date that Braskem and OPP PP came under
common control and to eliminate intercompany transactions for that
period. The following table shows the consolidation of OPP PP into
Braskem for the respective periods presented.
As of December 31, 2001
Braskem -
before
consolidation of
OPP PP (as
Eliminations
restated, see
and
Braskem -
Note 20(b))
OPP PP
reclassifications
restated
433,796
517,278
(41,632
)
909,442
159,868
96,651
147,923
404,442
336,406
9,581
(161,100
)
184,887
1,078,429
680,125
1,758,554
243,378
241,328
(38,785
)
445,921
2,251,877
1,544,963
(93,594
)
3,703,246
391,695
1,169,607
(41,633
)
1,519,669
943,326
759,976
(38,786
)
1,664,516
1,335,021
1,929,583
(80,419
)
3,184,185
132,579
200,625
(9,592
)
323,612
784,277
(585,245
)
(3,583
)
195,449
2,251,877
1,544,963
(93,594
)
3,703,246
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
For the year ended December 31, 2001
Braskem -
before
OPP PP - Five
consolidation
of
month-period
OPP PP (as
ended
restated,
see
December
Braskem -
Note 20(b))
31,2001
Eliminations
restated
1,382,050
457,792
(67,951
)
1,771,891
(1,186,779
)
(328,379
)
67,951
(1,447,207
)
195,271
129,413
324,684
133,485
110,567
244,052
(162,587
)
(77,870
)
(240,457
)
(29,102
)
32,697
3,595
14,524
(192
)
14,332
(14,578
)
32,505
17,927
4,358
(6,863
)
(3,585
)
(6,090
)
(1,265
)
(62,583
)
(63,848
)
(11,485
)
(36,941
)
(3,585
)
(52,011
)
1,767
1,767
(9,718
)
(36,941
)
(3,585
)
(50,244
)
(15.03
)
(57.00
)
(b)
After issuing the consolidated financial statements of the Company for the year
ended December 31, 2001, management of the Company determined that the original
accounting for the acquisition of the Northeast Assets (Note 1(c)) in July 2001
did not appropriately reflect the fact that the Odebrecht Group had indirect
control of the Company immediately after the ESAE Auction.
Table of Contents
Braskem S.A.
Notes to the consolidated financial statements
for the years ended December 31, 2002, 2001 and 2000
Expressed in thousands of U.S. dollars, unless otherwise stated
The consolidated financial statements for the year ended December 31, 2001 have
therefore been restated to record the portions of the Northeast Assets that
were purchased by the Company from the Odebrecht Group at their carry over
basis. The excess of the purchase price over the book value of the Northeast
Assets has been reflected as a distribution to the Odebrecht Group. The
effects of the restatement on the consolidated balance sheet and statement of
operations are summarized below:
As originally
reported
As restated
171,014
159,868
486,149
336,406
1,094,486
1,078,429
945,334
943,326
959,215
784,277
(1,187,592
)
(1,186,779
)
132,672
133,485
16,077
16,363
4,095
4,358
(11,080
)
(9,718
)
(17.13
)
(15.03
)
*
*
*
Exhibit 1.01
BRASKEM S.A.
CNPJ N0. 42.150.391/0001-70
NIRE 29300006939
COMPANY BYLAWS
CHAPTER I
NAME, HEADQUARTERS, PURPOSE AND DURATION
ARTICLE 1
BRASKEM S.A., a publicly listed company, with headquarters and under the jurisdiction of the Municipality of Camacari, State of Bahia, is governed by these bylaws and by the appropriate legislation.
SOLE PARAGRAPH - The Company may, through a document signed by its Executive Board, constitute branches, agencies and offices in any part of Brazil or outside it.
ARTICLE 2 - The objectives of the Company are as follows:
a) the manufacture, trading, import and export of chemical and petrochemical products;
b) production of goods for use by component companies of the Northeastern Petrochemical Complex, such as: the supply of steam, water, compressed air, industrial gases, electricity, as well as the provision of various services to the same companies;
c) the taking of holdings in other companies as a holder of quotas or shares;
d) the manufacture, distribution, sale, import and export of gasoline, diesel oil, liquefied petroleum gas (LPG), and other oil derivatives.
FIRST PARAGRAPH - The Company may produce, transform and distribute electricity to its various production units, as well as to its user/shareholders, always in accordance with the required authorizations of the National Department of Water and Energy.
SECOND PARAGRAPH - For the purposes of the first paragraph of this Article, a user/shareholder is understood as a corporate entity with a production unit 2 located within the Northeastern Petrochemical Complex that holds a stake in the Company in proportion to its consumption of goods and services.
THIRD PARAGRAPH - The Company's activities are of a commercial nature, except with regard to electricity, for which the supply costs will be shared jointly, in proportion to the share of each party in total consumption.
ARTICLE 3
The Company's term of duration is unspecified.
CHAPTER II
CAPITAL STOCK AND SHARES
ARTICLE 4
The Capital Stock is R$1,847,729,940.61 (one billion, eight hundred forty seven million, seven hundred twenty nine thousand, nine hundred and forty reais and sixty one centavos), divided into 3,398,380,922 (three billion, three hundred ninety eight million, three hundred eighty thousand, nine hundred and twenty two) shares, being 1,226,091,148 (one billion, two hundred twenty six million, ninety one thousand, one hundred and forty eight) common shares, 2,160,832,034 (two billion, one hundred sixty million, eight hundred thirty two thousand, and thirty four) class "A" preferred capital shares and 11,457,740 (eleven million, four hundred fifty seven thousand, seventy hundred and forty) class "B" preferred capital shares.
FIRST PARAGRAPH - The Company is authorized to increase, regardless of any changes to its bylaws, the Capital Stock up to 6,100,000,000 (six billion and one hundred million) shares, being 2,196,000,000 (two billion, one and ninety six million) common shares, 3,843,000,000 (three billion, eight hundred and forty three million) class "A" preferred capital shares and 61,000,000 (sixty one million) class "B" preferred capital shares, with the number of non-voting preferred capital shares or preferred capital shares with limited vote not permitted to exceed 2/3 of the Company's total capital stock ("Authorized Capital");
SECOND PARAGRAPH - The proportion verified above between the numbers of shares of the various classes of the Company's preferred shares may be modified.
ARTICLE 5
The class "B" preferred shares will always be paid in full, using resources assigned under the terms of the law on fiscal incentives for projects in the Northeast of Brazil.
SOLE PARAGRAPH - Shares paid in with resources from the Northeast Investment Fund - FINOR, created by Decree-Law No 1,376, of December 12, 1974, must remain as non-transferable registered shares for a period of 4 (four) years from the date that they are converted by that Fund for investors in accordance with Article 19 of Decree-Law No 1,376/74, except in the event that these shares are converted for the private individuals to which Article 3 of the same Decree-Law refers.
ARTICLE 6 - All of the Company's shares are held in book entry transfer form, in the name of their holders, and will be held in a deposit account in a financial institution without the issue of certificates.
FIRST PARAGRAPH - The cost for the service of transferring ownership of the shares that may be charged by the financial institution acting as depository, may be passed on to shareholders in accordance with the terms of the third paragraph of Article 35, of Law No 6,404/76.
SECOND PARAGRAPH - Preferred shares of any class are not convertible into voting shares.
THIRD PARAGRAPH - With regard to the class "B" preferred shares, once the period of non-transferability established in special legislation has elapsed, the said shares may be converted into class "A" preferred shares at any time, through a written request to the Company, in the proportion of 2 (two) class "B" preferred shares received for each class "A" preferred share converted.
FOURTH PARAGRAPH - All of the Company's shares will be entitled to tag along rights in the event that the control of the Company is transferred, with all shares qualifying for the same price per share paid to the ceding shareholders, pursuant to the terms of Chapter III of these bylaws.
ARTICLE 7
Subscription and payment in full for the shares will be subject to the following criteria:
a) the issue, quantity, price, types or classes of shares to be issued by the Company will be established by the Board of Directors, in accordance with the terms of the Authorized Capital;
b) the minimum amount in shares subscribed will be in accordance with the prevailing legislation;
c) the period for making full payment for the subscribed shares will be established by the Board of Directors for each capital increase;
d) payment for the shares in assets that are not credits in current legal tender will depend on approval by the General Meeting;
e) there will be no preemptive rights for the subscription of shares issued under the terms of the special Law on fiscal incentives (Article 172, First Paragraph of Law No 6,404/76); nor will holders of shares subscribed with funds originating from fiscal incentives have preemptive rights to subscribe any new shares;
f) without affecting the terms of the sole paragraph below, in exercising preemptive rights to subscribe to new shares and/or other securities issued by the Company, shareholders are guaranteed a period of 30 (thirty) days to carry out the subscription, starting from the date of publication in the Official Gazette of the Commercial Registry Certificate of the filing of the relevant minutes;
g) the Company may issue subscription warrants at the decision of the Board of Directors, up to the limit of the Authorized Capital.
SOLE PARAGRAPH - Except where there is an issue of voting shares, or other securities convertible into voting shares, the Board of Directors or the General Meeting may, depending on circumstances, exclude preemptive rights in any issue of shares, debentures, subscription warrants or other securities, the placement of which is made through a stock exchange, a public subscription
or in exchange for shares in a public offer to acquire control, in accordance with the terms of the law.
ARTICLE 8
Each voting share carries the right to one vote on the decisions of the General Meeting.
ARTICLE 9
Preferred shares will not have voting rights, but will nevertheless enjoy the following privileges:
a) Class "A" and "B" preferred shares will have equal priority in the distribution in each financial year, of a minimum, non-cumulative dividend, of 6% (six per cent) of its unit value, as defined in item "h" below, in accordance with the income available for distribution to shareholders. This dividend must be paid, except in the case of a decision by the General Meeting, or the Board of Directors, where there is a distribution of interim dividends (Article 44, 4th Paragraph), within 60 (sixty) days of the date on which it is declared, and in any case, before the end of the same financial year;
b) voting shares will only be entitled to dividends after the payment of dividends on the preferred shares referred to in item "a" of this article;
c) following the implementation of the terms of item "a" of this article and a dividend being guaranteed on the voting shares of 6% (six per cent) of their unit value, as defined in item "h" below, the class "A" preferred shares will have equal claim with the voting shares to the distribution of the remaining income. The class "B" preferred shares will not participate in the distribution of the remaining income after the said shares have received the minimum dividends referred to in item "a" of this article;
d) without restriction and under equal conditions, the class "A" and "B" preferred shares will have the same entitlement as the voting shares, to shares arising from the monetary correction of the Company's capital;
e) only the voting and class "A" preferred shares will be entitled to participate in the distribution of shares resulting from the incorporation of reserves into the capital stock;
f) the class "A" and "B" preferred shares are guaranteed priority in the reimbursement of share capital;
g) full payment for the subscription of shares by FINOR will be affected through the deposit of the corresponding amount in an escrow account with the Banco do Nordeste do Brasil S.A. in the name of the Company, with the relevant release of funds occurring immediately after the publication, in the Official Gazette of the Commercial Registry Certificate of the filing of the minutes of the Meeting of the Board of Directors that decides on the subscription;
h) the unit value of the shares will be obtained by dividing the capital stock by the number
of shares in the market.
SOLE PARAGRAPH - The preferred shares without voting rights when issued that have fixed or mandatory dividends, will acquire such rights in the event that the Company does not pay the fixed or mandatory dividends to which the shares are entitled for three consecutive financial years, and will retain these rights until such time as these dividends are paid, in the event that they are not cumulative, or until the overdue cumulative dividends are paid, in all cases pursuant to Paragraph 1 of Article 111 of Law N(0) 6,404/76.
CHAPTER III
JOINT SALE RIGHTS
ARTICLE 10
In the event that the controlling shareholder(s) cede control of the Company at any time, the same ceding party(ies) will be obliged to include in the document governing the same cession of control, an obligation on the part of the acquiring party(ies) to make, within a period of 30 (thirty) days of the formal transfer of the shares representing the controlling stake and affected through the financial institution responsible for the custody of the Company's shares, a public offer for the purchase of all shares issued by the Company, independent of the type or class of share, for the same price per share paid to the ceding shareholder(s).
ARTICLE 11
Pursuant to Article 10 above, transfer of control is understood to mean the sale, ceding and/or transfer of the shares representing the control of the Company, which removes from the ceding party(ies) the condition of controller(s) of the Company, whether in isolation or jointly with third parties, and transfers this to any company that is not (a) the controlling shareholder, directly or indirectly, of the ceding shareholder(s); (b) controlled directly or through a stake held in a controlling block by the controlling shareholders of the ceding party(ies); (c) controlled, whether directly or indirectly by the ceding shareholder(s).
SOLE PARAGRAPH - Notwithstanding the terms of Article 11 above, the sale, ceding and/or transfer of shares of the Company will not be considered to constitute a transfer of control, where these operations occur between shareholders that are members of the controlling block and/or signatories to agreements between shareholders of the Company regulating the exercise of rights over the shares pertaining to members of the controlling block.
ARTICLE 12
The right of joint sale established here in Chapter III will not apply in the event that the transfer of control of the Company occurs: (a) as the result of a court ruling or act, such as judicial seizure or sentence or (b) as the result of a final decision by regulatory authorities, including the Brazilian Anti-Trust Commission (CADE), that obliges the controlling shareholder(s) of the Company to divest part or all of the shares in the Company that they hold.
CHAPTER IV
PERMANENT BODIES OF THE COMPANY
ARTICLE 13
The following are permanent bodies of the Company:
a) the General Meeting;
b) the Board of Directors;
c) the Executive Board.
CHAPTER V
THE GENERAL MEETING
ARTICLE 14
The General Meeting will meet ordinarily during the first four months following the end of each financial year; and extraordinarily whenever the interests of the Company so require.
SOLE PARAGRAPH - The General Meeting will be called by the Board of Directors or in the form established by law.
ARTICLE 15
Notice of the General Meeting will be given in the written media, pursuant to the terms established by law.
ARTICLE 16
Participation in the General Meeting is restricted to shareholders whose shares
are held in the custody at the financial institution indicated by the Company 8
(eight) days prior to the holding of the said Meeting.
SOLE PARAGRAPH - Shareholders may appoint proxies pursuant to the terms of the law and rules published by the Brazilian Securities and Exchange Commission.
ARTICLE 17
After signing the Register of Attendance, the shareholders will elect the President and the Secretary to preside over the deliberations of the General Meeting.
CHAPTER VI
THE BOARD OF DIRECTORS
ARTICLE 18
The Board of Directors of the Company is composed of 11 (eleven) members and their respective substitutes, whether resident or not in Brazil, are elected and may be removed from office at any time by the General Meeting.
ARTICLE 19
The General Meeting must appoint from among the members of the Board of Directors, the President and Vice-President, and has the power to remove the latter from office at any time.
ARTICLE 20
The mandate of members of the Board of Directors will run for 2 (two) years, with re-election permitted.
SOLE PARAGRAPH - The members of the Board of Directors will take office by signing an investiture contract in the book of minutes of the same body, and will remain in their posts until their substitutes take office.
ARTICLE 21
The terms of office of the President and Vice-President will be 1 (one) year, with re-election permitted.
ARTICLE 22
In the event of absences or temporary incapacity, the members of the Board of Directors will be replaced by their respective substitutes. In the event of absences or the temporary incapacity the President, the Vice-President will preside over the Board of Directors. In the event of the absence or the temporary incapacity of the President and the Vice-President, the President will nominate one of the other members of the Board to replace him/her as President of the Board of Directors.
ARTICLE 23
In the event of a vacancy, a General Meeting will be called within 30 (thirty) days, to elect the member who must complete the remaining mandate of the replaced member.
ARTICLE 24
The Board of Directors will normally meet every 3 (three) months, and
extraordinarily, whenever summoned by the President, Vice-President or by any 2
(two) of its members.
FIRST PARAGRAPH -- Between the day of its calling and the day of holding the
extraordinary meeting of the Board of Directors, an interval of at least 10
(ten) days will be set, unless the majority of its current members determine a
shorter interval, which will not, however, be less than
48 (forty eight) hours.
SECOND PARAGRAPH - The Board of Directors will only deliberate in the presence of the majority of its current members, Board members however having the option of being represented by any other Board member or substitute that they may nominate, and decisions will be taken by a majority of votes among those Board Members present at the Meeting.
ARTICLE 25
The global annual compensation of the management will be set by the General Meeting, the Board of Directors having the discretion to assign the said amount among individual officers.
ARTICLE 26
The Board of Directors is responsible for:
a) setting the general business policy of the Company;
b) deciding on new investments;
c) deciding the Company's Business Plan, which must include its short-, medium- and long-term business and strategic objectives as well as annual and multi-year budgets, and monitoring implementation of the same;
d) approving proposals for policies to be applied generally within the Company;
e) providing an opinion on the management report and financial statements at the end of each financial year, as well as on the proposal for the distribution of net income, and decide as to movement in the reserve accounts;
f) approving the Operating Rules for the Board of Directors, which will rule on such subjects as the appointment of a Secretary and specialized committees to aid the Board in its decision-making process;
g) approving the criteria for the employee results sharing program;
h) appointing and dismissing the Directors of the Company and establishing the attributions and compensation of the same, pursuant to the terms of these bylaws and the global budget established by the General Meeting;
i) monitoring management, examining at any time, the books and papers of the Company, requesting information on contracts signed or due to be signed, and on any other acts;
j) appointing and dismissing the Company's independent auditors;
k) calling the Annual and Extraordinary General Meeting(s);
l) submitting to the General Meeting proposals regarding mergers, spinoffs, incorporations or the dissolution of the Company, as well as modifications to the bylaws, including increases in the Authorized Capital;
m) deciding on the constitution of and participation in other companies;
n) approving the acquisition of goods and the contracting of services of any kind for amounts exceeding R$100,000,000.00 (one hundred million reais), in accordance with the Company's Business Plans;
o) deciding on the rental, divestment, encumbrance and liens on the Company's property, plant and equipment, where the value of the relevant operation exceeds R$30,000,000,00 (thirty million reais);
p) deciding on any contract between the Company and the registered holders of its voting shares, companies controlled by the same, or individuals owning voting shares or quotas in corporate entities that are registered holders of the Company's voting shares, for amounts exceeding R$5,000,000.00 (five million reais) per operation;
q) setting annual operating limits on the Directors, in accordance with the terms of Article 37, within which the same Directors may contract loans or funding without the prior authorization of the Board of Directors, whether in Brazil or elsewhere;
r) deciding on the concession of guarantees for any value to any third parties that are not fully-owned subsidiaries;
s) deliberating, within the limits of the Authorized Capital, on the issue of shares and subscription warrants, as well as of promissory notes for public distribution ("commercial paper");
t) authorizing the Company to purchase its own shares to be held in treasury or cancelled, as well as the divestment of the same, in accordance with the terms of the law and rules published by the Brazilian Securities and Exchange Commission;
u) approving the issue of simple debentures that are not convertible into shares and unsecured by tangible assets;
v) approving the granting to its officers, employees, service providers or subsidiaries by the Company of stock options within the Authorized Capital and according to the stock option plan authorized by the General Meeting; and
w) deciding, within the limits of its authority, on cases not covered by these bylaws.
ARTICLE 27
The President of the Board of Directors will, in accordance with the Operating Rules for the Board
of Directors, be responsible for the following actions:
a) calling and directing the meetings of the Board of Directors; and
b) calling the General Meeting, provided that this has been authorized by the Board of Directors.
ARTICLE 28
The Vice-President, or in his/her absence, whoever is nominated by the President under the terms of Article 22, will be responsible for replacing the President whenever the latter is absent or temporarily incapacitated and, further, in the event of a vacancy, will occupy the position of President until a new incumbent is elected.
CHAPTER VII
EXECUTIVE BOARD
ARTICLE 29
The Executive Board will consist of at least 4 (four) and a maximum of 10 (ten) individuals, with one Chief Executive Officer and the remaining Directors without any specific designation, and all elected by the Board of Directors.
ARTICLE 30
The Executive Board will have a mandate of 2 (two) years, coinciding with the mandate of the members of the Board of Directors, with re-election permitted.
FIRST PARAGRAPH - The Directors will take office by signing the investiture contract recorded in the Executive Board's Minutes Register.
SECOND PARAGRAPH - The Directors will remain in office, exercising their powers in full until such time as their replacements take office.
ARTICLE 31
In the event that any of the Directors are absent or unable to attend, the Chief Executive Officer will be responsible for nominating their substitute from among the other Directors.
SOLE PARAGRAPH - In the event that the Chief Executive Officer is temporarily absent or incapacitated, the President of the Board of Directors will be responsible for designating his/her substitute.
ARTICLE 32
In the event of a vacancy in the post of Director, the Board of Directors will be responsible for
electing a substitute to hold the office for the remaining period of the mandate. If there are 5 (five) or more Executive Directors, the Board of Directors will have the option of leaving the position vacant.
ARTICLE 33
The Executive Board will be responsible for:
a) carrying out all actions necessary for the functioning of the Company, except those that, by law or by these bylaws, are assigned to other bodies;
b) drawing up the Business Plan for submission to the Board of Directors;
c) drawing up the annual management report, the financial statements and the proposal for the assignment of income for the relevant financial year, all of which will be submitted to the Board of Directors and the General Meeting; and
d) proposing policies for general application in the Company;
ARTICLE 34
The Chief Executive Officer will be responsible for:
a) proposing the overall organizational structure of the Company to the Board of Directors;
b) defining the areas of authority and coordinating the actions of the Directors in implementing the Company's Business Plan;
c) representing the Company, both actively and passively, whether in court or outside it, without affecting the terms of Article 37 of these bylaws;
d) calling and presiding over meetings of the Executive Board.
ARTICLE 35
The remaining Directors will be responsible for carrying out actions and managing within the attributions defined in the basic management structure.
ARTICLE 36
The Company may nominate attorneys-in-fact and the relevant document conferring a power of attorney must be signed by two of the Executive Directors.
SOLE PARAGRAPH - The powers of attorney must specify the powers conferred, and with the exception of those granted to attorneys to represent the Company in lawsuits or official inquiries, the period of validity of these powers will be at most 1 (one) year.
ARTICLE 37
With the exception of the instances established in these bylaws, the Company will only be bound by documents signed jointly by:
a) 2 (two) Directors;
b) one Director and one Attorney-in-Fact, or two Attorneys-in-Fact with specific powers conferred in accordance with the terms of Article 36 of these bylaws.
FIRST PARAGRAPH - The following acts need only be signed by 1 (one) Director, or by 1 (one) Attorney-in Fact, nominated according to the terms of these bylaws:
a) the endorsement of checks for deposit in the Company's bank account;
b) authorizations to conduct transactions in the blocked account of the Government Severance Indemnity Fund for Employees (FGTS);
c) the registration and issue of documents relating to labor, fiscal and customs issues; and
d) the receipt of any values due and signing of the relevant documents recognizing payment.
SECOND PARAGRAPH - In special cases, express powers may be granted to only one Director or Attorney-in-Fact in order to carry out actions specified in the relevant documents, albeit in accordance with the rules established in Article 36 of these bylaws.
ARTICLE 38
The Executive Directors will meet when summoned by the Chief Executive Officer.
SOLE PARAGRAPH - The Executive Board may meet with at least half of its current members in attendance, with the Chief Executive Officer or his/her substitute included among these, in accordance with the terms of Article 31, Sole Paragraph.
ARTICLE 39
The Executive Board is prohibited from:
a) contracting loans with institutions that are not members of the official banking network, either within Brazil or outside it, except where the Board of Directors grants express authorization;
b) performing acts of any nature relating to business or operations that are not consistent with the Company's objectives, such as the provision of guarantees on third-party liabilities, excepting those to fully-controlled subsidiaries, or where this is expressly authorized by the Board of Directors.
CHAPTER VIII
AUDIT COMMITTEE
ARTICLE 40
The Audit Committee, composed of at least 5 (five) members and their substitutes, elected by the General Meeting, will function on a permanent basis, in accordance with the Law.
SOLE PARAGRAPH - The holders of preferred shares without voting rights or with restricted voting rights, will be entitled to elect one member and his/her respective substitute. Minority shareholders will have the same right, provided that they collectively represent 10% (ten per cent) or more of the shares with voting rights.
ARTICLE 41
The mandate of the Audit Committee will be 1 (one) year, with re-election permitted, the said election always to occur during the Annual General Meeting.
SOLE PARAGRAPH - The Audit Committee must adopt its own set of Rules, which will establish procedures regarding its attributes.
ARTICLE 42
The members of the Audit Committee will receive the compensation established by the Annual General Meeting that elects them, observing the relevant terms of the law.
CHAPTER IX
FINANCIAL YEAR, FINANCIAL STATEMENTS AND DISTRIBUTION OF PROFITS
ARTICLE 43
The financial year begins on January 1 and ends on December 31 of each year.
ARTICLE 44
At the end of each financial year, the Company's financial statements will be prepared on the basis of the Company's official accounting records, as established by law.
FIRST PARAGRAPH - Profit sharing eventually attributable to the Company's officers will be deducted from the net income for the financial year, after allowing for accumulated losses and the provision for income tax pursuant to the decision of the Annual General Meeting, observing the legal limits on the same, the AGM only approving the distribution of such profit sharing after the minimum dividends established in Article 9, item "c" of these bylaws have been guaranteed to the voting shares.
SECOND PARAGRAPH - Of the net income verified in accordance with the law, 5% (five per cent) will be deducted for the constitution of a Legal Reserve Fund, until this reaches an amount equivalent to 20% (twenty per cent) of the capital stock.
THIRD PARAGRAPH - Shareholders will be entitled to receive a mandatory dividend of 25% (twenty five per cent) of the net income for the financial year, determined at the end of each financial year according to the terms of the law pursuant to the legal and statutory rights of the preferred shares. When the value of the preferential dividend paid to the preferred shares is equal to or greater than 25% of the net income for the financial year, calculated in accordance with Article 202 of Law No 6,404/76, this will be considered to represent payment in full of the obligatory dividend. If there is any residual mandatory dividend after the payment of the preferential dividend, it will be assigned:
a) in the form of a payment to the voting shares of a dividend up to the limit of the preferential dividend of the preferred shares; and
b) in the event of a continued residual balance, in the distribution of an additional dividend to the voting and the class "A" preferred shares on an equal basis, in such a way that each voting or preferred share of that class receives the same dividend.
FOURTH PARAGRAPH - The Company, may, at its discretion, draw up quarterly and/or half-yearly financial statements; if there is positive net income in such statements and in the annual statements, dividends may be distributed in accordance with the terms of the law, by prior decision of the Board of Directors, the Executive Board being prohibited from distributing dividends on an ad referendum basis.
FIFTH PARAGRAPH - The Board of Directors may declare interim dividends using accumulated profits or the profit reserves held over from previous annual or half-yearly balance sheets. Sixth Paragraph - The Company may, at the decision of the Board of Directors, pay interest on capital to its shareholders in accordance with the terms of Article 9, Paragraph 7 of Law N(0) 9,249 of December 26, 1995 and relevant legislation, offsetting the amount of interest paid or credited against the value of the preferential dividend for the preferred shares and the mandatory dividend established in Article 9 and the third paragraph of Article 44 of these bylaws, respectively.
ARTICLE 45
The dividends and the interest on capital considered in the sixth paragraph of Article 44 that is attributed to the shareholders will not be subject to interest, and if not claimed within 3 (three) years of the initial date for payment of each dividend or payment of interest on capital, will revert to the Company.
CHAPTER X
SHAREHOLDERS AGREEMENT
ARTICLE 46
The Shareholders Agreements duly registered at the Company's headquarters, which, among other things, establish clauses and conditions for the purchase and sale of shares issued by the Company, preemptive rights in acquiring the same, exercising voting rights or power of control, will be respected by the Company, by Management and by the President of the General Meetings.
SOLE PARAGRAPH - The obligations and responsibilities arising from such agreements will be valid and will be binding on third parties as soon as such agreements have been registered in the Company's books. Company management will ensure that these agreements are respected and the President of the General Meeting or the President of the Meetings of the Board of Directors will, as the case may be, act in accordance with the terms established in law.
CHAPTER XI
GENERAL CONSIDERATIONS
ARTICLE 47
The Company shall be liquidated pursuant to the terms of the law. Sole Paragraph
- In the event of the extrajudicial liquidation of the Company, it shall be
incumbent on the General Meeting to determine the manner of liquidation, appoint
the liquidator and the Audit Committee that will function during the liquidation
period.
In accordance with the original approved by the Extraordinary General Meeting of Braskem S.A. held on April 29, 2003.
/s/ Ana Patricia Soares Nogueira ---------------------------------------- Ana Patricia Soares Nogueira Secretary |
DEPOSIT AGREEMENT
by and among
COPENE - PETROQUIMICA DO NORDESTE S.A.
as Issuer
AND
CITIBANK, N.A.,
as Depositary,
AND
THE HOLDERS AND BENEFICIAL OWNERS
OF AMERICAN DEPOSITARY SHARES EVIDENCED BY
AMERICAN DEPOSITARY RECEIPTS ISSUED HEREUNDER
Dated as of November 24, 1998
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS....................................................................1 SECTION 1.1 "Affiliate".................................................1 SECTION 1.2 "American Depositary Share(s)" and "ADS(s)".................1 SECTION 1.3 "ADS Record Date"...........................................2 SECTION 1.4 "Beneficial Owner"..........................................2 SECTION 1.5. "Brazil"....................................................2 SECTION 1.6 "Business Day"..............................................2 SECTION 1.7 "Commission"................................................2 SECTION 1.8 "Company"...................................................2 SECTION 1.9 "Custodian".................................................2 SECTION 1.10 "Deliver" and "Delivery"....................................2 SECTION 1.11 "Deposit Agreement".........................................2 SECTION 1.12 "Depositary"................................................2 SECTION 1.13 "Deposited Securities"......................................2 SECTION 1.14 "Dollars" and "$"...........................................2 SECTION 1.15 "DTC".......................................................2 SECTION 1.16 "DTC Participant"...........................................3 SECTION 1.17 "Exchange Act"..............................................3 SECTION 1.18 "Foreign Currency"..........................................3 SECTION 1.19 "Holder"....................................................3 SECTION 1.20 "Pre-Release"...............................................3 SECTION 1.21 "Principal Office"..........................................3 SECTION 1.22 "Real;" "Reais" and "R$"....................................3 SECTION 1.23 "Receipt(s)"; "American Depositary Receipt(s)" and "ADR(s) "3 SECTION 1.24 "Registrar".................................................3 SECTION 1.25 "Restricted Securities".....................................3 SECTION 1.26 "Securities Act"............................................4 SECTION 1.27 "Share Registrar"...........................................4 SECTION 1.28 "Shares"....................................................4 SECTION 1.29 "United States" or "U.S."...................................4 (i) |
Page ARTICLE II APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS; DEPOSIT OF SHARES; EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS......................4 SECTION 2.1 Appointment of Depositary...................................4 SECTION 2.2 Form and Transferability of Receipts........................4 SECTION 2.3 Deposit with Custodian......................................6 SECTION 2.4 Registration of Shares......................................6 SECTION 2.5 Execution and Delivery of Receipts..........................7 SECTION 2.6 Transfer of Receipts; Combination and Split-up of Receipts..7 SECTION 2.7 Surrender of Receipts and Withdrawal of Deposited Securities..................................................8 SECTION 2.8 Limitations on Execution and Delivery, Transfer, etc. of Receipts; Suspension of Delivery, Transfer, etc.............9 SECTION 2.9 Lost Receipts, etc.........................................10 SECTION 2.10 Cancellation and Destruction of Surrendered Receipts; Maintenance of Records.....................................10 SECTION 2.11 Partial Entitlement ADSs...................................10 ARTICLE III CERTAIN OBLIGATIONS OF HOLDERS AND BENEFICIAL OWNERS OF RECEIPTS....................................11 SECTION 3.1 Proofs, Certificates and Other Information.................11 SECTION 3.2 Liability for Taxes and Other Charges......................12 SECTION 3.3 Representations and Warranties on Deposit of Shares........12 SECTION 3.4 Compliance with Information Requests.......................12 SECTION 3.5 Ownership Restrictions.....................................13 ARTICLE IV THE DEPOSITED SECURITIES......................................................13 SECTION 4.1 Cash Distributions.........................................13 SECTION 4.2 Distribution in Shares.....................................14 SECTION 4.3 Elective Distributions in Cash or Shares...................14 SECTION 4.4 Distribution of Rights to Purchase Shares..................15 SECTION 4.5 Distributions Other Than Cash, Shares or Rights to Purchase Shares............................................16 SECTION 4.6 Distributions with Respect to Deposited Securities in Bearer Form................................................17 SECTION 4.7 Redemption.................................................17 SECTION 4.8 Conversion of Foreign Currency.............................18 SECTION 4.9 Fixing of Record Date......................................18 SECTION 4.10 Voting of Deposited Securities.............................19 SECTION 4.11 Changes Affecting Deposited Securities.....................19 SECTION 4.12 Available Information......................................20 (ii) |
Page SECTION 4.13 Reports....................................................20 SECTION 4.14 List of Holders............................................20 SECTION 4.15 Taxation...................................................20 ARTICLE V THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY.................................22 SECTION 5.1 Maintenance of Office and Transfer Books by the Registrar..................................................22 SECTION 5.2 Exoneration................................................22 SECTION 5.3 Standard of Care...........................................23 SECTION 5.4 Resignation and Removal of the Depositary; Appointment of Successor Depositary....................................23 SECTION 5.5 The Custodian..............................................24 SECTION 5.6 Notices and Reports........................................25 SECTION 5.7 Issuance of Additional Shares, ADSs etc....................25 SECTION 5.8 Indemnification............................................26 SECTION 5.9 Fees and Charges of Depositary.............................27 SECTION 5.10 Pre-Release................................................27 EXHIBIT A Form of Receipt..................................................A-1 EXHIBIT B Fees Schedule....................................................B-1 |
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT, dated as of November 24, 1998, by and among (i) COPENE -
PETROQUIMICA DO NORDESTE S.A., a company incorporated under the laws of the
Federative Republic of Brazil ("Brazil"), and its successors (the "Company"),
(ii) CITIBANK, N.A., a national banking association organized under the laws of
the United States of America acting in its capacity as depositary, and any
successor depositary hereunder (the "Depositary"), and (iii) all Holders and
Beneficial Owners of American Depositary Shares evidenced by American Depositary
Receipts issued hereunder (all such capitalized terms as hereinafter defined).
W I T N E S S E T H T H A T:
WHEREAS, the Company has duly authorized and has outstanding 1,134,260 thousand non-voting preferred class "A" shares, without par value (the "Shares") which are listed for trading on Bolsa de Valores de Sao Paulo (the "Sao Paulo Stock Exchange"); and
WHEREAS, the Company desires to establish with the Depositary an ADR facility to provide for the deposit of the Shares and the creation of American Depositary Shares representing the Shares so deposited and for the execution and delivery of American Depositary Receipts evidencing such American Depositary Shares; and
WHEREAS, the Depositary is willing to act as the Depositary for such facility upon the terms set forth in this Deposit Agreement; and
WHEREAS, the American Depositary Receipts evidencing the American Depositary Shares issued pursuant to the terms of this Deposit Agreement are to be substantially in the form of Exhibit A annexed hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement; and
WHEREAS, the American Depositary Shares to be issued pursuant to the terms of this Deposit Agreement are to be listed on The New York Stock Exchange, Inc.; and
WHEREAS, the Board of Directors of the Company (or an authorized committee thereof) has duly approved the establishment of an ADR facility upon the terms set forth in this Deposit Agreement, the execution and delivery of this Deposit Agreement on behalf of the Company, and the actions of the Company and the transactions contemplated herein.
NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
All capitalized terms used, but not otherwise defined, herein shall have the meanings set forth below, unless otherwise clearly indicated:
SECTION 1.1 "Affiliate" shall have the meaning assigned to such term by the Commission (as hereinafter defined) under Regulation C promulgated under the Securities Act (as hereinafter defined).
SECTION 1.2 "American Depositary Share(s)" and "ADS(s)" American Depositary Share(s) shall mean with respect to any American Depositary Receipt, the rights and interests in the Deposited Securities granted to the Holders and Beneficial Owners pursuant to the terms and conditions of this Deposit Agreement and the American Depositary Receipts issued hereunder. Each American Depositary Share shall represent 50 Shares, until there shall occur a distribution
upon Deposited Securities referred to in Section 4.2 or a change in Deposited Securities referred to in Section 4.11 with respect to which additional American Depositary Receipts are not executed and delivered, and thereafter each American Depositary Share shall represent the Shares or Deposited Securities specified in such Sections.
SECTION 1.3 "ADS Record Date" shall have the meaning given to such term in
Section 4.9.
SECTION 1.4 "Beneficial Owner" shall mean as to any ADS, any person or entity having a beneficial interest deriving from the ownership of such ADS. A Beneficial Owner may or may not be the Holder of the ADR evidencing such ADSs. A Beneficial Owner shall be able to exercise any right or receive any benefit hereunder solely through the person who is the Holder of the ADR(s) evidencing the ADSs owned by such Beneficial Owner.
SECTION 1.5. "Brazil" shall mean the Federal Republic of Brazil.
SECTION 1.6 "Business Day" shall mean any day on which both the banks in both Rio de Janeiro, Brazil and New York are open for business.
SECTION 1.7 "Commission" shall mean the Securities and Exchange Commission of the United States or any successor governmental agency in the United States.
SECTION 1.8 "Company" shall mean Copene - Petroquimica do Nordeste S.A., a company incorporated and existing under the laws of Brazil, and its successors.
SECTION 1.9 "Custodian" shall mean, as of the date hereof, Banco Itau S.A.,
having its principal office at Rua Boa Vista, 176, Sao Paulo, Brazil, as the
custodian for the purposes of this Deposit Agreement, and any other firm or
corporation which may be appointed by the Depositary pursuant to the terms of
Section 5.5 as a successor or an additional custodian or custodians hereunder,
as the context shall require. The term "Custodians" shall mean all custodians,
collectively.
SECTION 1.10 "Deliver" and "Delivery" shall mean, when used in respect of American Depositary Shares, Receipts, Deposited Securities and Shares, the physical delivery of the certificate representing such security, or the electronic delivery of such security by means of book-entry transfer, as appropriate.
SECTION 1.11 "Deposit Agreement" shall mean this Deposit Agreement and all exhibits hereto, as the same may from time to time be amended and supplemented in accordance with the terms hereof.
SECTION 1.12 "Depositary" shall mean Citibank, N.A., a national banking association organized under the laws of the United States of America, in its capacity as depositary under the terms of this Deposit Agreement, and any successor depositary hereunder.
SECTION 1.13 "Deposited Securities" shall mean Shares at any time deposited under this Deposit Agreement and any and all other securities, property and cash held by the Depositary or the Custodian in respect thereof, subject, in the case of cash, to the provisions of Section 4.8. The collateral delivered in connection with Pre-Release Transactions described in Section 5.10 hereof shall not constitute Deposited Securities.
SECTION 1.14 "Dollars" and "$" shall refer to the lawful currency of the United States.
SECTION 1.15 "DTC" shall mean The Depository Trust Company, a national clearinghouse and the central book-entry settlement system for securities traded in the United States and, as such, the custodian for the securities of DTC Participants (as hereinafter defined) maintained in DTC, and any successor thereto.
SECTION 1.16 "DTC Participant" shall mean any financial institution (or any nominee of such institution) having one or more participant accounts with DTC for receiving, holding and delivering the securities and cash held in DTC.
SECTION 1.17 "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as from time to time amended.
SECTION 1.18 "Foreign Currency" shall mean any currency other than Dollars.
SECTION 1.19 "Holder" shall mean the person in whose name a Receipt is registered on the books of the Depositary (or the Registrar, if any) maintained for such purpose. A Holder may or may not be a Beneficial Owner. If a Holder is not the Beneficial Owner of the ADSs evidenced by the Receipt registered in its name, such person shall be deemed to have all requisite authority to act on behalf of the Beneficial Owners of such ADSs.
SECTION 1.20 "Pre-Release" shall have the meaning set forth in Section 5.10 hereof.
SECTION 1.21 "Principal Office" when used with respect to the Depositary, shall mean the principal office of the Depositary at which at any particular time its depositary receipts business shall be administered, which, at the date of this Deposit Agreement, is located at 111 Wall Street, New York, New York 10043, U.S.A.
SECTION 1.22 "Real;" "Reais" and "R$" shall refer to the lawful currency of Brazil.
SECTION 1.23 "Receipt(s)"; "American Depositary Receipt(s)" and "ADR(s)" shall mean the certificate(s) issued by the Depositary evidencing the American Depositary Shares issued under the terms of this Deposit Agreement, as such Receipts may be amended from time to time in accordance with the provisions of this Deposit Agreement. A Receipt may evidence any number of American Depositary Shares and may, in the case of American Depositary Shares held through a central depository such as DTC, be in the form of a "Balance Certificate."
SECTION 1.24 "Registrar" shall mean the Depositary or, with the approval of the Company, any bank or trust company having an office in the Borough of Manhattan, The City of New York, which shall be appointed by the Depositary to register ownership of Receipts and transfers of Receipts as herein provided, and shall include any co-registrar appointed by the Depositary, with the approval of the Company, for such purposes. Registrars (other than the Depositary) may be removed and substitutes appointed by the Depositary with the approval of the Company. Each Registrar (other than the Depositary) appointed pursuant to this Deposit Agreement shall be required to give notice in writing to the Depositary accepting such appointment and agreeing to be bound by the applicable terms of this Deposit Agreement.
SECTION 1.25 "Restricted Securities" shall mean Shares, or American Depositary Shares representing such Shares, which (i) have been acquired directly or indirectly from the Company or any of its Affiliates in a transaction or chain of transactions not involving any public offering and subject to resale limitations under the Securities Act or the rules issued thereunder, or (ii) are held by an officer or director (or persons performing similar functions) or other Affiliate of the Company, or (iii) are subject to other restrictions on sale or deposit under the laws of the United States, Brazil, or under a shareholders' agreement or the Estatuto Social of the Company or under the regulations of an applicable securities exchange unless, in each case, such Shares are being sold to persons other than an Affiliate of the Company in a transaction (i) covered by an effective resale registration statement or (ii) exempt from the registration requirements of the Securities Act (as hereinafter defined), and the Shares are not, when held by such person, Restricted Securities.
SECTION 1.26 "Securities Act" shall mean the United States Securities Act of 1933, as from time to time amended.
SECTION 1.27 "Share Registrar" shall mean Banco Itau S.A. or a depository institution organized under the laws of Brazil, which carries out the duties of registrar for the Shares or any successor as Share Registrar for such Shares appointed by the Company.
SECTION 1.28 "Shares" shall mean the Company's non-voting preferred class "A" (acoes preferencias classe "A") shares, without par value, validly issued and outstanding and fully paid and may, if the Depositary so agrees after consultation with the Company, include evidence of the right to receive Shares; provided that in no event shall Shares include evidence of the right to receive Shares with respect to which the full purchase price has not been paid or Shares as to which preemptive rights have theretofore not been validly waived or exercised; provided further, however, that, if there shall occur any change in par value, split-up, consolidation, reclassification, conversion or any other event described in Section 4.8, in respect of the Shares of the Company, the term "Shares" shall thereafter, to the extent permitted by law, represent the successor securities resulting from such change in par value, split-up, consolidation, exchange, conversion, reclassification or event.
SECTION 1.29 "United States" or "U.S." shall mean the United States of America.
ARTICLE II
APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS;
DEPOSIT OF SHARES; EXECUTION
AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS
SECTION 2.1 Appointment of Depositary. The Company hereby appoints the Depositary as depositary for the Deposited Securities and hereby authorizes and directs the Depositary to act in accordance with the terms set forth in this Deposit Agreement. Each Holder and each Beneficial Owner, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms of this Deposit Agreement, shall be deemed for all purposes to (a) be a party to and bound by the terms of this Deposit Agreement and (b) appoint the Depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in this Deposit Agreement, to adopt any and all procedures necessary to comply with applicable law and to take such action as the Depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of this Deposit Agreement (the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof).
SECTION 2.2 Form and Transferability of Receipts.
(a) Form. American Depositary Shares shall be evidenced by definitive Receipts which shall be engraved, printed, lithographed or produced in such other manner as may be agreed upon by the Company and the Depositary. The Receipts shall be substantially in the form set forth in Exhibit A to this Deposit Agreement, with any appropriate insertions, modifications and omissions. Receipts shall be (i) dated, (ii) executed by the manual or facsimile signature of a duly authorized signatory of the Depositary, (iii) countersigned by the manual or facsimile signature of a duly authorized signatory of the Registrar and (iv) registered in the books maintained by the Registrar for the issuance and transfer of Receipts. No Receipt and no American Depositary Share evidenced thereby shall be entitled to any benefits under this Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company,
unless such Receipt shall have been so dated, signed, countersigned and registered. Receipts bearing the facsimile signature of a duly-authorized signatory of the Depositary or the Registrar, who at the time of signature was a duly-authorized signatory of the Depositary or the Registrar, as the case may be, shall bind the Depositary, notwithstanding the fact that such signatory has ceased to be so authorized prior to the delivery of such Receipt by the Depositary. The Receipts shall bear a CUSIP number that is different from any CUSIP number that was, is or may be assigned to any depositary receipts previously or subsequently issued pursuant to any other arrangement between the Depositary (or any other depositary) and the Company which are not Receipts issued hereunder.
(b) Legends. The Receipts may be endorsed with or have incorporated in the
text thereof such legends or recitals or changes not inconsistent with the
provisions of this Deposit Agreement as (i) may be necessary to enable the
Depositary to perform its obligations hereunder, (ii) may be required to comply
with any applicable law or regulations, or with the rules and regulations of any
securities exchange or market upon which American Depositary Shares may be
traded, listed or quoted or to conform with any usage with respect thereto,
(iii) may be necessary to indicate any special limitations or restrictions to
which any particular Receipts or American Depositary Shares are subject by
reason of the date of issuance of the Deposited Securities, or (iv) may be
required by any book-entry system in which the ADSs are held.
(c) Title. Subject to the limitations contained herein and in the form of Receipt, title to a Receipt (and to each American Depositary Share evidenced thereby), shall be transferable by delivery of the Receipt, provided that the Receipt has been properly endorsed or accompanied by proper instruments of transfer, such Receipt being a certificated security under the laws of the State of New York. However, notwithstanding any notice to the contrary, the Depositary may deem and treat the Holder of a Receipt (that is, the person in whose name a Receipt is registered on the books of the Depositary) as the absolute owner thereof for all purposes, and the Depositary shall have no obligation or be subject to any liability under this Deposit Agreement to any holder of a Receipt or any beneficial owner unless such holder is the registered Holder of such Receipt on the books of the Depositary or, in the case of a Beneficial Owner, such Beneficial Owner or the Beneficial Owner's representative is the Holder registered on the books of the Depositary.
(d) Book-Entry Systems. The Depositary shall make arrangements for the acceptance of the American Depositary Shares into DTC. A single ADR in the form of a "Balance Certificate" will evidence all ADSs held through DTC and will be registered in the name of the nominee for DTC (currently "Cede & Co."). As such, the nominee for DTC will be the only "Holder" of the ADR evidencing all ADSs held through DTC. Each Beneficial Owner of ADSs held through DTC must rely upon the procedures of DTC and the DTC Participants to exercise or be entitled to any rights attributable to such ADSs. The DTC Participants shall for all purposes be deemed to have all requisite power and authority to act on behalf of the Beneficial Owners of the ADSs held in the DTC Participants' respective accounts in DTC, and the Depositary shall for all purposes be authorized to rely upon any instructions and information given to it by DTC Participants on behalf of Beneficial Owners of ADSs. So long as ADSs are held through DTC or unless otherwise required by law, ownership of beneficial interests in the ADR registered in the name of the nominee for DTC will be shown on, and transfers of such ownership will be effected only through, records maintained by (i) DTC (or its nominee), or (ii) DTC Participants (or their nominees).
SECTION 2.3 Deposit with Custodian. Subject to the terms and conditions of this Deposit Agreement and applicable law, Shares or evidence of rights to receive Shares (other than Restricted Securities) may be deposited by any person (including the Depositary in its individual capacity but subject, however, in the case of the Company or any Affiliate of the Company, to Section 5.7 hereof) at any time, whether or not the transfer books of the Company or the Share Registrar, if any, are closed, by Delivery of the Shares to the Custodian, and (A) (in the case of Shares represented by certificates issued in registered form) appropriate instruments of transfer or endorsement, in a form satisfactory to the Custodian or, (in the case of Shares represented by certificates in bearer form) of the requisite coupons pertaining thereto, (B) such certifications and payments (including, without limitation, the Depositary's fees and related charges) and evidence of such payments (including, without limitation, stamping or otherwise marking such Shares by way of receipt) as may be required by the Depositary or the Custodian in accordance with the provisions of this Deposit Agreement, (C) if the Depositary so requires, a written order directing the Depositary to execute and deliver to, or upon the written order of, the person or persons stated in such order a Receipt or Receipts for the number of American Depositary Shares representing the Shares so deposited, (D) evidence satisfactory to the Depositary (which may include an opinion of counsel reasonably satisfactory to the Depositary) that all necessary approvals have been granted by, and there has been compliance with the rules and regulations of, the Banco Central do Brasil (the "Central Bank of Brazil"), the Comissao de Valores Mobiliarios ("CVM") and any other applicable governmental agency in Brazil, and (E) if the Depositary so requires, (i) an agreement, assignment or instrument satisfactory to the Depositary or the Custodian which provides for the prompt transfer by any person in whose name the Shares are or have been recorded to the Custodian of any distribution, or right to subscribe for additional Shares or to receive other property in respect of any such deposited Shares or, in lieu thereof, such indemnity or other agreement as shall be satisfactory to the Depositary or the Custodian and (ii) if the Shares are registered in the name of the person on whose behalf they are presented for deposit, a proxy or proxies entitling the Custodian to exercise voting rights in respect of the Shares for any and all purposes until the Shares so deposited are registered in the name of the Depositary, the Custodian or any nominee. Without limiting any other provision of this Deposit Agreement, the Depositary shall instruct the Custodian not to, and the Depositary shall not knowingly, accept for deposit (a) any Restricted Securities or (b) any fractional Shares or fractional Deposited Securities or (c) a number of Shares or Deposited Securities which upon application of the ADS to Shares ratio would give rise to fractional ADSs. No Share shall be accepted for deposit unless accompanied by evidence, if any is required by the Depositary, that is reasonably satisfactory to the Depositary or the Custodian that all conditions to such deposit have been satisfied by the person depositing such Shares under the laws and regulations of Brazil and any necessary approval has been granted by any governmental body in Brazil, if any, which is then performing the function of the regulator of currency exchange. The Depositary may issue Receipts against evidence of rights to receive Shares from the Company, any agent of the Company or any custodian, registrar, transfer agent, clearing agency or other entity involved in ownership or transaction records in respect of the Shares. Such evidence of rights shall consist of written blanket or specific guarantees of ownership of Shares furnished on behalf of the holder thereof.
SECTION 2.4 Registration of Shares. The Depositary shall instruct the Custodian upon each delivery of certificates representing registered Shares being deposited hereunder with
the Custodian (or other Deposited Securities pursuant to Article IV hereof), together with the other documents above specified, to present such certificate or certificates, together with the appropriate instrument or instruments of transfer or endorsement, duly stamped, to the Share Registrar for transfer and registration of the Shares (as soon as transfer and registration can be accomplished and at the expense of the person for whom the deposit is made) in the name of the Depositary, the Custodian or a nominee of either. Deposited Securities shall be held by the Depositary or by a Custodian for the account and to the order of the Depositary or a nominee, in each case on behalf of the Holders and Beneficial Owners, at such place or places as the Depositary or the Custodian shall determine.
Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under this Deposit Agreement any Shares or other Deposited Securities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such Shares or other Deposited Securities, or any Shares or Deposited Securities the deposit of which would violate any provisions of the Estatuto Social (bylaws) of the Company.
SECTION 2.5 Execution and Delivery of Receipts. The Depositary has made
arrangements with the Custodian to confirm to the Depositary (i) that a deposit
of Shares has been made pursuant to Section 2.3 hereof, (ii) that any such
Deposited Securities have been recorded in the name of the Depositary, the
Custodian or a nominee of either on the shareholders' register maintained by or
on behalf of the Company if registered Shares have been deposited or if deposit
is made by book-entry transfer, confirmation of such transfer in the books of
the Share Registrar, (iii) that all required documents have been received, and
(iv) the person or persons to whom or upon whose written order American
Depositary Shares are deliverable in respect thereof and the number of American
Depositary Shares to be evidenced thereby. Such notification may be made by
letter, cable, telex, swift message or, at the risk and expense of the person
making the deposit, by facsimile or other means of electronic transmission. Upon
receiving such notice from the Custodian, the Depositary, subject to the terms
and conditions of this Deposit Agreement, shall issue the American Depositary
Shares representing the Shares so deposited to or upon the order of the
person(s) named in the notice delivered to the Depositary and shall execute and
deliver a Receipt or Receipts, registered in the name or names requested by such
person(s) and evidencing the aggregate number of American Depositary Shares to
which such person(s) are entitled, but only upon payment to the Depositary of
the charges of the Depositary for accepting a deposit, issuing American
Depositary Shares and executing and delivering such Receipt or Receipts (as set
forth in Section 5.9 and Exhibit B hereto) and all taxes and governmental
charges and fees payable in connection with such deposit and the transfer of the
Shares and the issuance of the Receipt or Receipts. The Depositary shall only
issue American Depositary Shares in whole numbers and deliver American
Depositary Receipts evidencing whole numbers of American Depositary Shares.
Nothing herein shall prohibit any Pre-Release Transaction upon the terms set
forth in this Deposit Agreement.
SECTION 2.6 Transfer of Receipts; Combination and Split-up of Receipts.
(a) Transfer. The Registrar, subject to the terms and conditions of this Deposit Agreement, shall register transfers of Receipts on its books, upon surrender at the Principal Office of the Depositary of a Receipt by the Holder thereof in person or by duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer (including signature guarantees in accordance with standard industry practice) and duly stamped as may be required by the laws of the State of New York and of the United States. Subject to the terms and
conditions of this Deposit Agreement, including payment of the applicable fees and charges of the Depositary set forth in Section 5.9 and Exhibit B hereto, the Depositary shall execute, and if the Depositary's signature is by facsimile, the Registrar shall manually countersign, a new Receipt or Receipts and deliver the same to or upon the order of the person entitled thereto evidencing the same aggregate number of American Depositary Shares as those evidenced by the Receipts surrendered.
(b) Combination & Split Up. The Depositary, subject to the terms and conditions of this Deposit Agreement shall, upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts and upon payment to the Depositary of the applicable fees and charges set forth in Section 5.9 and Exhibit B hereto, execute, and if the Depositary's signature is by facsimile, the Registrar shall manually countersign and deliver, a new Receipt or Receipts for any authorized number of American Depositary Shares requested, evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered.
(c) Co-Transfer Agents. The Depositary may, with the approval of the
Company, appoint one or more co-transfer agents for the purpose of effecting
transfers, combinations and split-ups of Receipts at designated transfer offices
on behalf of the Depositary. In carrying out its functions, a co-transfer agent
may require evidence of authority and compliance with applicable laws and other
requirements by Holders or persons entitled to such Receipts and will be
entitled to protection and indemnity to the same extent as the Depositary. Such
co-transfer agents may be removed and substitutes appointed by the Depositary
with the approval of the Company. Each co-transfer agent appointed under this
Section 2.6 (other than the Depositary) shall give notice in writing to the
Depositary accepting such appointment and agreeing to be bound by the applicable
terms of this Deposit Agreement.
SECTION 2.7 Surrender of Receipts and Withdrawal of Deposited Securities.
Upon surrender, at the Principal Office of the Depositary, of American
Depositary Shares for the purpose of withdrawal of the Deposited Securities
represented thereby, and upon payment of (i) the fees and charges of the
Depositary for the making of withdrawals of Deposited Securities and
cancellation of Receipts (as set forth in Section 5.9 and Exhibit B hereof) and
(ii) all applicable taxes and governmental charges payable in connection with
such surrender and withdrawal, and subject to the terms and conditions of this
Deposit Agreement, the Company's Estatuto Social, Section 7.8 hereof and any
other provisions of or governing the Deposited Securities and other applicable
laws, the Holder of such American Depositary Shares shall be entitled to
Delivery, to him or upon his order, of the Deposited Securities at the time
represented by the American Depositary Shares so surrendered. American
Depositary Shares may be surrendered for the purpose of withdrawing Deposited
Securities by delivery of a Receipt evidencing such American Depositary Shares
(if held in registered form) or by book-entry delivery of such American
Depositary Shares to the Depositary.
A Receipt surrendered for such purposes shall, if so required by the Depositary, be properly endorsed in blank or accompanied by proper instruments of transfer in blank, and if the Depositary so requires, the Holder thereof shall execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to or upon the written order of a person or persons designated in such order. Thereupon, the Depositary shall direct the Custodian to Deliver (without unreasonable delay) at the designated office of the Custodian (subject to Sections 2.8, 3.1, 3.2, 5.9, and to the other terms and
conditions of this Deposit Agreement, to the Estatuto Social of the Company, to the provisions of or governing the Deposited Securities and to applicable laws, now or hereafter in effect) to or upon the written order of the person or persons designated in the order delivered to the Depositary as provided above, the Deposited Securities represented by such American Depositary Shares, together with any certificate or other proper documents of or relating to title of the Deposited Securities, or evidence of the electronic transfer thereof (if available), as the case may be, to or for the account of such person. The Depositary may make delivery to such person or persons at the Principal Office of the Depositary of any dividends or cash distributions with respect to the Deposited Securities represented by such American Depositary Shares, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary.
The Depositary shall not accept for surrender a Receipt evidencing American Depositary Shares representing less than one Share. The Depositary may, in its discretion, refuse to accept for surrender a number of American Depositary Shares representing a number other than a whole number of Shares. In the case of surrender of a Receipt evidencing a number of American Depositary Shares representing other than a whole number of Shares, the Depositary shall cause ownership of the appropriate whole number of Shares to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) issue and deliver to the person surrendering such Receipt a new Receipt evidencing American Depositary Shares representing any remaining fractional Share, or (ii) sell or cause to be sold the fractional Shares represented by the Receipt surrendered and remit the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the Receipt.
At the request, risk and expense of any Holder so surrendering a Receipt, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any cash or other property (other than securities) held in respect of, and any certificate or certificates and other proper documents of or relating to title to, the Deposited Securities represented by such Receipt to the Depositary for delivery at the Principal Office of the Depositary, and for further delivery to such Holder. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission.
SECTION 2.8 Limitations on Execution and Delivery, Transfer, etc. of Receipts; Suspension of Delivery, Transfer, etc.
(a) Additional Requirements. As a condition precedent to the execution and
delivery, registration, registration of transfer, split-up, combination or
surrender of any Receipt, the delivery of any distribution thereon or withdrawal
of any Deposited Securities, the Depositary or the Custodian may require (i)
payment from the depositor of Shares or presenter of the Receipt of a sum
sufficient to reimburse it for any tax or other governmental charge and any
stock transfer or registration fee with respect thereto (including any such tax
or charge and fee with respect to Shares being deposited or withdrawn) and
payment of any applicable fees and charges of the Depositary as provided in
Section 5.9 and Exhibit B hereof, (ii) the production of proof satisfactory to
it as to the identity and genuineness of any signature or any other matter
contemplated by Section 3.1 hereof and (iii) compliance with (A) any laws or
governmental regulations relating to the execution and delivery of Receipts or
American Depositary Shares or to the withdrawal of Deposited Securities and (B)
such reasonable regulations as the Depositary
and the Company may establish consistent with the provisions of this Deposit Agreement and applicable law.
(b) Additional Limitations. The issuance of ADSs against deposits of Shares generally or against deposits of particular Shares may be suspended, or the issuance of ADSs against the deposit of particular Shares may be withheld, or the registration of transfer of Receipts in particular instances may be refused, or the registration of transfers of Receipts generally may be suspended, during any period when the transfer books of the Company, the Depositary, a Registrar or the Share Registrar are closed or if any such action is deemed necessary or advisable by the Depositary or the Company, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the Receipts or Shares are listed, or under any provision of this Deposit Agreement or provisions of, or governing, the Deposited Securities, or any meeting of shareholders of the Company or for any other reason, subject, in all cases, to Section 7.8 hereof.
(c) Regulatory Restrictions. Notwithstanding any provision of this Deposit
Agreement or any Receipt to the contrary, the Holders of Receipts are entitled
to surrender outstanding ADSs to withdraw the Deposited Securities at any time
subject only to (i) temporary delays caused by closing the transfer books of the
Depositary or the Company or the deposit of Shares in connection with voting at
a shareholders' meeting or the payment of dividends, (ii) the payment of fees,
taxes and similar charges, (iii) compliance with any U.S. or foreign laws or
governmental regulations relating to the Receipts or to the withdrawal of the
Deposited Securities, and (iv) other circumstances specifically contemplated by
Section I.A.(l) of the General Instructions to Form F-6 (as such General
Instructions may be amended from time to time).
SECTION 2.9 Lost Receipts, etc. In case any Receipt shall be mutilated, destroyed, lost, or stolen, the Depositary shall execute and deliver a new Receipt of like tenor at the expense of the Holder (a) in the case of a mutilated Receipt, in exchange of and substitution for such mutilated Receipt upon cancellation thereof, or (b) in lieu of and in substitution for such destroyed, lost, or stolen Receipt, after the Holder thereof (i) has submitted to the Depositary a written request for such exchange and substitution before the Depositary has notice that the Receipt has been acquired by a bona fide purchaser, (ii) has provided such security or indemnity (including an indemnity bond) as may be required by the Depositary to save it and any of its agents harmless, and (iii) has satisfied any other reasonable requirements imposed by the Depositary, including, without limitation, evidence satisfactory to the Depositary of such destruction, loss or theft of such Receipt, the authenticity thereof and the Holder's ownership thereof.
SECTION 2.10 Cancellation and Destruction of Surrendered Receipts; Maintenance of Records. All Receipts surrendered to the Depositary shall be canceled by the Depositary. The Depositary is authorized to destroy Receipts so canceled, provided the Depositary maintains a record of all destroyed Receipts.
SECTION 2.11 Partial Entitlement ADSs. In the event any Shares are
deposited which entitle the holders thereof to receive a per-share distribution
or other entitlement in an amount different from the Shares then on deposit (the
Shares then on deposit collectively, "Full Entitlement Shares" and the Shares
with different entitlement, "Partial Entitlement Shares"), the Depositary shall
(i) cause the Custodian to hold Partial Entitlement Shares separate and distinct
from Full Entitlement Shares, and (ii) subject to the terms of this Agreement, issue ADSs and deliver ADRs representing Partial Entitlement Shares which are separate and distinct from the ADSs and ADRs representing Full Entitlement Shares, by means of separate CUSIP numbering and legending (if necessary) ("Partial Entitlement ADSs/ADRs" and "Full Entitlement ADSs/ADRs", respectively). If and when Partial Entitlement Shares become Full Entitlement Shares, the Depositary shall (a) give notice thereof to Holders of Partial Entitlement ADSs and give Holders of Partial Entitlement ADRs the opportunity to exchange such Partial Entitlement ADRs for Full Entitlement ADRs, (b) cause the Custodian to transfer the Partial Entitlement Shares into the account of the Full Entitlement Shares, and (c) take such actions as are necessary to remove the distinctions between (i) the Partial Entitlement ADRs and ADSs, on the one hand, and (ii) the Full Entitlement ADRs and ADSs on the other. Holders and Beneficial Owners of Partial Entitlement ADSs shall only be entitled to the entitlement of Partial Entitlement Shares. Holders and Beneficial Owners of Full Entitlement ADSs shall be entitled only to the entitlements of Full Entitlement Shares. All provisions and conditions of this Agreement shall apply to Partial Entitlement ADRs and ADSs to the same extent as Full Entitlement ADRs and ADSs, except as contemplated by this Section 2.11. The Depositary is authorized to take any and all other actions as may be necessary (including, without limitation, making the necessary notations on Receipts) to give effect to the terms of this Section 2.11. The Company agrees to give timely written notice to the Depositary if any Shares issued or to be issued are Partial Entitlement Shares and shall assist the Depositary with the establishment of procedures enabling the identification of Partial Entitlement Shares upon Delivery to the Custodian.
ARTICLE III
CERTAIN OBLIGATIONS OF HOLDERS
AND BENEFICIAL OWNERS OF RECEIPTS
SECTION 3.1 Proofs, Certificates and Other Information. Any person presenting Shares for deposit, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approval, legal or beneficial ownership of ADSs and Deposited Securities, compliance with applicable laws and the terms of this Deposit Agreement and the provisions of, or governing, the Deposited Securities or other information; to execute such certifications and to make such representations and warranties, and to provide such other information and documentation (or in the case of Shares in registered form presented for deposit, such information relating to the registration on the books of the Company or of the appointed agent of the Company for the registration and transfer of Shares) as the Depositary or the Custodian may deem necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations hereunder. The Depositary and the Registrar, as applicable, may withhold the execution or delivery or registration of transfer of any Receipt or the distribution or sale of any dividend or distribution of rights or of the proceeds thereof, or to the extent not limited by the terms of Section 7.8 hereof, the delivery of any Deposited Securities, until such proof or other information is filed or such certifications are executed, or such representations are made, or such other documentation or information provided, in each case to the Depositary's, the Registrar's and the Company's satisfaction. The
Depositary shall provide the Company, in a timely manner, with copies or originals if necessary and appropriate of (i) any such proofs of citizenship or residence, taxpayer status, or exchange control approval which it receives from Holders and Beneficial Owners, and (ii) any other information or documents which the Company may reasonably request and which the Depositary shall request and receive from any Holder or Beneficial Owner or any person presenting Shares for deposit or ADSs for cancellation and withdrawal. Nothing herein shall obligate the Depositary to (i) obtain any information for the Company if not provided by the Holders or Beneficial Owners or (ii) verify or vouch for the accuracy of the information so provided by the Holders or Beneficial Owners.
SECTION 3.2 Liability for Taxes and Other Charges. If any tax or other governmental charge shall become payable by the Depositary or the Custodian with respect to any ADR or any Deposited Securities or American Depositary Shares, such tax or other governmental charge shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or the Depositary may withhold or deduct from any distributions made in respect of Deposited Securities and may sell for the account of a Holder and/or Beneficial Owner any or all of the Deposited Securities and apply such distributions and sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, with the Holder and the Beneficial Owner remaining fully liable for any deficiency. The Custodian may refuse the deposit of Shares, and the Depositary may refuse to issue ADSs, to deliver ADRs, register the transfer, split-up or combination of ADRs and (subject to Section 7.8) the withdrawal of Deposited Securities, until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner agrees to indemnify the Depositary, the Company, the Custodian, and each of their respective agents, officers, directors, employees and Affiliates for, and to hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for such Holder and/or Beneficial Owner.
SECTION 3.3 Representations and Warranties on Deposit of Shares. Each person depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares and the certificates therefor are duly authorized, validly issued, fully paid, non-assessable and were legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares have been validly waived or exercised, (iii) the person making such deposit is duly authorized so to do, (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the American Depositary Shares issuable upon such deposit will not be, Restricted Securities and (v) the Shares presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of American Depositary Shares in respect thereof and the transfer of such American Depositary Shares. If any such representations or warranties are false in any way, the Company and the Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof.
SECTION 3.4 Compliance with Information Requests. Notwithstanding any other provision of this Deposit Agreement, each Holder and Beneficial Owner agrees to comply with requests from the Company pursuant to Brazilian law, the rules and requirements of the Sao Paulo Stock Exchange, and any other stock exchange on which the Shares are, or will be, registered, traded or listed or the Estatuto Social of the Company, which are made to provide information, inter alia, as to the capacity in which such Holder or Beneficial Owner owns
American Depositary Shares (and Shares as the case may be) and regarding the identity of any other person interested in such American Depositary Shares and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request. The Depositary agrees to use its reasonable efforts to forward upon the request of the Company, at the Company's expense, any such request from the Company to the Holders and to forward to the Company any such responses to such requests received by the Depositary.
SECTION 3.5 Ownership Restrictions. Notwithstanding any other provision in this Deposit Agreement the Company may restrict transfers of the Shares where such transfer might result in ownership of Shares exceeding limits imposed by applicable law or the Estatuto Social of the Company. The Company may also restrict, in such manner as it deems appropriate, transfers of the American Depositary Shares where such transfer may result in the total number of Shares represented by the American Depositary Shares owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including, but not limited to, the imposition of restrictions on the transfer of American Depositary Shares, the removal or limitation of voting rights or the mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Shares represented by the American Depositary Shares held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such sale or disposition is permitted by applicable law and the Estatuto Social of the Company.
ARTICLE IV
THE DEPOSITED SECURITIES
SECTION 4.1 Cash Distributions. Whenever the Depositary receives confirmation from the Custodian of receipt of any cash dividend or other cash distribution on any Deposited Securities, or receives proceeds from the sale of any Shares, rights, securities or other entitlements under the terms hereof, the Depositary will, if at the time of receipt thereof any amounts received in a foreign currency can in the judgment of the Depositary (pursuant to Section 4.8 hereof) be converted on a practicable basis into Dollars transferable to the United States, promptly convert or cause to be converted such cash dividend, distribution or proceeds into Dollars (on the terms described in Section 4.8) and will distribute promptly the amount thus received (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the Holders of record as of the ADS Record Date in proportion to the number of American Depositary Shares held by such Holders respectively as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of Receipts outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the American Depositary Shares representing such Deposited Securities shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company, the Custodian or the Depositary to the relevant governmental authority. Evidence of
payment thereof by the Company shall be forwarded by the Company to the Depositary upon request.
SECTION 4.2 Distribution in Shares. If any distribution upon any Deposited
Securities consists of a dividend in, or free distribution of, Shares, the
Company shall cause such Shares to be deposited with the Custodian and
registered, as the case may be, in the name of the Depositary, the Custodian or
any of their nominees. Upon receipt of confirmation of such deposit from the
Custodian, the Depositary shall establish the ADS Record Date upon the terms
described in Section 4.9 and shall, subject to Section 5.9 hereof, either (i)
distribute to the Holders as of the ADS Record Date in proportion to the number
of American Depositary Shares held as of the ADS Record Date, additional
American Depositary Shares, which represent in the aggregate the number of
Shares received as such dividend, or free distribution, subject to the other
terms of this Deposit Agreement (including, without limitation, (a) the
applicable fees and charges of, and expenses incurred by, the Depositary and (b)
taxes), or (ii) if additional American Depositary Shares are not so distributed,
each American Depositary Share issued and outstanding after the ADS Record Date
shall, to the extent permissible by law, thenceforth also represent rights and
interests in the additional Shares distributed upon the Deposited Securities
represented thereby (net of (a) the applicable fees and charges of, and expenses
incurred by, the Depositary and (b) taxes). In lieu of delivering fractional
American Depositary Shares, the Depositary shall sell the number of Shares
represented by the aggregate of such fractions and distribute the proceeds upon
the terms described in Section 4.1. In the event that the Depositary determines
that any distribution in property (including Shares) is subject to any tax or
other governmental charges which the Depositary is obligated to withhold, or, if
the Company, in the fulfillment of its obligation under Section 5.7 hereof, has
furnished an opinion of U.S. counsel (reasonably acceptable to the Depositary)
determining that Shares must be registered under the Securities Act or other
laws in order to be distributed to Holders (and no such registration statement
has been declared effective), the Depositary may dispose of all or a portion of
such property (including Shares and rights to subscribe therefor) in such
amounts and in such manner, including by public or private sale, as the
Depositary deems necessary and practicable, and the Depositary shall distribute
the net proceeds of any such sale (after deduction of applicable (a) taxes and
(b) fees and charges of, and expenses incurred by, the Depositary) to Holders
entitled thereto upon the terms described in Section 4.1. The Depositary shall
hold and/or distribute any unsold balance of such property in accordance with
the provisions of this Deposit Agreement.
SECTION 4.3 Elective Distributions in Cash or Shares. Whenever the Company
intends to distribute a dividend payable at the election of the holders of
Shares in cash or in additional Shares, the Company shall give notice thereof to
the Depositary at least 30 days prior to the proposed distribution stating
whether or not it wishes such elective distribution to be made available to
Holders of ADSs. Upon receipt of notice indicating that the Company wishes such
elective distribution to be made available to Holders of ADSs, the Depositary
shall consult with the Company to determine, and the Company shall assist the
Depositary in its determination, whether it is lawful and reasonably practicable
to make such elective distribution available to the Holders of ADSs. The
Depositary shall make such elective distribution available to Holders only if
(i) the Depositary shall have determined that such distribution is reasonably
practicable and (ii) the Depositary shall have received satisfactory
documentation within the terms of Section 5.7. If the above conditions are not
satisfied, the Depositary shall, to the extent permitted by law, distribute to
the Holders, on the basis of the same determination as is made in the local
market in
respect of the Shares for which no election is made, either (X) cash upon the
terms described in Section 4.1 or (Y) additional ADSs representing such
additional Shares upon the terms described in Section 4.2. If the above
conditions are satisfied, the Depositary shall establish an ADS Record Date (on
the terms described in Section 4.9) and establish procedures to enable Holders
to elect the receipt of the proposed dividend in cash or in additional ADSs. The
Company shall assist the Depositary in establishing such procedures to the
extent necessary. If a Holder elects to receive the proposed dividend (X) in
cash, the dividend shall be distributed upon the terms described in Section 4.1,
or (Y) in ADSs, the dividend shall be distributed upon the terms described in
Section 4.2. Nothing herein shall obligate the Depositary to make available to
Holders a method to receive the elective dividend in Shares (rather than ADSs).
There can be no assurance that Holders generally, or any Holder in particular,
will be given the opportunity to receive elective distributions on the same
terms and conditions as the holders of Shares.
SECTION 4.4 Distribution of Rights to Purchase Shares.
(a) Distribution to ADS Holders. Whenever the Company intends to distribute to the holders of the Deposited Securities rights to subscribe for additional Shares, the Company shall give notice thereof to the Depositary at least 60 days prior to the proposed distribution stating whether or not it wishes such rights to be made available to Holders of ADSs. Upon receipt of a notice indicating that the Company wishes such rights to be made available to Holders of ADSs, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to Holders only if (i) the Company shall have requested that such rights be made available to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. In the event any of the conditions set forth above are not satisfied, the Depositary shall proceed with the sale of the rights as contemplated in Section 4.4(b) below. In the event all conditions set forth above are satisfied, the Depositary shall establish an ADS Record Date (upon the terms described in Section 4.9) and establish procedures to distribute such rights (by means of warrants or otherwise) and to enable the Holders to exercise the rights (upon payment of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes). The Company shall assist the Depositary to the extent necessary in establishing such procedures. Nothing herein shall obligate the Depositary to make available to the Holders a method to exercise such rights to subscribe for Shares (rather than ADSs).
(b) Sale of Rights. If (i) the Company does not request the Depositary to make the rights available to Holders or requests that the rights not be made available to Holders, (ii) the Depositary fails to receive satisfactory documentation within the terms of Section 5.7 or determines it is not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity or otherwise, at such place and upon such terms (including public or private sale) as it may deem proper. The Company shall assist the Depositary to the extent necessary to determine such legality and practicability. The Depositary shall, upon such sale, convert and distribute proceeds of such sale (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) upon the terms set forth in Section 4.1.
(c) Lapse of Rights. If the Depositary is unable to make any rights available to Holders upon the terms described in Section 4.4(a) or to arrange for the sale of the rights upon the terms described in Section 4.4(b), the Depositary shall allow such rights to lapse.
The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution.
Notwithstanding anything to the contrary in this Section 4.4, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders unless and until a registration statement under the Securities Act covering such offering is in effect. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders shall be reduced accordingly. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges.
There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to exercise rights on the same terms and conditions as the holders of Shares or be able to exercise such rights. Nothing herein shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights.
SECTION 4.5 Distributions Other Than Cash, Shares or Rights to Purchase Shares.
(a) Whenever the Company intends to distribute to the holders of Deposited
Securities property other than cash, Shares or rights to purchase additional
Shares, the Company shall give notice thereof to the Depositary at least 30 days
prior to the proposed distribution and shall indicate whether or not it wishes
such distribution to be made to Holders of ADSs. Upon receipt of a notice
indicating that the Company wishes such distribution be made to Holders of ADSs,
the Depositary shall consult with the Company, and the Company shall assist the
Depositary, to determine whether such distribution to Holders is lawful and
reasonably practicable. The Depositary shall not make such distribution unless
(i) the Company shall have requested the Depositary to make such distribution to
Holders, (ii) the Depositary shall have received satisfactory documentation
within the terms of Section 5.7, and (iii) the Depositary shall have determined
that such distribution is reasonably practicable.
(b) Upon receipt of satisfactory documentation and the request of the Company to distribute property to Holders of ADSs and after making the requisite determinations set forth in (a) above, the Depositary shall distribute ((i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld) the property so received to the Holders of record as of the ADS Record Date, in proportion to the number of ADSs held by such Holders respectively and in such manner as the Depositary may
deem practicable for accomplishing such distribution. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution.
(c) If (i) the Company does not request the Depositary to make such
distribution to Holders or requests not to make such distribution to Holders,
(ii) the Depositary does not receive satisfactory documentation within the terms
of Section 5.7, or (iii) the Depositary determines that all or a portion of such
distribution is not reasonably practicable or feasible, the Depositary shall
sell or cause such property to be sold in a public or private sale, at such
place or places and upon such terms as it may deem proper and shall distribute
the net proceeds of such sale received by the Depositary (net of applicable (a)
fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to
the Holders as of the ADS Record Date upon the terms of Section 4.1. If the
Depositary is unable to sell such property, the Depositary may dispose of such
property in any way it deems reasonably practicable under the circumstances.
SECTION 4.6 Distributions with Respect to Deposited Securities in Bearer Form. Subject to the terms of this Article IV, distributions in respect of Deposited Securities that are held by the Depositary in bearer form shall be made to the Depositary for the account of the respective Holders of Receipts with respect to which any such distribution is made upon due presentation by the Depositary or the Custodian to the Company of any relevant coupons, talons, or certificates. The Company shall promptly notify the Depositary of such distributions. The Depositary or the Custodian shall promptly present such coupons, talons or certificates, as the case may be, in connection with any such distribution.
SECTION 4.7 Redemption. If the Company intends to exercise any right of redemption in respect of any of the Deposited Securities, the Company shall give notice thereof to the Depositary at least 30 days prior to the intended date of redemption, which notice shall set forth the particulars of the proposed redemption. Upon receipt of such (i) notice and (ii) satisfactory documentation given by the Company to the Depositary within the terms of Section 5.7, the Depositary shall mail to each Holder a notice setting forth the intended exercise by the Company of such redemption rights and any other particulars set forth in the Company's notice to the Depositary. The Depositary shall instruct the Custodian to present to the Company the Deposited Securities in respect of which redemption rights are being exercised against payment of the applicable redemption price. Upon receipt of confirmation from the Custodian that the redemption has taken place and that funds representing the redemption price have been received, the Depositary shall upon delivery of the ADSs to which such redemption rights relate by Holder thereof, distribute the proceeds (net of applicable (a) fees and charges of, and the expenses incurred by, the Depositary, and (b) taxes) upon the terms of Section 4.1, retire such ADSs and cancel the related ADRs upon the terms set forth in Sections 4.1 and 6.2 hereof. If less than all outstanding Deposited Securities are redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as may be determined by the Depositary. The redemption price per ADS shall be the per share amount received by the Depositary upon the redemption of the Deposited Securities represented by American Depositary Shares (the applicable (a) fees and charges of, and expenses incurred by, the Depositary, and (b) taxes) multiplied by the number of Deposited Securities represented by each ADS redeemed.
SECTION 4.8 Conversion of Foreign Currency. Whenever the Depositary or the Custodian shall receive Foreign Currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, and in the judgment of the Depositary such Foreign Currency can at such time be converted on a practicable basis (by sale or in any other manner that it may determine in accordance with applicable law) into Dollars transferable to the United States and distributable to the Holders entitled thereto, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may determine, such Foreign Currency into Dollars, and shall distribute such Dollars (net of any applicable fees, any reasonable and customary expenses incurred in such conversion and any expenses incurred on behalf of the Holders in complying with currency exchange control or other governmental requirements) in accordance with the terms of the applicable sections of this Deposit Agreement. If the Depositary shall have distributed warrants or other instruments that entitle the holders thereof to such Dollars, the Depositary shall distribute such Dollars to the holders of such warrants and/or instruments upon surrender thereof for cancellation, in either case without liability for interest thereon. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Holders on account of any application of exchange controls or otherwise.
If such conversion or distribution generally or with regard to a particular Holder can be effected only with the approval or license of any government or agency thereof, the Depositary shall have authority to file such application for approval or license, if any, as it may deem desirable. The Depositary shall make such a filing to the extent that the Depositary in its sole discretion shall determine that such filing may be made at a reasonable cost and is otherwise practicable.
If at any time the Depositary shall determine that in its judgment the conversion of any Foreign Currency and the transfer and distribution of proceeds of such conversion received by the Depositary is not practical or lawful, or if any approval or license of any governmental authority or agency thereof that is required for such conversion, transfer and distribution is denied, or in the opinion of the Depositary, not obtainable at a reasonable cost or within a reasonable period, the Depositary shall, in its sole discretion, take one or more of the following actions: (i) make such conversion and distribution in Dollars to the Holders for whom such conversion, transfer and distribution is lawful and practicable; (ii) distribute the Foreign Currency (or an appropriate document evidencing the right to receive such Foreign Currency) to Holders for whom such distribution is lawful and practicable; or (iii) hold (or cause the Custodian to hold) such Foreign Currency (without liability for interest thereon) for the respective accounts of the Holders entitled to receive the same.
SECTION 4.9 Fixing of Record Date. Whenever the Depositary shall receive notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights, or other distribution), or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall receive notice of any meeting of or solicitation of holders of Shares or other Deposited Securities, or whenever the Depositary shall find it necessary or convenient in connection with the giving of any notice, solicitation of any consent or any other matter, the Depositary shall, after consultation with the Company, fix a record date (the "ADS Record Date") for the determination of the Holders who shall be entitled to receive such distribution, give instructions for the exercise of
voting rights at any such meeting, or to give or withhold such consent, or to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each American Depositary Share. The Depositary shall make reasonable efforts to establish the ADS Record Date as closely as possible to the record date applicable to the Deposited Securities (if any). Subject to applicable law and the provisions of Section 4.1 through 4.8 and to the other terms and conditions of this Deposit Agreement, only the Holders of record at the close of business on such ADS Record Date shall be entitled to receive such distribution, to give such voting instructions, to receive such notice or solicitation, or otherwise take action.
SECTION 4.10 Voting of Deposited Securities. If, in the future, the terms of the Shares should be revised or amended so as to provide for voting rights, or should such Shares obtain voting rights through any change in the laws, rules or regulations applicable to such Shares or through any change in interpretation of such laws, then the following shall apply. As soon as practicable after receipt of notice of any meeting at which the holders of Shares are entitled to vote, or of solicitation of consents or proxies from holders of Shares or other Deposited Securities, the Depositary shall fix the ADS Record Date in respect of such meeting or solicitation of consent or proxy. The Depositary shall, if requested by the Company in writing in a timely manner and at the Company's expense, mail to Holders: (a) such notice of meeting or solicitation of consent or proxy; (b) a statement that the Holders at the close of business on the ADS Record Date will be entitled, subject to any applicable law, the Estatuto Social of the Company and the provisions of or governing the Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Shares or other Deposited Securities represented by such Holder's American Depositary Shares; and (c) a brief statement as to the manner in which such instructions may be given. Voting instructions may be given only in respect of a number of American Depositary Shares representing an integral number of Shares or other Deposited Securities. Upon the timely receipt of written instructions of a Holder of American Depositary Shares on the ADS Record Date, the Depositary shall endeavor, insofar as practicable and permitted under applicable law and the provisions of the Estatuto Social of the Company and the provisions of or governing the Deposited Securities, to vote or cause the Custodian to vote the Shares and/or other Deposited Securities (in person or by proxy) represented by American Depositary Shares evidenced by such Receipt in accordance with such instructions.
Neither the Depositary nor the Custodian shall, under any circumstances exercise any discretion as to voting, and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of for purposes of establishing a quorum or otherwise, the Shares or other Deposited Securities represented by American Depositary Shares except pursuant to and in accordance with such written instructions from Holders. Shares or other Deposited Securities represented by American Depositary Shares for which no specific voting instructions are received by the Depositary from the Holder shall not be voted.
SECTION 4.11 Changes Affecting Deposited Securities. Upon any change in nominal or par value, split-up, cancellation, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is otherwise a party, any securities which shall be received by the Depositary or the Custodian in exchange for, or in conversion of or replacement or
otherwise in respect of, such Deposited Securities shall, to the extent
permitted by law, be treated as new Deposited Securities under this Deposit
Agreement, and the Receipts shall, subject to the provisions of this Deposit
Agreement and applicable law, evidence American Depositary Shares representing
the right to receive such additional securities. Alternatively, the Depositary
may, with the Company's approval, and shall, if the Company shall so request,
subject to the terms of the Deposit Agreement and receipt of an opinion of
counsel to the Company satisfactory to the Depositary that such distributions
are not in violation of any applicable laws or regulations, execute and deliver
additional Receipts as in the case of a stock dividend on the Shares, or call
for the surrender of outstanding Receipts to be exchanged for new Receipts, in
either case, as well as in the event of newly deposited Shares, with necessary
modifications to the form of Receipt contained in Exhibit A hereto, specifically
describing such new Deposited Securities and/or corporate change. The Company
agrees to, jointly with the Depositary, amend the Registration Statement on Form
F-6 as filed with the Commission to permit the issuance of such new form of
Receipts. Notwithstanding the foregoing, in the event that any security so
received may not be lawfully distributed to some or all Holders, the Depositary
may, with the Company's approval, and shall, if the Company requests, subject to
receipt of an opinion of Company's counsel satisfactory to the Depositary that
such action is not in violation of any applicable laws or regulations, sell such
securities at public or private sale, at such place or places and upon such
terms as it may deem proper and may allocate the net proceeds of such sales (net
of (a) fees and charges of, and expenses incurred by, the Depositary and (b)
taxes) for the account of the Holders otherwise entitled to such securities upon
an averaged or other practicable basis without regard to any distinctions among
such Holders and distribute the net proceeds so allocated to the extent
practicable as in the case of a distribution received in cash pursuant to
Section 4.1. The Depositary shall not be responsible for (i) any failure to
determine that it may be lawful or feasible to make such securities available to
Holders in general or to any Holder in particular, (ii) any foreign exchange
exposure or loss incurred in connection with such sale, or (iii) any liability
to the purchaser of such securities.
SECTION 4.12 Available Information. The Company is subject to the periodic reporting requirements of the Exchange Act and accordingly files certain information with the Commission. These reports and documents can be inspected and copied at the public reference facilities maintained by the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's New York City office located at Seven World Trade Center, 13th Floor, New York, New York 10048.
SECTION 4.13 Reports. The Depositary shall make available for inspection by
Holders at its Principal Office any reports and communications, including any
proxy soliciting materials, received from the Company which are both (a)
received by the Depositary, the Custodian, or the nominee of either of them as
the holder of the Deposited Securities and (b) made generally available to the
holders of such Deposited Securities by the Company. The Depositary shall also
mail to Holders copies of such reports when furnished by the Company pursuant to
Section 5.6.
SECTION 4.14 List of Holders. Promptly upon written request by the Company, the Depositary shall furnish to the Company a list, as of a recent date, of the names, addresses and holdings of American Depositary Shares of all Holders, as such information is reflected in the Depositary's records.
SECTION 4.15 Taxation. The Depositary will, and will instruct the Custodian to, forward to the Company or its agents such information from its records as the Company may
reasonably request to enable the Company or its agents to file necessary tax reports with governmental authorities or agencies. The Depositary, the Custodian or the Company and its agents may, but shall not be obligated to, file such reports as are necessary to reduce or eliminate applicable taxes on dividends and on other distributions in respect of Deposited Securities under applicable tax treaties or laws for the Holders and Beneficial Owners. In accordance with instructions from the Company and to the extent practicable, the Depositary or the Custodian will take reasonable administrative actions to obtain tax refunds, reduced withholding of taxes at source on dividends and other benefits under applicable tax treaties or laws with respect to dividends and other distributions on the Deposited Securities. Holders and Beneficial Owners of American Depositary Shares may be required from time to time, and in a timely manner, to file such proof of taxpayer status, residence and beneficial ownership (as applicable), to execute such certificates and to make such representations and warranties, or to provide any other information or documents, as the Depositary or the Custodian may deem necessary or proper to fulfill the Depositary's or the Custodian's obligations under applicable law. The Holders and Beneficial Owners shall indemnify the Depositary, the Company, the Custodian and any of their respective directors, employees, agents and Affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained.
If the Company (or any of its agents) withholds from any distribution any amount on account of taxes or governmental charges, or pays any other tax in respect of such distribution (i.e. stamp duty tax, capital gains or other similar tax), the Company shall (and shall cause such agent to) remit promptly to the Depositary information about such taxes or governmental charges withheld or paid, and, if so requested, the tax receipt (or other proof of payment to the applicable governmental authority) therefor, in each case, in a form satisfactory to the Depositary. The Depositary shall, to the extent required by U.S. law, report to Holders: (i) any taxes withheld by it; (ii) any taxes withheld by the Custodian, subject to information being provided to the Depositary by the Custodian; and (iii) any taxes withheld by the Company, subject to information being provided to the Depositary by the Company. The Depositary and the Custodian shall not be required to provide the Holders with any evidence of the remittance by the Company (or its agents) of any taxes withheld, or of the payment of taxes by the Company, except to the extent the evidence is provided by the Company to the Depositary. Neither the Depositary nor the Custodian shall be liable for the failure by any Holder or Beneficial Owner to obtain the benefits of credits on the basis non-U.S. tax paid against such Holder's or Beneficial Owner's income tax liability.
The Depositary is under no obligation to provide the Holders and Beneficial Owners with any information about the tax status of the Company. The Depositary shall not incur any liability for any tax consequences that may be incurred by Holders and Beneficial Owners on account of their ownership of the American Depositary Shares, including without limitation, tax consequences resulting from the Company (or any of its subsidiaries) being treated as a "Foreign Personal Holding Company," or as a "Passive Foreign Investment Company" (in each case as defined in the U.S. Internal Revenue Code, as amended, and the regulations issued thereunder) or otherwise.
ARTICLE V
THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY
SECTION 5.1 Maintenance of Office and Transfer Books by the Registrar. Until termination of this Deposit Agreement in accordance with its terms, the Registrar shall maintain in the Borough of Manhattan, the City of New York, an office and facilities for the execution and delivery, registration, registration of transfers, combination and split-up of Receipts, the surrender of Receipts and the delivery and withdrawal of Deposited Securities in accordance with the provisions of this Deposit Agreement.
The Registrar shall keep books for the registration of Receipts and transfers of Receipts which at all reasonable times shall be open for inspection by the Company and by the Holders of such Receipts, provided that such inspection shall not be, to the Registrar's knowledge, for the purpose of communicating with Holders of such Receipts in the interest of a business or object other than the business of the Company or other than a matter related to this Deposit Agreement or the Receipts.
The Registrar may close the transfer books with respect to the Receipts, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company, subject, in all cases, to Section 7.8 hereof.
If any Receipts or the American Depositary Shares evidenced thereby are listed on one or more stock exchanges or automated quotation systems in the United States, the Depositary shall act as Registrar or, with the approval of the Company, appoint a Registrar or one or more co-registrars for registration of Receipts and transfers, combinations and split-ups, and to countersign such Receipts in accordance with any requirements of such exchanges or systems. Such Registrar or co-registrars may be removed and a substitute or substitutes appointed by the Depositary with the approval of the Company.
SECTION 5.2 Exoneration. Neither the Depositary nor the Company shall be obligated to do or perform any act which is inconsistent with the provisions of this Deposit Agreement or shall incur any liability (i) if the Depositary or the Company shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required by the terms of this Deposit Agreement, by reason of any provision of any present or future law or regulation of the United States, Brazil or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future of the Estatuto Social of the Company or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement or in the Estatuto Social of the Company or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of this
Deposit Agreement, made available to Holders of American Depositary Shares or
(v) for any consequential or punitive damages for any breach of the terms of
this Deposit Agreement.
The Depositary, its controlling persons, its agents, the Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties.
No disclaimer of liability under the Securities Act is intended by any provision of this Deposit Agreement.
SECTION 5.3 Standard of Care. The Company and its agents assume no obligation and shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Company and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith.
The Depositary and its agents assume no obligation and shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Depositary and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith.
Without limitation of the foregoing, neither the Depositary, nor the Company, nor any of their respective controlling persons, or agents, shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expenses (including fees and disbursements of counsel) and liabilities be furnished as often as may be required (and the Custodian shall not be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary).
The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effects of any vote, provided that any such action or omission is in good faith and in accordance with the terms of this Deposit Agreement. The Depositary shall not incur any liability for any failure to determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Securities, for the validity or worth of the Deposited Securities or for any tax consequences that may result from the ownership of ADSs, Shares or Deposited Securities, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of this Deposit Agreement or for the failure or timeliness of any notice from the Company.
SECTION 5.4 Resignation and Removal of the Depositary; Appointment of Successor Depositary. The Depositary may at any time resign as Depositary hereunder by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 30th day after delivery thereof to the Company (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 hereof), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided.
The Depositary may at any time be removed by the Company by written notice of such removal, which removal shall be effective on the earlier of (i) the 30th day after delivery thereof
to the Depositary (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 hereof), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided.
In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall be required by the Company to execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed (except as required by applicable law), shall become fully vested with all the rights, powers, duties and obligations of its predecessor. The predecessor depositary, upon payment of all sums due to it and on the written request of the Company, shall (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in Sections 5.8 and 5.9), (ii) duly assign, transfer and deliver all right, title and interest to the Deposited Securities to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding Receipts and such other information relating to Receipts and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly mail notice of its appointment to such Holders.
Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act.
SECTION 5.5 The Custodian. The Depositary has initially appointed Banco Itau S.A. as Custodian for the purpose of this Deposit Agreement. The Custodian or its successors in acting hereunder shall be subject at all times and in all respects to the direction of the Depositary for the Deposited Securities for which the Custodian acts as custodian and shall be responsible solely to it. If any Custodian resigns or is discharged from its duties hereunder with respect to any Deposited Securities and no other Custodian has previously been appointed hereunder, the Depositary shall promptly appoint a substitute custodian that is organized under the laws of Brazil. The Depositary shall require such resigning or discharged Custodian to deliver the Deposited Securities held by it, together with all such records maintained by it as Custodian with respect to such Deposited Securities as the Depositary may request, to the Custodian designated by the Depositary. Whenever the Depositary determines, in its discretion, that it is appropriate to do so, it may appoint an additional custodian with respect to any Deposited Securities, or discharge the Custodian with respect to any Deposited Securities and appoint a substitute custodian, which shall thereafter be Custodian hereunder with respect to the Deposited Securities. Immediately upon any such change, the Depositary shall give notice thereof in writing to all Holders of Receipts, each other Custodian and the Company.
Upon the appointment of any successor depositary, any Custodian then acting hereunder shall, unless otherwise instructed by the Depositary, continue to be the Custodian of the Deposited Securities without any further act or writing and shall be subject to the direction of the successor depositary. The successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority to act on the direction of such successor depositary.
SECTION 5.6 Notices and Reports. On or before the first date on which the Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action by such holders other than at a meeting, or of the taking of any action in respect of any cash or other distributions or the offering of any rights in respect of Deposited Securities, the Company shall transmit to the Depositary and the Custodian a copy of the notice thereof in the English language but otherwise in the form given or to be given to holders of Shares or other Deposited Securities. The Company shall also furnish to the Custodian and the Depositary a summary, in English, of any applicable provisions or proposed provisions of the Estatuto Social of the Company that may be relevant or pertain to such notice of meeting or be the subject of a vote thereat.
The Company will also transmit to the Depositary (a) an English language version of the other notices, reports and communications which are made generally available by the Company to holders of its Shares or other Deposited Securities and (b) the English-language versions of the Company's annual and other reports prepared in accordance with the applicable requirements of the Commission. The Depositary shall arrange, at the request of the Company and at the Company's expense, for the mailing of copies thereof to all Holders or make such notices, reports and other communications available to all Holders on a basis similar to that for holders of Shares or other Deposited Securities or on such other basis as the Company may advise the Depositary or as may be required by any applicable law, regulation or stock exchange requirement. The Company has delivered to the Depositary and the Custodian a copy of the Company's Estatuto Social along with the provisions of or governing the Shares and any other Deposited Securities issued by the Company or any Affiliate of the Company in connection with such Shares, and promptly upon any amendment thereto or change therein, the Company shall deliver to the Depositary and the Custodian a copy of such amendment thereto or change therein. The Depositary may rely upon such copy for all purposes of this Deposit Agreement.
The Depositary will, at the expense of the Company, make available a copy of any such notices, reports or communications issued by the Company and delivered to the Depositary for inspection by the Holders of the Receipts evidencing the American Depositary Shares representing such Shares governed by such provisions at the Depositary's Principal Office, at the office of the Custodian and at any other designated transfer office.
SECTION 5.7 Issuance of Additional Shares, ADSs etc. The Company agrees
that in the event it or any of its Affiliates proposes (i) an issuance, sale or
distribution of additional Shares, (ii) an offering of rights to subscribe for
Shares or other Deposited Securities, (iii) an issuance of securities
convertible into or exchangeable for Shares, (iv) an issuance of rights to
subscribe for securities convertible into or exchangeable for Shares, (v) an
elective dividend of cash or Shares, (vi) a redemption of Deposited Securities,
(vii) a meeting of holders of Deposited Securities, or solicitation of consents
or proxies, relating to any reclassification of securities, merger or
consolidation or transfer of assets or (viii) any reclassification,
recapitalization, reorganization, merger, consolidation or sale of assets which
affects the Deposited Securities, it will obtain U.S. legal advice and take all
steps necessary to ensure that the application of the proposed transaction to
Holders and Beneficial Owners does not violate the registration provisions of
the Securities Act, or any other applicable laws (including, without limitation,
the Investment Company Act of 1940, as amended, the Exchange Act or the
securities laws of the states of the United States). In support of the
foregoing, the Company will furnish to the Depositary (a) a written opinion of
U.S. counsel (reasonably satisfactory to the Depositary)
stating whether or not application of such transaction to Holders and Beneficial Owners (1) requires a registration statement under the Securities Act to be in effect or (2) is exempt from the registration requirements of the Securities Act and (b) an opinion of Brazilian counsel (reasonably satisfactory to the Depositary) stating that (1) making the transaction available to Holders and Beneficial Owners does not violate the laws or regulations of Brazil and (2) all requisite regulatory consents and approvals have been obtained in Brazil. If the filing of a registration statement is required, the Depositary shall not have any obligation to proceed with the transaction unless it shall have received evidence reasonably satisfactory to it that such registration statement has been declared effective. If, being advised by counsel, the Company determines that a transaction is required to be registered under the Securities Act, the Company will either (i) register such transaction to the extent necessary, (ii) alter the terms of the transaction to avoid the registration requirements of the Securities Act or (iii) direct the Depositary to take specific measures, in each case as contemplated in this Deposit Agreement, to prevent such transaction from violating the registration requirements of the Securities Act.
The Company agrees with the Depositary that neither the Company nor any of its Affiliates will at any time (i) deposit any Shares or other Deposited Securities, either upon original issuance or upon a sale of Shares or other Deposited Securities previously issued and reacquired by the Company or by any such Affiliate, or (ii) issue additional Shares, rights to subscribe for such Shares, securities convertible into or exchangeable for Shares or rights to subscribe for such securities, unless such transaction and the securities issuable in such transaction are exempt from registration under the Securities Act or have been registered under the Securities Act (and such registration statement has been declared effective).
Notwithstanding anything else contained in this Deposit Agreement, nothing in this Deposit Agreement shall be deemed to obligate the Company to file any registration statement in respect of any proposed transaction.
SECTION 5.8 Indemnification. The Depositary agrees to indemnify the Company and its directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) which may arise out of acts performed or omitted by the Depositary under the terms hereof due to the negligence or bad faith of the Depositary.
The Company agrees to indemnify the Depositary, the Custodian and any of their respective directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) that may arise (a) out of or in connection with any offer, issuance, sale, resale, transfer, deposit or withdrawal of Receipts, American Depositary Shares, the Shares, or other Deposited Securities, as the case may be, (b) out of or as a result of any offering documents in respect thereof or (c) out of acts performed or omitted, including, but not limited to, any delivery by the Depositary on behalf of the Company of information regarding the Company in connection with this Deposit Agreement, the Receipts, the American Depositary Shares, the Shares, or any Deposited Securities, in any such case (i) by the Depositary, the Custodian or any of their respective directors, officers, employees, agents and Affiliates, except to the extent such loss, liability, tax, charge or expense is due to the negligence or bad faith of any of them, or (ii) by the Company or any of its directors, officers, employees, agents and Affiliates.
The obligations set forth in this Section shall survive the termination of this Deposit Agreement and the succession or substitution of any party hereto.
Any person seeking indemnification hereunder (an "indemnified person") shall notify the person from whom it is seeking indemnification (the "indemnifying person") of the commencement of any indemnifiable action or claim promptly after such indemnified person becomes aware of such commencement (provided that the failure to make such notification shall not affect such indemnified person's rights to indemnification except to the extent the indemnifying person is materially prejudiced by such failure) and shall consult in good faith with the indemnifying person as to the conduct of the defense of such action or claim that may give rise to an indemnity hereunder, which defense shall be reasonable under the circumstances. No indemnified person shall compromise or settle any action or claim that may give rise to an indemnity hereunder without the consent of the indemnifying person, which consent shall not be unreasonably withheld.
SECTION 5.9 Fees and Charges of Depositary. The Company, the Holders, the Beneficial Owners, and persons depositing Shares or surrendering ADSs for cancellation and withdrawal of Deposited Securities shall be required to pay to the Depositary the Depositary's fees and related charges identified as payable by them respectively in the Fee Schedule attached hereto as Exhibit B. All fees and charges so payable may, at any time and from time to time, be changed by agreement between the Depositary and the Company, but, in the case of fees and charges payable by Holders and Beneficial Owners, only in the manner contemplated in Section 6.1. The Depositary shall provide, without charge, a copy of its latest fee schedule to anyone upon request.
The Company agrees to promptly pay to the Depositary such other fees and charges and to reimburse the Depositary for such out-of-pocket expenses as the Depositary and the Company may agree to in writing from time to time. Responsibility for payment of such charges may at any time and from time to time be changed by agreement between the Company and the Depositary. Unless otherwise agreed, the Depositary shall present its statement for such expenses and fees or charges to the Company once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary.
The right of the Depositary to receive payment of fees, charges and expenses as provided above shall survive the termination of this Deposit Agreement. As to any Depositary, upon the resignation or removal of such Depositary as described in Section 5.4 hereof, such right shall extend for those fees, charges and expenses incurred prior to the effectiveness of such resignation or removal.
SECTION 5.10 Pre-Release. Subject to the further terms and provisions of this Section 5.10, the Depositary, its Affiliates and their agents, on their own behalf, may own and deal in any class of securities of the Company and its Affiliates and in ADSs. In its capacity as Depositary, the Depositary shall not lend Shares or ADSs or deliver Shares prior to the receipt and cancellation of ADSs. Notwithstanding the foregoing, the Depositary may (i) issue ADSs prior to the receipt of Shares (each such transaction a "Pre-Release Transaction") as provided below and (ii) deliver Shares upon the receipt and cancellation of ADSs that were issued in a Pre-Release Transaction, but for which Shares may not yet have been received. The Depositary may receive ADSs in lieu of Shares under (i) above. Each such Pre-Release Transaction will be (a) subject to a written agreement whereby the person or entity (the "Applicant") to whom ADSs or Shares are to be delivered (1) represents that at the time of the Pre-Release Transaction the
Applicant or its customer owns the Shares or ADSs that are to be delivered by the Applicant under such Pre-Release Transaction, (2) agrees to indicate the Depositary as owner of such Shares or ADSs in its records and to hold such Shares or ADSs in trust for the Depositary until such Shares or ADSs are delivered to the Depositary or the Custodian, (3) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Shares or ADSs, and (4) agrees to any additional restrictions or requirements that the Depositary deems appropriate, (b) at all times fully collateralized with cash, United States government securities or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days' notice and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The Depositary will normally limit the number of ADSs and Shares involved in such Pre-Release Transactions at any one time to thirty percent (30%) of the ADSs outstanding (without giving effect to ADSs outstanding under (i) above), provided, however, that the Depositary reserves the right to disregard such limit from time to time for cancellations and other circumstances beyond its control. The Depositary may also set limits with respect to the number of ADSs and Shares involved in Pre-Release Transactions with any one person on a case by case basis as it deems appropriate.
The Depositary may retain for its own account any compensation received by it in conjunction with the foregoing. Collateral provided pursuant to (b) above, but not the earnings thereon, shall be held for the benefit of the Holders (other than the Applicant).
SECTION 5.11 Restricted Securities Owners. The Company agrees to advise in writing each of the persons or entities who, to the knowledge of the Company, holds Restricted Securities that such Restricted Securities are ineligible for deposit hereunder and, to the extent practicable, shall require each of such persons to represent in writing that such person will not deposit Restricted Securities hereunder.
ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.1 Amendment/Supplement. The Receipts outstanding at any time, the provisions of this Deposit Agreement and the form of Receipt attached hereto and to be issued under the terms hereof may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding Receipts until 30 days after notice of such amendment or supplement shall have been given to the Holders of outstanding Receipts. The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the American Depositary Shares to be registered on Form F-6 under the Securities Act or (b) the American Depositary Shares or the Shares to be traded solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such American
Depositary Share or Shares, to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement as amended and supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the Receipt at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations.
SECTION 6.2 Termination. The Depositary shall, at any time at the written direction of the Company, terminate this Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination. If 30 days shall have expired after (i) the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and in either case a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.4, the Depositary may terminate this Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed for such termination. On and after the date of termination of this Deposit Agreement, the Holder will, upon surrender of such Receipt at the Principal Office of the Depositary, upon the payment of the charges of the Depositary for the surrender of Receipts referred to in Section 2.7 and subject to the conditions and restrictions therein set forth, and upon payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by such Receipt. If any Receipts shall remain outstanding after the date of termination of this Deposit Agreement, the Registrar thereafter shall discontinue the registration of transfers of Receipts, and the Depositary shall suspend the distribution of dividends to the Holders thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights or other property as provided in this Deposit Agreement, and shall continue to deliver Deposited Securities, subject to the conditions and restrictions set forth in Section 2.7, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of this Deposit Agreement and any applicable taxes or governmental charges or assessments). At any time after the expiration of six months from the date of termination of this Deposit Agreement, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, in an unsegregated account, without liability for interest for the pro rata benefit of the Holders of Receipts whose Receipts have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement with
respect to the Receipts and the Shares, Deposited Securities and American Depositary Shares, except to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of this Deposit Agreement and any applicable taxes or governmental charges or assessments). Upon the termination of this Deposit Agreement, the Company shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary under Sections 5.8, 5.9 and 7.6 hereof.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Counterparts. This Deposit Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one and the same agreement. Copies of this Deposit Agreement shall be maintained with the Depositary and shall be open to inspection by any Holder during business hours.
SECTION 7.2 No Third-Party Beneficiaries. This Deposit Agreement is for the exclusive benefit of the parties hereto (and their successors) and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person, except to the extent specifically set forth in this Deposit Agreement. Nothing in this Deposit Agreement shall be deemed to give rise to a partnership or joint venture among the parties hereto nor establish a fiduciary or similar relationship among the parties. The parties hereto acknowledge and agree that (i) the Depositary and its Affiliates may at any time have multiple banking relationships with the Company and its Affiliates, (ii) the Depositary and its Affiliates may be engaged at any time in transactions in which parties adverse to the Company or the Holders or Beneficial Owners may have interests and (iii) nothing contained in this Agreement shall (a) preclude the Depositary or any of its Affiliates from engaging in such transactions or establishing or maintaining such relationships, or (b) obligate the Depositary or any of its Affiliates to disclose such transactions or relationships or to account for any profit made or payment received in such transactions or relationships.
SECTION 7.3 Severability. In case any one or more of the provisions contained in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby.
SECTION 7.4 Holders and Beneficial Owners as Parties; Binding Effect. The Holders and Beneficial Owners from time to time of American Depositary Shares shall be parties to the Deposit Agreement and shall be bound by all of the terms and conditions hereof and of any Receipt by acceptance hereof or any beneficial interest therein.
SECTION 7.5 Notices. Any and all notices to be given to the Company shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Copene-Petroquimica do Nordeste S.A., Rua Eteno, 1561, Polo Petroquimico de Camacari, Camacari, Bahia, Brazil, Attention: Finance Department, or to any other address which the Company may specify in writing to the Depositary.
Any and all notices to be given to the Depositary shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Citibank, N.A., 111 Wall Street, New York, New York 10043, U.S.A. Attention: ADR Department, or to any other address which the Depositary may specify in writing to the Company.
Any and all notices to be given to the Custodian shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Rua Boa Vista, 176, Sao Paulo, Brazil, or to any other address which the Custodian may specify in writing to the Company.
Any and all notices to be given to any Holder shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission, confirmed by letter, addressed to such Holder at the address of such Holder as it appears on the transfer books for Receipts of the Depositary, or, if such Holder shall have filed with the Depositary a written request that notices intended for such Holder be mailed to some other address, at the address specified in such request. Notice to Holders shall be deemed to be notice to Beneficial Owners for all purposes of this Deposit Agreement.
Delivery of a notice sent by mail, air courier or cable, telex or facsimile transmission shall be deemed to be effective at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box or delivered to an air courier service. The Depositary or the Company may, however, act upon any cable, telex or facsimile transmission received by it from the other or from any Holder, notwithstanding that such cable, telex or facsimile transmission shall not subsequently be confirmed by letter as aforesaid.
SECTION 7.6 Governing Law and Jurisdiction. This Deposit Agreement and the Receipts shall be interpreted in accordance with, and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, the laws of the State of New York without reference to the principles of choice of law thereof. Except as set forth in the following paragraph of this Section 7.6, the Company and the Depositary agree that the federal or state courts in the City of New York shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute between them that may arise out of or in connection with this Deposit Agreement and, for such purposes, each irrevocably submits to the non-exclusive jurisdiction of such courts. The Company hereby irrevocably designates, appoints and empowers CT Corporation System (the "Agent") now at 1633 Broadway, New York, NY 10019, as its authorized agent to receive and accept for and on its behalf, and on behalf of its properties, assets and revenues, service by mail of any and all legal process, summons, notices and documents that may be served in any suit, action or proceeding brought against the Company in any federal or state court as described in the preceding sentence or in the next paragraph of this Section 7.6. If for any reason the Agent shall cease to be available to act as such, the Company agrees to designate a new agent in the City of New York on the terms and for the purposes of this Section 7.6 reasonably satisfactory to the Depositary. The Company further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents in any suit, action or proceeding against the Company, by service by mail of a copy thereof upon the Agent (whether or not the appointment of such Agent shall for any reason prove to be ineffective or such Agent shall fail to accept or acknowledge such service), with a copy mailed to the Company by registered or certified air mail, postage prepaid, to its address provided in Section
7.5 hereof. The Company agrees that the failure of the Agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon.
Notwithstanding the foregoing, the Depositary and the Company unconditionally agree that in the event that a Holder or Beneficial Owner brings a suit, action or proceeding against (a) the Company, (b) the Depositary in its capacity as Depositary under this Deposit Agreement or (c) against both the Company and the Depositary, in any state or federal court of the United States, and the Depositary or the Company have any claim, for indemnification or otherwise, against each other arising out of the subject matter of such suit, action or proceeding, then the Company and the Depositary may pursue such claim against each other in the state or federal court in the United States in which such suit, action, or proceeding is pending, and for such purposes, the Company and the Depositary irrevocably submit to the non-exclusive jurisdiction of such courts. The Company agrees that service of process upon the Agent in the manner set forth in the preceding paragraph shall be effective service upon it for any suit, action or proceeding brought against it as described in this paragraph.
The Company irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any actions, suits or proceedings brought in any court as provided in this Section 7.6, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.
No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement.
The provisions of this Section 7.6 shall survive any termination of this Deposit Agreement, in whole or in part.
SECTION 7.7 Assignment. Subject to the provisions of Section 5.4 hereof, this Deposit Agreement may not be assigned by either the Company or the Depositary.
SECTION 7.8 Compliance with U.S. Securities Laws. Notwithstanding anything in this Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Instruction I.A.(1) of the General Instructions to Form F-6 Registration Statement, as amended from time to time, under the Securities Act.
SECTION 7.9. Regulatory Compliance. The Depositary and the Company hereby confirm to each other that, for as long as this Deposit Agreement is in effect, they shall comply with any requirements for registration of the amount of Deposited Securities with the Central Bank of Brazil and furnish the Brazilian securities regulatory authority - the CVM and the Central Bank of Brazil such information and documents related to the Deposited Securities, the Receipts and the Depositary's obligations hereunder as may be requested by such authorities from time to time pursuant to paragraph 3, article 3 of Regulation Annex V to Resolution 1.289.87 (as published in Resolution 1.927/92) of the Brazilian National Monetary Council. In the event that the Depositary or the Custodian shall be advised in writing (the "Legal Warning") by Brazilian counsel reasonably satisfactory to the Depositary that the Depositary or Custodian reasonably could be subject to criminal or civil liabilities as a result of the Company having failed to provide to the CVM or the Central Bank of Brazil such information or documents available through the Company, the Depositary will immediately send a copy of the Legal Warning to the Company, shall have the right to immediately resign as Depositary by written notice to the Company and
will not be subject to any liability hereunder for such resignation or such determination, and the Company agrees to indemnify the Depositary, the Custodian and any of their respective officers, directors, employees, and agents against, and hold each of them harmless from any loss or liability of any kind incurred that arises under this Section 7.9. Upon effectiveness of such resignation, the Depositary shall otherwise be discharged from all of its obligations under this Deposit Agreement. Resignation pursuant to this paragraph shall be effected in accordance with Section 5.4; provided that, if the Company fails to appoint a new depositary within ninety (90) days of such resignation, this Deposit Agreement shall be terminated in accordance with Section 6.2 and the Company or its designated agents will assume the obligations stated as the obligations of the Depositary in such section.
The provisions of this Section shall survive any termination of this Deposit Agreement in whole or in part.
SECTION 7.10 Titles. All references in this Deposit Agreement to exhibits, articles, sections, subsections, and other subdivisions refer to the exhibits, articles, sections, subsections and other subdivisions of this Deposit Agreement unless expressly provided otherwise. The words "this Deposit Agreement", "herein", "hereof", "hereby", "hereunder", and words of similar import refer to the Deposit Agreement as a whole as in effect between the Company, the Depositary and the Holders and Beneficial Owners of ADSs and not to any particular subdivision unless expressly so limited. Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. Titles to sections of this Deposit Agreement are included for convenience only and shall be disregarded in construing the language contained in this Deposit Agreement.
IN WITNESS WHEREOF, COPENE - PETROQUIMICA DO NORDESTE S.A. and CITIBANK, N.A. have duly executed this Deposit Agreement as of the day and year first above set forth and all Holders and Beneficial Owners shall become parties hereto upon acceptance by them of American Depositary Shares evidenced by Receipts issued in accordance with the terms hereof.
COPENE - PETROQUIMICA DO NORDESTE S.A.
Title:
Title:
CITIBANK, N.A.
Title:
Exhibit 3.01
SHAREHOLDERS AGREEMENT
By this private deed:
1) ODEBRECHT QUIMICA S/A, a stock company with head office at Av. das Nacoes Unidas no 4777, 3o andar, Sala 3, in the City of Sao Paulo, State of Sao Paulo, enrolled in the National Roll of Corporate Taxpayers under # 57.015.018/0001-84 ("Odebrecht"), herein represented by its undersigned legal representatives (Odebrecht and those companies directly or indirectly controlling or controlled by or under common control with Odebrecht hereinafter jointly referred to as "Odebrecht Group"); and 2) PETROQUIMICA DA BAHIA S/A, a stock company with head office at Rua Miguel Calmon no 57, 20 andar (parte), in the City of Salvador, State of Bahia, enrolled in the National Roll of Corporate Taxpayers under # 13.943.667/0001-70 ("PQBA"), herein represented by its undersigned legal representatives (PQBA and those companies directly or indirectly controlling or controlled by or under common control with PQBA hereinafter jointly referred to as "PQBA Group"); |
all of them referred to jointly as Parties and severally as Party.
WHEREAS:
A) on November, 1999, the Groups "Odebrecht", "PQBA" and "Economico" signed a Memorandum of Understandings (as subsequently amended) aiming at conveying, by means of controlled companies, certain petrochemical assets ("Northeast Assets - Memorandum") located in the Petrochemical Pole of Camacari and, as a result, three (03) Auctions were carried out to sell said assets;
B) in the 1st Auction, on December 14th, 2000, the only proposal that was submitted did not meet the Binding Price, as set out in the Memorandum of Understandings; in the 2nd Auction, dated March 27th, 2001, despite the substantial reduction of price in comparison to the 1st Auction, no proposal was submitted at all;
C) the absence of proposals in the 2nd Auction caused Odebrecht Group and PQBA Group, supported by certain financial institutions, to join in order to restructure the Petrochemical Pole of Camacari, beginning with the corporate uncrossing of the involved companies and the second-generation
companies integration to Copene - Petroquimica do Nordeste S/A ("Corporate Restructuring"); |
D) on July 25th, 2001, the Central Bank of Brazil, acting as liquidator of
Banco Economico, carried out the auction of the Economico S/A Empreendimentos assets, whose winner was a module of Odebrecht Group named Nova Camacari Participacoes S/A; E) after the financial settlement for the Auction, both the (i) uncrossing of the shares issued by Norquisa and indirectly held by Polialden - which shares started being held by Odebrecht Group - and the (ii) conveyance to Copene of all the shares issued by Nova Camacari took place; |
F) PQBA Group holds directly or indirectly 92,808,018 common shares and 2,980,408 preferred shares issued by Norquisa, fully subscribed and paid up and free from any burdens, liens or encumbrances whatsoever, excepting those listed in the "Sixth Amendment and Deed of Consolidation to the
Agreement of Shareholders of Nordeste Quimica S/A - Norquisa", dated 01/10/1995 ("Sixth Amendment") and, in its turn, Odebrecht Group holds directly or indirectly 229,339,518 common shares and 7,340,707 preferred shares issued by Norquisa, fully subscribed and paid up and free from any burdens, liens or encumbrances whatsoever, excepting those listed in said Sixth Amendment; |
G) the Parties do hereby decide to execute this Agreement, whereby they rule their relationships as direct or indirect shareholders of Copene, and this document is to take into account the Corporate Restructuring steps, also running upon the Copene management and the preferred right as to the purchase of shares issued by Copene and/or Norquisa;
NOW, THEREFORE, both parties sign this Agreement to be governed by the following clauses and conditions:
1 - Definitions:
1.1 In addition to other terms defined hereunder, the following ones will have the meanings set out below, when written in capital letters:
a) "Shareholder" means any of the Parties hereto as well as their successors, affiliates or fellow companies that may have the rights and duties hereunder transferred to it.
b) "Shares" means those shares issued by Norquisa at this time directly or indirectly held by each Party. For the purposes hereof, "Shares" shall include any and all shares that may be added to such Shares issued by Norquisa in case of bonus, split or combination. It is here and now agreed and understood that,
in case Norquisa is wound up, only those shares issued by Copene and received by the Shareholders as a result of their current equity in Norquisa will be taken into account for the purposes hereof, and any shares issued by Norquisa or Copene and received in view of the Corporate Restructuring foreseen for the Petrochemical Pole integration shall not be reckoned.
c) "Affiliate" or "Affiliates" means, regarding any Party, any individual or corporation resident or headquartered in Brazil or abroad, which (i) is directly or indirectly controlled by such Party; (ii) directly or indirectly controls such Party; or (iii) is directly or indirectly controlled by any person directly or indirectly controlling such Party.
2 - Subject Matter:
2.1 The subject matter hereof is to rule the relationships between the Parties as direct or indirect shareholders of Copene and to run upon the preferred right as to the Shares as well as the Copene management and control, whether directly or by means of Norquisa.
3 - Preferred Right:
3.1 By this private deed and according to law, PQBA grants to Odebrecht the preferred right to purchase common shares out of the set of Shares held by PQBA, and therefore such common shares may not be sold, assigned, transferred, granted to another company's capital or otherwise, whether directly or indirectly, conveyed, promised to convey or encumbered, given in beneficial ownership or trust (all these acts hereinafter referred to as "Conveyance"), without having been first offered to Odebrecht, on even terms, according to this clause.
3.2 In like manner, Odebrecht grants to PQBA the preferred right to purchase common shares held by Odebrecht, exactly as provided by clause 3.1 above. The preferred right herein granted by Odebrecht will be valid until the date in which Odebrecht Group shall transfer to Copene all the petrochemical assets directly or indirectly held by Odebrecht, as listed in Exhibit 3.2 attached hereto, and after such date the preferred right herein granted by Odebrecht to PQBA shall be revoked.
3.3 Such legal acts or things described in clauses 3.1 and 3.2 above, when performed by any of the Parties, their affiliates and/or successors, without the previous written consent of the other Party pursuant to this clause 3, will be subject to annulment, without prejudice to any other penalties provided by law, in addition to indemnity for losses and damages and loss of profits.
3.4 If any Shareholder wishes to convey all or any part of its common shares (the "Offeror"), it must inform its intention to the other Shareholder signing this Agreement (the "Offeree"), in writing, mentioning the class, if any, and the quantity of Shares it intends to convey, as well as the conditions for such operation, including price, which must be paid invariably in domestic currency (the denomination thereof in another currency being allowed, to be converted the day the offer is accepted, according to the law in force), payment conditions, interest rate, the name of the person interested in purchasing (showing its final controller) and any other information that might be relevant to the concrete case, so as the Offeree may exert its preferred right according to clause 3.1 or 3.2 below, as the case may be.
3.5 The Offeree will enjoy preferred right to purchase the offered Shares for the same price and in the same payment conditions as those offered by the interested third party, also adhering to what follows:
(a) the exertion of the preferred right shall take place within a term of thirty (30) days from the date the notice referred to under clause 3.4 is received and will be valid only when encompassing all and nothing less than all the offered Shares; such preferred right shall be exerted upon the delivery of a written notice by the interested Offeree to the Offeror;
(b) once manifested the exertion of the preferred right, the respective purchase will be completed within thirty (30) days after the deadline set forth in subsection (a) above.
3.6 If said term of thirty (30) days referred to under clause 3.5(a) elapses and the Offeree has not manifested its interest, or said term of thirty (30) days referred to under clause 3.5(b) elapses and the offered Shares have not been purchased by the Offeree, the Offeror will be free to convey such Shares for the same price and conditions as those firstly offered by the interested third party, within the next succeeding thirty (30) days. After such term is elapsed, or in case the Conveyance conditions and/or price are different, the offer shall be renewed.
3.7 In case the common shares held by one of the Shareholders are pledged, the relevant offer for the conveyance of such Shares will be deemed duly made to the other Shareholder if no legal constriction is designed within the next succeeding one hundred and twenty (120) days from the date the pledge is effected, or within up to five (05) days before the date the respective auction takes place, whichever is the longest. In this case, "offer price" means the updated worth of the common shares and, should the other Shareholder be interested in exerting its preferred right, he will be invested with full powers to apply for those pledged common shares to be substituted by money, according
to the provisions and period of time set out in article 668 of the Civil Procedure Code.
3.8 The provisions of clause 3.9 below being complied with, if Odebrecht wishes to convey its Shares, whether directly or indirectly, in full or in part, PQBA will be entitled (but not required) to convey its Shares for the same pro rata price and in the same conditions, together with those Shares offered by Odebrecht ("Joint Sale"), it being understood that the number of Shares to be included by PQBA in the Joint Sale must represent a percentage of the total number of Shares held by it equal to or lower than the percentage represented by the number of Shares offered by Odebrecht as regards to the total number of Shares held by it. To such effect, PQBA must inform Odebrecht in writing about its intention to exert the Joint Sale right referred to hereunder within a term of thirty (30) days from the date the notice referred to under clause 3.4 is received. If the interested third party does not wish to purchase all or any part of the Shares that have been added to those firstly offered Shares as a result of the Joint Sale referred to hereunder, the quantity of Shares to be conveyed to the interested third party by Odebrecht and PQBA must be reduced accordingly.
3.9 Without prejudice to the aforementioned provisions, should Odebrecht, at any time, whether directly or indirectly, in one or more operations, convey Shares meaning loss of direct or indirect control of Norquisa, conjointly with PQBA Group, PQBA will be entitled (but not required) to convey all its Shares for the same average unit price per Share and in the same conditions, together with those Shares conveyed by Odebrecht. To such effect, PQBA must inform Odebrecht in writing about its intention to exert the Joint Sale right referred to hereunder within a term of thirty (30) days from the date the notice referred to under clause 3.4 is received. In case the interested third party does not wish to purchase all or any part of the Shares that have been added to those Shares firstly offered by Odebrecht as a result of the Joint Sale referred to hereunder, the conveyance of the Shares may not take place.
3.10 Odebrecht does hereby irrevocably and unchangeably grant and guarantee to PQBA Group the right (but not the obligation) to joint sale (tag along) the whole equity held by PQBA Group in the corporate capital of Copene, in case of sale or transfer, under any concept whatsoever, to third parties, of the direct or indirect control on Copene, after the completion of the Corporate Restructuring foreseen for the integration of the Petrochemical Pole of Camacari, in the same conditions as those offered by the purchasing third party to the shareholders controlling Copene.
4 - Vote Agreements:
4.1 Both Parties do hereby commit themselves to exert their voting rights as to Norquisa and/or Copene according to the provisions of this clause 4, as well as to advise their representatives in the Administration Board or in the Board of Directors of those companies to do so.
4.2 Both Parties commit themselves to cause all steps of the Corporate Restructuring to be fulfilled, exerting their voting rights always aiming at the faithful compliance with and regular course of the Corporate Restructuring process, including:
(i) transfer of all the petrochemical assets directly or indirectly held by Odebrecht Quimica to Copene;
(ii) option for PQBA to be able to transfer its second-generation assets, whether directly or indirectly held, to Copene;
(iii) migration to Copene of the minor shareholders of the second-generation companies directly or indirectly controlled by PQBA
and Odebrecht Quimica S/A. 4.3 Odebrecht Group shall appoint, whether directly or indirectly, the majority of the Administration Board members of Norquisa and the majority of the Administration Board members of Copene, and PQBA is entitled to appoint at least one member of the Administration Board of Norquisa and at least one member of the Administration Board of Copene. It is further agreed that Odebrecht Group shall appoint, whether directly or indirectly, all the members of the Board of Directors of Norquisa and Copene, it being understood that, should the Administration Board of Norquisa be wound up, PQBA Group shall be entitled to appoint at least one member for the Board of Directors of Norquisa. |
4.4 Both Parties do hereby commit themselves to exert their voting rights as to Copene in order to make it feasible the transfer of the petrochemical assets directly or indirectly held by Odebrecht Quimica to Copene, upon any modality of conveyance permitted by the law, also ensuring to PQBA the chance to transfer its second-generation petrochemical assets, whether directly or indirectly held, in the same conditions and at the same criteria as those applied to the transfer of Odebrecht Quimica assets.
4.5 Both Parties do hereby commit themselves to exert their voting rights as to Copene in order to promote the migration to its corporate capital of the minor shareholders of the second-generation companies controlled by Copene, and also promise to vote for the second-generation companies integration to Copene as soon as such migration takes place.
5 - Representations and Guarantees:
5.1 Each Party hereby represents and guarantees to the other Party that:
(a) it is duly organized and validly existing under the laws of its jurisdiction, enjoys full power and authority, as the case may be, to execute this Agreement and undertake the obligations contained herein; the execution of this Agreement and the compliance with the obligations hereunder were duly authorized by the respective managing boards of each Party;
(b) excepting this instrument, it is not a party to or bound by any other agreement whatsoever, regarding the ownership, transfer or liens on its Shares conflicting the provisions hereof, aside from the Agreement
of Shareholders of Nordeste Quimica S/A - Norquisa; (c) it is the rightful owner of its Shares, which Shares are free and clear from any burdens, debts, doubts and disputes whatsoever, in respect of third parties; |
(d) this Agreement is a legal, valid, effective and binding obligation that the respective Party may be required to comply with pursuant to the provisions set forth herein.
6 - Miscellaneous:
6.1 The Party failing to comply with any provisions hereof or stating any faithless representations or guarantees will be deemed a defaulter and shall bear every burden and consequence from such default, being subject to payment for losses and damages it may give rise to.
6.2 Whenever this Agreement requires or allows any consent, approval, notification or request from one Party to the other Party, such consent, approval, notification or request will be deemed delivered and received if: (i) delivered personally or by telegram; (ii) sent by ordinary mail, upon prepaid, certified or registered postage; in any event, provided it is sent to such persons at such addresses listed below for each Party:
If to Odebrecht:
Av. das Nacoes Unidas no 4.777, 30 andar
Sao Paulo, Sao Paulo
Care of: Board of Directors
If to PQBA:
Praca Pio X, 9o andar, Centro
Rio de Janeiro, RJ
Care of: Mrs. Livia Mariani Soter
6.4 The failure by any of the Parties in exerting any right set forth hereunder shall be construed separately and may not be deemed as waiver by any of the Parties or novation as to any obligation contained herein, which failure shall be deemed a mere act of gratuity.
6.5 This Agreement is executed as an irrevocable and unchangeable deed, binds the Parties and their successors whomsoever, and may be amended only by means of written agreement signed by both Parties.
6.6 Any default to or noncompliance with any obligations hereunder will grant the affected Party the right to demand in court the compliance with such obligation, upon specific enforcement, since this is an extrajudicial document valid to commence an execution process, for all purposes and effects of articles 461, 632, 639 et. seq. of the Civil Procedure Code.
6.7 The Parties hereby commit themselves to consult each other whenever there is any need to disclose the contents hereof to third parties.
6.8 This Agreement will be governed by, construed under and subject to the laws of Brazil; in case of any noncompliance with the obligations undertaken hereunder, the Parties hereby elect the Court of the County of the Capital of the State of Bahia to settle any disputes or controversies arising hereof, excluding any other one, the most privileged it might be.
And, being thus fair and agreed, the Parties cause this Agreement to be signed in two (02) copies of equal form and substance, and for a single effect, in the presence of the two undersigned witnesses.
Salvador, July 27th, 2001.
[sign.](illegible) ODEBRECHT QUIMICA S/A [sign.](illegible) PETROQUIMICA DA BAHIA S/A Witnesses: 1. [signature] 2. [signature] Name: (illegible) Name: (illegible) Taxpayer Card: 063.346.438-43 Taxpayer Card: 041.490.088-09 |
Exhibit 3.02
FIRST AMENDMENT TO SHAREHOLDERS AGREEMENT
By this private deed:
1) ODEBRECHT QUIMICA S/A, a stock company with head office at Av. das Nacoes Unidas no 4777, 3o andar, Sala 3, in the City of Sao Paulo, State of Sao Paulo, enrolled in the National Roll of Corporate Taxpayers under # 57.015.018/0001-84; ODBPAR INVESTIMENTOS S/A, a stock company with head office at Av. Luiz Viana Filho no 2841, Ed. Odebrecht, in the City of Salvador, State of Bahia, enrolled in the National Roll of Corporate Taxpayers under # 05.144.757/0001-72; and ODEBRECHT S/A, a stock company with head office at Av. Luiz Viana Filho no 2841, Ed. Odebrecht, in the City of Salvador, State of Bahia, enrolled in the National Roll of Corporate Taxpayers under # 15.105.588/0001-15 (jointly referred to as "Odebrecht"), herein represented by their undersigned legal representatives (Odebrecht and those companies directly or indirectly controlling or controlled by or under common control with Odebrecht hereinafter jointly referred to as "Odebrecht Group"); and 2) PETROQUIMICA DA BAHIA S/A, a stock company with head office at Rua Miguel Calmon no 57, 2o andar (parte), in the City of Salvador, State of Bahia, enrolled in the National Roll of Corporate Taxpayers under # 13.943.667/0001-70 ("PQBA"), herein represented by its undersigned legal representatives (PQBA and those companies directly or indirectly controlling or controlled by or under common control with PQBA hereinafter jointly referred to as "PQBA Group"); |
all of them referred to jointly as Parties and severally as Party.
WHEREAS:
A) on July 27th, 2001, Odebrecht Quimica S/A and PQBA executed an Agreement on Vote Orientation and other Covenants (hereinafter referred to as "Agreement", a copy thereof is attached hereto), whose object matter is to rule the relationships between the Parties as direct or indirect shareholders of Copene, and also runs upon the preferred right as to the purchase of Shares as well as the Copene management and control, whether directly or by means of Norquisa; |
B) said Agreement sets forth, among other things, the rules for the Parties to carry out the restructuring of the Petrochemical Pole of Camacari, beginning with the integration of the Parties' second-generation companies to Copene -
Petroquimica do Nordeste S/A and culminating in the organization of Braskem S/A ("Corporate Restructuring"); C) a Special General Meeting of Copene is hereby convened to be held on August 16th, 2002, to approve said Corporate Restructuring as proposed by the Administration Board of Copene; D) as soon as the Corporate Restructuring is approved, ODBPAR Investimentos S/A will start being the holder of the whole equity of Odebrecht Group in Norquisa and will also start holding, together with Odebrecht S/A, a direct equity in Braskem S/A; accordingly, it is convenient to include such companies as Parties to the Agreement; E) upon the organization of Braskem S/A and the establishment of the controlling block arising from said Corporate Restructuring, the Parties decided to delineate more defined outlines to the vote agreements as to Norquisa; |
F) Odebrecht and PQBA are the holders of 39.72% and 16.07%, respectively, of the voting capital of Norquisa;
NOW, THEREFORE, the Parties do hereby decide to execute this Amendment to be governed by the following clauses and conditions:
1 - Definitions:
1.1 The terms and expressions written in capital letters shall have the meanings set out in the Agreement herein amended.
2 - Object Matter:
2.1 Vote Cast in the Deliberative Bodies of Norquisa. The Parties do hereby
decide to amend the Agreement so as to determine that, without prejudice to the
provisions regarding the right to vote provided by Clause 4 thereof, the Parties
must hold Previous Meetings before the General Meetings of Norquisa, in order to
set forth the orientation of the votes from its representatives. Except as
otherwise determined by the Parties, such Previous Meetings must be held one
(01) hour before the time scheduled for the General Meeting and at that place
informed in the calling edict for the General Meeting.
The resolutions of said Previous Meeting shall be adopted by simple majority of votes - it being understood that each common share of Norquisa entitles its holder to one (01) vote - and are vote agreements that bind the vote from the Parties as to the respective General Meeting.
2.2 New Parties to the Agreement. In view of the new formation of the corporate
capital of Norquisa and Braskem S/A after said Corporate Restructuring, ODBPAR Investimentos S/A and Odebrecht S/A start being Parties to the Agreement, for any purposes whatsoever. 3 - Jurisdiction: |
3.1 This Amendment will be governed by, construed under and subject to the laws of Brazil; in case of any noncompliance with the obligations undertaken hereunder, the Parties hereby elect the Court of the County of the Capital of the State of Bahia to settle any disputes or controversies arising hereof, excluding any other one, the most privileged it might be.
And, being thus fair and agreed, the Parties cause this Amendment to be signed in two (02) copies of equal form and substance, and for a single effect, in the presence of the two undersigned witnesses.
Salvador, July 29th, 2002.
[sign.](illegible) ODEBRECHT QUIMICA S/A [sign.](illegible) ODBPAR INVESTIMENTOS S/A [sign.](illegible) ODEBRECHT S/A [sign.](illegible) PETROQUIMICA DA BAHIA S/A Witnesses: 1. [signature] 2. [signature] Name: (illegible) Name: (illegible) Taxpayer Card: 063.346.438-43 Taxpayer Card: 041.490.088-09 |
Exhibit 3.03
MEMORANDUM OF UNDERSTANDING REGARDING
SHAREHOLDERS AGREEMENT OF COPENE
By this private instrument and in the best legal form, the contracting parties:
I - ODEBRECHT QUIMICA S.A., headquartered in the City of Sao Paulo, SP, at Avenida Nacoes Unidas, 4777, third floor, room 03, enrolled before CNPJ/MF under number 57.015.018/000-84, hereinafter referred to as ODEQUI, herein represented by Marcelo Bahia Odebrecht, Brazilian, married, engineer, bearer of the Identification Card under number RG-2.598.834-SSP/BA, CPF under number 487.956.235-15 and Adriano Chaves Juca Rolim, Brazilian, married, lawyer, bearer of the Identification Card under number RG-3.703.556-SSP/BA, CPF under number 508.511.015-34 and;
II - PETROQUIMICA DA BAHIA S.A., headquartered in the City of Salvador, Bahia, at Rua Miguel Calmon 57, second floor, part, enrolled before CNPJ/MF under number 13.943.667/0001-70, hereinafter referred to as PQBA herein represented by Francisco Teixeira de Sa, Brazilian, married, engineer, bearer of the Identification Card under number RG-728.830-SSP/BA, CPF number 221.072.908-49 and Pedro Mariani Lacerda, Brazilian, married, administrator, bearer of the Identification Card under number RG-06.705.280-3 IFP, CPF number 874.746.317-20;
Companies jointly or severely named CONTROLLING COMPANIES, by itself or any controlling, affiliate or under common control company, and;
III - PETROBRAS QUIMICA S.A. - PETROQUISA, a corporate headquartered at Avenida Republica do Chile, number 65, Centro, City of Rio de Janeiro, State of Rio de Janeiro, enrolled before CNPJ/MF under No. 33.000.167/0001-01, herein represented by Carlos Alberto de Meira Fontes, Brazilian, married, engineer, bearer of the Identification Card under number RG-2.370.421 IFP, CPF number 264.978.087-87 and Lucio Antonio Mello da Costa Braga, Brazilian, married, engineer, bearer of the Identification Card under number RG-1.591.798 IFP, CPF number 012375007-53, hereinafter simply referred to as PETROQUISA,
ODEQUI, PQBA and PETROQUISA hereinafter jointly referred to as Parties or under indeterminate form as Party;
WHEREAS:
1) The CONTROLLING COMPANIES intend to acquire the stockholding at Norquisa
S.A. (hereinafter referred to as "NORQUISA"), which shall confer to the
CONTROLLING COMPANIES, severely or under agreement with the other
shareholders, the direct or indirect control of COPENE - Petroquimica do
Nordeste S.A., hereinafter simply referred to as COPENE;
2) PETROQUISA holds today the stockholding corresponding to 15.4% of the
voting capital and 21.4% of COPENE's total capital;
3) Once the acquisition of the direct or indirect control of COPENE by the
CONTROLLING COMPANIES is completed, the Parties intend to consolidate its
adjustments through the execution of a shareholders agreement between
PETROQUISA and the direct controller of COPENE;
4) The parties, hereby, intend to set forth the basic terms and conditions to
govern the future COPENE's Shareholders Agreement between PETROQUISA and
the direct controller of COPENE.
The parties decide to formalize this Memorandum of Understandings, with the objective to set forth the basic terms and conditions governing the future COPENE's Shareholders Agreement.
FIRST CLAUSE - OBJECT
1.1. By Memorandum of Understandings, the Parties, hereby, agree that, in the event the CONTROLLING COMPANIES acquire COPENE's direct or indirect stockholding, the CONTROLLING COMPANIES shall execute or shall cause the companies holding the COPENE'S direct stockholding to execute the Shareholders Agreement with PETROQUISA, as relevant minority shareholder, which shall include the basic terms and conditions established under Clauses Second, Third and Fourth of this Memorandum of Understandings.
SECOND CLAUSE - THE ASSIGNMENT OF SHARES
2.1. The parties hereby agree that the assignment of shares (i) held by the Parties or (ii) by the company holding the direct stockholding of COPENE, or (iii) by its direct or indirect controlled companies holding the direct stockholding of COPENE, shall be regulated in the COPENE's future shareholders agreement, including the following basic terms and conditions:
2.1.1. Foresight of the Parties preemptive right in respect to third parties acquirer at the acquisition and assignment of the shares representing COPENE's capital, conferring to Petroquisa the option to enlarge its stockholding on COPENE for up to 35% (thirty five percent) of the Company's voting capital.
2.1.2. Foresight of the joint tag along rights of PETROQUISA's stockholding on COPENE's capital, in the event of sale and assignment of the direct or indirect control of COPENE to third parties, under the same conditions offered by the acquirer third party(ies) to the shareholders controlling COPENE.
THIRD CLAUSE - DECISIONS OF GENERAL MEETING
3.1. The Parties agree that COPENE's future shareholders agreement shall confer to PETROQUISA the veto right at the decisions taken upon COPENE's shareholders general meeting, whenever the following subject matters are discussed:
a) modification to the rights conferred to the shares existing under the bylaws, negatively effecting the value of COPENE's shares owned by Petroquisa.
b) alteration, increasing or decreasing of the company's objects scope, except those which may be required to allow COPENE to operate as an integrated petrochemical company;
c) increase of the number of members of COPENE's Administration Council.
d) decrease of the number of members of COPENE's Administration Council, elected by PETROQUISA's nomination;
e) increase of COPENE's capital, upon payment through assets or rights, unless said assets or rights are related to COPENE's object and the evaluation of said assets or rights is done, under the terms of the 8th Article of Law number 6.404/76, by a prime investment bank or independent audit company;
f) merger, split up, incorporation of COPENE into another company or of another company into COPENE, which may imply the unjustified dilution of PETROQUISA's shareholding, with the integration of the second-generation companies into COPENE understood as justified; among which are included the second-generation companies controlled by the CONTROLLING COMPANIES, provided it is performed based on the procedures foreseen above;
g) COPENE's dissolution or liquidation.
First Paragraph - Notwithstanding the provisions under items (e) and (f) of this clause, it is understood that the Parties shall make, under the same criteria, the evaluation of the second-generation companies of which they are shareholders, direct or indirectly, with the purpose of integration to COPENE.
Second Paragraph - Whenever the process of integration of companies to COPENE imply in capital increase, the Parties shall be ensured the preemptive right to the acquisition or subscription of new shares, in such way that the opportunity for the maintenance of the percentile of the respective shareholding previous to the integration process is ensured, provided the CONTROLLING COMPANIES have ensured COPENE's control in the general meetings and the majority of members of the respective administration council.
FOURTH CLAUSE - DECISIONS OF THE ADMINISTRATION COUNCIL
4.1. Observed the provisions under the Third Clause the Parties agree that COPENE's future shareholder agreement shall confer to PETROQUISA the right to veto power of the decisions taken within COPENE's Administration Council meetings, whenever any of subject matter established below are discussed.
a) acquisition, disposition or burden of goods of the permanent assets or the execution of contracts under whatever nature, in operations contemplating values above 30% (thirty percent) of COPENE's net equity, except, in any case, those operations inherent to the performance of COPENE's object, requiring PETROQUISA's approval;
b) the execution of juridical business with companies directly or indirectly controlled, controlling, controlled by the controlling companies, directly or indirectly, of any of the Parties and, further, affiliated companies, not applicable however, to the integration of the second-generation companies controlled by the CONTROLLING COMPANIES;
c) whatever motion or proposal causing COPENE not to comply with any of the financial indexes below:
(i) indebtedness index (Projected Net Debt/EBITDA) under 3.5;
(ii) projected profits coverage index (EBITDA/Total profits) above 3.0;
(iii) debt service coverage index, except the trade finance lines (EBITDA/{Profits + Amortization}) higher than 1.75;
(iv) All indexes are obtained in consideration to the recent history and projections. The market and prices projections shall be performed by internationally known companies under said specialties, while the projections of floating interest rate shall be performed through Investment Banks.
d) the stockholding in other companies, except those included within the scope of COPENE's object.
FIFTH CLAUSE - DURATION
5.1. This Memorandum of Understandings shall be effective from the date of acquisition of COPENE's stockholding by the CONTROLLING COMPANIES, severely or upon agreement with other shareholders, and remaining in force (i) for 20 (twenty) years or (ii) until the execution of COPENE's future shareholders agreement, by the CONTROLLING COMPANIES or its controlled companies, and PETROQUISA what happens first.
5.2. During the term of duration hereof and the future Shareholders Agreement, the Parties shall abstain to vote over whatever issues which may place them under conflict of interests situation before COPENE.
Sole Paragraph: This Memorandum of Understandings shall be considered automatically revoked, with no burden to any of the Parties, in the event the CONTROLLING COMPANY does not acquire COPENE's (direct or indirect) control until 12/31/2001.
SIXTH CLAUSE - GENERAL PROVISIONS
6.1. No common association, partnership or any other kind of organization or corporate entity between PETROQUISA and the CONTROLLING COMPANY is established under this Memorandum of Understandings.
6.2. This Memorandum of Understandings represents the complete understanding between the Parties, in respect to the object hereunder and substitutes in full, any and all rights and/or obligations arising from other instruments and/or verbal agreements, relative to the purchase and sale of shares issued by COPENE or to the exercise of the right to vote in the General Meeting and COPENE's Administration Council Meeting.
SEVENTH CLAUSE - ARBITRATION
7.1. All questions arising or relative hereto, which are not solved under specific execution, under the terms of the 118th Article, 3rd paragraph of law no. 6.404/76 c/c articles 461, 632 and 639 and following of the Civil Proceedings Code, shall be submitted and solved under definite form upon arbitration. The arbitration shall be done in the city of Rio de Janeiro, State of Rio de Janeiro and shall be conducted, in the Portuguese language, by an arbitration court comprising 03 (three) arbitrators, indicated according to the arbitration norms of UNCITRAL.
7.2. The arbitration judgement shall be announced within the term of 6 (six) months, from the date of the institution of the arbitration or from the replacement of any arbitrator and shall observe the provisions under articles 26 and 32 of the Law number 9.307, of September 23, 1996. For the purposes of execution of the arbitration judgement, if it is the case, the courts of the city of Rio de Janeiro are hereby elected, with the abdication of any other one, the most privileged it may be.
7.3. The Brazilian laws shall be applicable by the arbitration court, for the solution of the litigation.
7.4. Each one of the Parties bears the right to access to court: (i) to oblige the other Party to adopt the arbitration; (ii) in order to obtain the legal measures focusing the protection of its rights previously to the institution of the arbitration, with said measures not able to be considered as a waiver to the arbitration solution; and (iii) so as to execute whatever solution of the arbitrators, including the arbitration judgement.
7.5. The provisions under the item 7.1 above do not apply to the questions relative to interpretation, application or execution of the issues provided hereunder, relative to rights and obligations susceptible to specific execution, under the terms of the articles 118 of the Law 6.404/76 c/c 461, 632, 639 and following of the civil Proceedings Code, with the courts of the county of the Capital of the State of Rio de Janeiro hereby elected, with the abdication of any other one, the most privileged it may be.
And, being thus fair and agreed, the contracting Parties sign this Memorandum of Understandings in 3 (three) counterparts of same tenor and form, before the undersigned witnesses.
Rio de Janeiro, July 3, 2001.
(s.) illegible (s.) illegible Odebrecht Quimica S.A. Petroquimica da Bahia S.A. (s.) illegible Petrobras Quimica S.A. Petroquisa |
Witnesses:
(s.) illegible Aloisio F. Nobrega CPF number 270.434.187-07 CREA number 20745-D (s.) illegible Ronaldo Batista Assuncao CPF number 240.452.686-34 Id. Card number M-583.730 SSP/MG |
Exhibit 3.04
FIRST AMENDMENT TO MEMORANDUM OF UNDERSTANDING REGARDING
SHAREHOLDERS AGREEMENT
COPENE - PETROQUIMICA DO NORDESTE S.A.
By this private instrument, the parties:
On the one hand:
(a) ODEBRECHT S.A., a joint stock company with headquarters at Av. Luiz Viana Filho, n.(o) 2.841, Paralela, Salvador - BA, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 15.105.588/0001-15, herein represented by its Directors, Messrs. Pedro Augusto Ribeiro Novis and Newton Sergio de Souza, hereinafter referred to as ODEBRECHT;
On the other hand:
(b) PETROBRAS QUIMICA S.A. - PETROQUISA, a joint stock company with headquarters in the capital of the state of Rio de Janeiro at Av. Republica do Chile, n.(o) 65, Centro, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 33.000.167/0001-01, herein represented by its President, Mr. Carlos Alberto de Meira Fontes, and by its Director, Mrs. Margareth Feijo Brunnet, hereinafter referred to as PETROQUISA;
ODEBRECHT and PETROQUISA hereinafter jointly referred to as Parties or, individually, Party,
And as Consenting Parties:
(c) PETROQUIMICA DA BAHIA S.A., a joint stock company with headquarters in the city of Salvador, state of Bahia, at Rua Miguel Calmon, n.(o) 57, 2(0) andar, parte, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 13.943.667/0001-70, herein represented by its Directors, Messrs. Andre Philippe Mattias Lindner Krepel and Lucio Jose Santos Junior, hereinafter referred to as PQBA;
(d) NORDESTE QUIMICA S.A. - NORQUISA, a joint stock company with headquarters in the city of Camacari, state of Bahia, at Rua Eteno, n.(o) 1561, Complexo Basico, Polo Petroquimico, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 15.659.535/0001-45, herein represented by its attorneys, Messrs. Lucio Jose Santos Junior and Newton Sergio de Souza, hereinafter referred to as NORQUISA;
(e) COPENE - PETROQUIMICA DO NORDESTE S.A., a joint stock company with headquarters in the city of Camacari, state of Bahia, at Rua Eteno, n.(o) 1561, Complexo Basico, Polo Petroquimico, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 42.150.391/0001-70, herein represented by its legal representatives, Messrs. Francisco Teixeira de Sa and Ruy Lemos Sampaio, hereinafter referred to as COMPANY; and
(f) PETROLEO BRASILEIRO S.A. - PETROBRAS, controller of PETROQUISA, hereinafter referred to as PETROBRAS, when appearing individually, a private and public joint stock company with headquarters in the city of Rio de Janeiro, state of Rio de Janeiro, at Avenida Republica do Chile, n.(o) 65, enrolled at the Tax Roll of Legal Entities of the Treasury Department (CNPJ/MF) under # 33.000.167/0001-01, herein represented by its President, Mr. Francisco Roberto Andre Gros;
WHEREAS:
1) ODEBRECHT, PQBA and PETROQUISA signed, on July 3, 2001, the "Memorandum of Understanding for the Execution of Agreement of Shareholders of Copene" ("Memorandum") defining the terms and conditions that shall rule the future agreement of shareholders of the Company;
2) The Managing Board of the Company shall meet on this date to decide on the implementation, by the Company, of the so-called "Braskem Project", by which the Company (i) shall incorporate OPP Produtos Petroquimicos S.A. and 52114 Participacoes S.A. and, as a result, the COMPANY shall hold, either directly or indirectly, among other assets, stockholdings in the second generation companies controlled by and/or associated to ODEBRECHT and PQBA, including Odebrecht
Quimica S/A, OPP Quimica S/A, Trikem S.A., OPP Borealis, Companhia Petroquimica do Sul - Copesul ("COPESUL") and Nitrocarbono S.A., and (ii) shall be named BRASKEM S.A. ("Reorganization"); |
3) The Parties and PQBA intend to amend and ratify the terms of the Memorandum, as well as to establish additional terms and conditions that shall rule their relationship as shareholders of the COMPANY;
The Parties decide to sign this Amendment to the Memorandum of Understandings for the Execution of Agreement of Shareholders of Copene ("Amendment"), with the following terms and conditions:
CHAPTER I - RATIFICATION OF THE RIGHTS AND OBLIGATIONS OF THE PARTIES AS PER THE MEMORANDUM
1.1 Rights and Obligations of the Parties. The Parties expressly ratify the rights they currently have and their respective obligations as shareholders of the COMPANY, in special, but not limited to, those set forth in the Memorandum, which are expressly maintained, notwithstanding the changes in their respective stockholdings arising out of the implementation of the Reorganization.
1.2 Ratification of the Memorandum. The provisions of the Memorandum not expressly changed by the provisions of this Amendment remain unchanged and in force.
1.3 Execution of Agreement of Shareholders. The Parties herein commit themselves
to sign the agreement of shareholders of the COMPANY within the maximum term of
06 (six) months from this date, which shall contain, in details, the terms and
conditions foreseen in the Memorandum and this Amendment. Notwithstanding, it is
clear and agreed that the provisions of the Memorandum and this Amendment
(including, but not limited to, those related to the participation of PETROQUISA
in the Managing Board of the Company by means of the election of, at least, 02
(two) effective members and their respective substitutes, and the exercise of
the rights of veto foreseen in Clauses 3rd and 4th of the Memorandum) are
already in full force and subject to specific execution under the terms of Art.
118 of Law 6.404/76, as amended from time to time, and they shall continue as
such even though the above mentioned Agreement of Shareholders is not executed
due to any reason.
1.4 Consent. NORQUISA, PQBA and PETROBRAS commit themselves to respecting the provisions of the Memorandum and this Amendment, as the case might be. NORQUISA and PQBA also commit themselves to exercising the vote of their shares issued by the COMPANY and, in case of PQBA, also the vote of its shares issued by NORQUISA, together with ODEBRECHT, so as to ensure the full exercise, by PETROQUISA, of the rights it currently has according to the law, the Memorandum and this Amendment.
1.5 By-laws. The Controllers (as defined in Clause 2.1 below) herein commit themselves to exercising their right of vote in the COMPANY so as to prevent the COMPANY's by-laws from containing, now or in the future, any provision conflicting with the provisions of the Memorandum, of the Amendment and, once the Agreement of Shareholders is signed, of said Agreement, or able to impede, somehow, the exercise, by PETROQUISA, of its rights foreseen in the Memorandum, in the Amendment and, once the Agreement of Shareholders is signed, in said Agreement.
CHAPTER II - PETROQUISA'S OPTION TO SHARE THE CONTROL OF THE COMPANY, UNDER EQUAL CONDITIONS, WITH THE CONTROLLERS
2.1 Option to Buy/Subscribe Common Shares. By this instrument, ODEBRECHT irrevocably grants to PETROQUISA an option ("Option to Buy/Subscribe - Control") in order for PETROQUISA to subscribe and buy common and preferred shares issued by the COMPANY, which confer on PETROQUISA an equity equal to the voting equity and interest in the total capital of the COMPANY that shall be directly held, after said increase, jointly by ODEBRECHT, PQBA and NORQUISA ("Controllers") in the total and voting corporate capital of the COMPANY ("Control - Option Shares"). The purchase of Control - Option Shares by PETROQUISA shall be made as follows:
(i) subscription of common and preferred Control - Option Shares at the proportion existing between the types of shares on the date of this subscription, by PETROQUISA, to be issued in increase of capital of the COMPANY and paid up by PETROQUISA upon the contribution, to the COMPANY, of its shares in the capital of COPESUL, which increase the Controllers, from now, commit themselves to approving with their votes, waiving their rights of preference in the subscription in behalf of PETROQUISA.
(ii) if the Control - Option Shares subscribed as per the above item (i) are not enough for PETROQUISA to hold an equity equal to the voting and total equity then directly held by the Controllers in the corporate capital of the COMPANY, ODEBRECHT shall be bound to sell the remaining Control - Option Shares to PETROQUISA, under the terms and conditions foreseen in this Chapter II.
2.1.1 The Option to Buy/Subscribe - Control may be exercised by PETROQUISA one time only, and it shall comprise all of the Control - Option Shares.
2.1.2 The Option to Buy/Subscribe - Control may be exercised by PETROQUISA upon written notice delivered to ODEBRECHT in the form of Clause 4.6 below, on the last business day of each month, from this month up to and including 04/30/2005.
2.1.3 On the date corresponding to the 90th (ninetieth) day or, if there is a Relevant Difference of Evaluation, on the 120th (one hundred twentieth) day from the day on which ODEBRECHT receives a written notice about the exercise of the Option to Buy/Subscribe - Control mentioned in Clause 2.1.1 ("Date of Option to Buy/Subscribe - Control"), the Parties shall attend the general meeting called for the purposes of deciding on the increase of capital of the COMPANY as per the above Clause 2.1 (i), and shall approve the issue, by the COMPANY, of the Control - Option Shares and their subscription by PETROQUISA, at the Option Price obtained as per Clause 2.1.6, which shall pay them up upon the contribution, to the COMPANY, of all its shares of capital of COPESUL, at the COPESUL Evaluation Value obtained according to the evaluation to be made according to the same Clause 2.1.6.
2.1.4 If on the business day subsequent to the end of the term for the exercise of the right of preference of the other shareholders of the COMPANY, which shall be determined as 30 (thirty) days from the Date of Option to Buy/Subscribe - Control, the Control - Option Shares subscribed as per the above Clause 2.1.3 are not enough for PETROQUISA to hold an equity equal to the voting equity and interest in the total capital then directly held by the Controllers in the corporate capital of the COMPANY, the Parties shall appear at the COMPANY's headquarters and PETROQUISA shall purchase and ODEBRECHT shall sell and transfer to PETROQUISA the Control - Option Shares necessary for PETROQUISA to hold a voting equity and interest in the total capital of the COMPANY equal to the equity then held by the Controllers, at the Option Price applicable as per the following Clause 2.1.6, up front, in national currency, upon credit in the checking account indicated by ODEBRECHT for this purpose.
2.1.5 The Control - Option Shares shall be sold flat, i.e., they shall be worthy of verified profits from the moment of their subscription or purchase, as the case might be.
2.1.6 The price of Control - Option Shares ("Option Price") shall correspond to the percentage - represented by them - of the economic value of 100% of the COMPANY, obtained based on classical market criteria, under the terms of this Clause 2.1.6, and the value of the shares issued by COPESUL to be contributed to the COMPANY by PETROQUISA ("COPESUL Evaluation Value") shall correspond to the percentage - represented by them - of the economic value of 100% of COPESUL, calculated also based on classical market criteria, under the terms of this Clause 2.1.6, both companies being evaluated according to the same criteria and on the same basic date, without control premium. For the purposes of this Clause 2.1.6, the Parties commit themselves to proceeding as follows:
(a) within the term of 20 (twenty) days from the date on which the notice
mentioned in Clause 2.1.1 is delivered, ODEBRECHT, on the one hand, and
PETROQUISA, on the other hand, shall, each of them, hire a first class
investment bank to perform the evaluations of the COMPANY and COPESUL for
the purposes of this Clause. The banks chosen shall be informed by each one
of the Parties to the other, within the term of 5 (five) days set forth
herein, upon written notice prepared according to the following Clause 4.6.
(b) each bank shall have 60 (sixty) days to present to the Parties the
results of their evaluations. If the difference between the results
obtained, either in the evaluation of the COMPANY or in the evaluation of
COPESUL, is lower than 10% (ten per cent), the Option Price and/or COPESUL
Evaluation Value, as the case might be, shall correspond to the
arithmetical mean of the two evaluations and shall be final, binding the
Parties for the purposes of the Option to Buy/Subscribe - Control. If there
is a difference of more than 10% in any or both of the evaluations
("Relevant Difference of Evaluation"), the two banks initially hired shall
have the term of 5 (five) days to indicate a third first class investment
bank to work as referee. (c) the referee may use all work papers of the
banks originally hired by the Parties and shall have 30 (thirty) days from
the date of its hiring to inform to the Parties the result of its
evaluation, which, in its turn, shall be final, binding the Parties for the
purposes of the Option to Buy/Subscribe - Control, provided that,
notwithstanding the result presented by the referee, the final Option Price
and/or COPESUL Evaluation Value, as the case might be, may be neither lower
than the least evaluation nor higher than the greatest evaluation made by
the banks originally hired by the Parties, according to this Clause. (d)
each Party shall pay the costs with hiring of the investment bank chosen by
it and, as the case might be, ODEBRECHT, on the one hand, and PETROQUISA,
on the other hand, shall each pay 50% of the costs with hiring of the
referee. (e) any eventual delay in the compliance, by the banks they hired,
with the obligations set forth herein or necessary to complete the
evaluations, shall not damage PETROQUISA's right to fully exercise its
rights to purchase the Control - Option Shares.
2.1.8 With the exercise of the Option to Buy/Subscribe - Control, the purchase and sale/subscription of the Control - Option Shares shall be considered perfect and finished, irrespective of any additional formality, and its fulfillment may be demanded irrespective of conditions, including upon specific execution.
2.1.9 In the event of exercise of the Option to Buy/Subscribe - Control by PETROQUISA, subject to the provisions of the above Clause 2.1 (i), ODEBRECHT commits itself to sale to PETROQUISA the Control - Option Shares free and clear of CONSENTING PARTY and all restrictions, preferences, usufructs or other guarantees and/or onus of any nature ("Onus"). If by the time of the exercise of the Option to Buy/Subscribe - Control by PETROQUISA the Control - Option Shares are subject to any Onus, PETROQUISA may, at its sole discretion, use a part of or the entire Option Price, as the case might be, to release the burdened Control - Option Shares or retain the entirety of the Option Price until all the Option Shares have been transferred to PETROQUISA free and clear of any and all Onus.
2.1.10 Notwithstanding the provisions of the above Clause 2.1.9, the voting rights and equity rights related to all the Control - Option Shares shall be exercised by PETROQUISA from the date of Option to Buy/Subscribe - Control, without any restriction.
2.2 Execution of Agreement of Shareholders - Control Sharing. By this instrument, the Parties and Consenting Parties agree, from now, that if PETROQUISA exercises its Option to Buy/Subscribe - Control, the Controllers shall sign or cause the company(ies) holding control shares of the COMPANY to sign, on the Date of Option to Buy/Subscribe - Control, the agreement of shareholders with PETROQUISA, which shall bind its respective voting shares in the capital of the COMPANY and include the basic terms and conditions set forth in this Clause 2.2, as follows.
2.2.1. The vote of the Parties at general meetings and meeting of the Managing Board of the COMPANY shall be determined in previous meetings at which the Controllers jointly, on the one hand, and PETROQUISA, on the other hand, shall have the same number of votes, which voting shall be always exercised in group, the sporadic or formal alliances with shareholders outside the control group being forbidden. In the absence of an agreement as to the exercise of vote, the Parties, jointly, shall not approve the subject to be submitted to the general meetings or meetings of the Managing Board, as the case might be.
2.2.2 The Controllers, jointly, on the one hand, and PETROQUISA, on the other hand, shall have equal political rights, including the right to elect the same number of representatives for the Managing Board of the COMPANY.
2.2.3 The mechanism of right of preference in the purchase of shares under equal conditions with third parties shall be foreseen in case of direct or indirect sale, by PETROQUISA and/or by the Controllers, of the common shares issued by the COMPANY held by them.
2.2.4 Both PETROQUISA and the Controllers shall have the right of joint sale ("tag along") in the event of sale, to third parties, of their common shares, under the same conditions as those offered by the purchasing third party, without discount, being that the tag along right foreseen herein shall apply both to direct sales and to indirect sales of control shares made by ODEBRECHT and/or PQBA and/or Petroleo Brasileiro S.A. - PETROBRAS, as the case might be.
2.2.4.1 If any of the Controllers and/or PETROQUISA receives an offer and the other does not exercise its right of preference or tag along as foreseen in the above Clauses 2.2.3 and 2.2.4, respectively, the Party that has received the offer may request that the other also sells its equity to interested third parties ("drag along"), conditioned to obtaining a sale price of, at least, the one obtained by means of an independent evaluation, as foreseen in the above Clause 2.1.6 and next ones. The Party that intends to drag along shall inform the other with antecedence so that the minimum price may be established before the beginning of the sale process, and said price shall be valid for 06 (six) months, being extendable for 6 (six) months upon updating of the respective evaluation.
2.2.4.2 The rights and obligations related to transfers of control shares of the COMPANY foreseen in the above Clauses 2.2.3, 2.2.4 and 2.2.4.1 shall not apply in case of transfer of said shares by PETROQUISA and/or the Controllers, as the case might be, to any Affiliate of its, which shall adhere to this instrument for all purposes and effects.
2.2.4.3 For the purposes of the Memorandum and this Amendment, "Affiliate" means any and all party directly or indirectly controlled by, controller of or under the common control with certain parties, being that "control" shall have the definition attributed by Art. 116 of Law 6.404/76, as amended from time to time.
2.2.5 After the Date of Option to Buy/Subscribe - Control, none of the Parties may purchase additional common shares issued by the COMPANY from third parties, except upon mutual agreement or as authorized by the Agreement of Shareholders. If PETROQUISA holds a voting equity in the COMPANY greater than that held by the Controllers as a result of the exercise of the Option to Buy/Subscribe - Control effected by the contribution of the shares of the capital of COPESUL or by any other means, or if the Controllers hold a voting equity in the COMPANY greater than that held by PETROQUISA as a result of corporate reorganizations or capital refunds involving the Controllers and their respective controlled/associated companies or mandatory public offers or by any other means ("Surplus Equity"), the Surplus Equity shall not be regarded as control shares, thus being excluded from the Agreement of Shareholders for all purposes and effects.
2.2.5.1 The Party that holds the least equity shall be entitled to, at any time, purchase 50% (fifty per cent) of the Surplus Equity at a price equivalent to the cost of purchase of the Surplus Equity, corrected based on the CDI. If the cost of purchase of the Surplus Equity can not be determined, the price to purchase 50% of said equity shall be determined by independent evaluation, as foreseen in the above Clause 2.1.6 and next ones.
2.2.6 PETROQUISA agrees that if it exercises and consummates the Option to Buy/Subscribe - Control, it shall, after said exercise and consummation, dispose, in the subsequent 18 (eighteen) months, of its investments in companies that are competitors of the COMPANY, either directly or by means of related companies, provided that, from the consummation of the Option to Buy/Subscribe - Control, PETROQUISA shall refrain from exercising rights of participation in managing boards of said companies, or shall exercise said rights by means of parties not related to the staff of PETROQUISA. The provisions of this Clause shall not apply to minority interests held by PETROQUISA in Competitors of the COMPANY not granting on PETROQUISA a right of participation in its managing boards.
2.2.6 For the purposes of this Amendment, Competitors of the COMPANY are companies acting in a competing activity in Brazil in respect to the preponderant activities of the COMPANY on the Date of Option to Buy/Subscribe - Control.
2.2.7.1 If after the term of 18 (eighteen) months foreseen in the above Clause
2.2.6 PETROQUISA has not disposed of any of its investments mentioned therein,
then, from the end of said term, PETROQUISA's exercise of the rights foreseen in
the Agreement of Shareholders shall be temporarily suspended, as purchased as a
result of the exercise of the Option to Buy/Subscribe - Control; in any case,
PETROQUISA's exercise of the rights foreseen in the Memorandum shall be
maintained. Once effected, by PETROQUISA, the liquidation or sale of its
investments in companies that are Competitors of the COMPANY, the exercise of
all rights of PETROQUISA as holder of level interest with the Controllers, as
foreseen in the Agreement of Shareholders, shall be automatically restored.
2.2.8 The Agreement of Shareholders shall be in force for the term of 20 (twenty) years from the Date of Option to Buy/Subscribe - Control.
2.2.9 The terms and conditions of the Agreement of Shareholders that shall be in force from the Date of Option to Buy/Subscribe - Control subject of this Clause 2.2 shall appear, in full, in the Agreement of Shareholders to be entered into according to Clause 1.3 of this Amendment. Notwithstanding, if said Agreement of Shareholders is not, due to any reason, entered into, the relationship of the Parties shall be ruled by the principles and conditions set forth in this Clause 2.2 and other applicable provisions of the Memorandum and this Amendment, which shall remain in full force for all purposes.
CHAPTER III - MAINTENANCE OF THE RIGHTS FORESEEN IN THE MEMORANDUM
3.1. Even though the Option to Buy/Subscribe - Control is not exercised, the Parties expressly agree that all the rights foreseen in the Memorandum and this Amendment shall be maintained, including, but not limited to the rights of veto, of participation of PETROQUISA in the Managing Board of the COMPANY and of tag along, irrespective of its stockholding.
3.2. The right of preference foreseen in Cause 2.1.1 of the Memorandum shall cease to be in force from May 1st, 2005. If the Option to Buy/Subscribe - Control is not exercised, provided that the provisions of the following Clauses 4.1 and 4.2 are observed in respect to the transfers of shares by PETROQUISA.
CHAPTER IV - GENERAL PROVISIONS
4.1 Exclusion of the Shares of PETROQUISA from the Memorandum and the Amendment. PETROQUISA may, at its sole discretion and at any time, until the consummation of the purchase/subscription of the Control - Option Shares and if the Option to Buy/Subscribe - Control is not exercised, sell any and all of its common and/or preferred shares issued by the COMPANY to third parties, without observing the right of preference foreseen in the Second Clause of the Memorandum and, in this case, the common and preferred shares to be sold shall be excluded from the Memorandum and this Amendment. In any case, all the rights of PETROQUISA foreseen in the Memorandum and this Amendment shall remain in full force and effect while PETROQUISA holds any stockholding represented by common shares issued by the COMPANY. after the consummation of the purchase/subscription of the Control - Option Shares, any sale of common shares issued by the COMPANY shall observe the provisions of the above Clauses 2.2.3, 2.2.4 and 2.4.1.
4.2 Assignment of Rights. PETROQUISA may, at any time and at its sole discretion, sell the whole interest then held by it in the voting capital of the COMPANY to a third party, together with al the rights it is assured by the Memorandum and this Amendment, including, but not limited to, the right of veto and participation in the Managing Board of the COMPANY, exception being exclusively made to the right to Option to Buy/Subscribe - Control foreseen in Chapter II of this Amendment, which is established under the concept of intuitu personae and, therefore, it may be exercised only by PETROQUISA and/or their Affiliates appointed for this purpose. In this case, the third-party purchaser shall adhere, in writing, to all the terms and conditions foreseen in the Memorandum and the Amendment. The provisions of this Clause 4.2 shall apply exclusively to the sale of the entirety, i.e., in all, of the interest in the voting capital of the COMPANY then held by PETROQUISA.
4.2.1. None of the Controllers may assign this Amendment and/or the Memorandum in all or in part without the previous written consent of PETROQUISA.
4.3 Specific Performance. With no prejudice to other means of judicial or extra-judicial action legally available to the Parties, the provisions and obligations assumed in Chapters II and III bear specific performance, under the terms of articles 461, 632, 639 and following ones of the Code of Civil Procedure, and eventual damages shall not mean proper satisfaction of the rights of the Parties, and the forum of the county of the capital of the state of Rio de Janeiro is hereby elected, with renunciation to any other one, the most privileged it might be.
4.4 Registration. This instrument, including the options set forth herein, shall be registered before the depository of the shares of the COMPANY, under the terms of article 40 of Law # 6.404/76.
4.5 Independence. The options of sale and purchase set forth in this instrument are hired independently, and they shall remain in force and produce, in full, their effects, even though the Agreement of Shareholders is not entered into or the Memorandum (as amended) is terminated, due to any reason, before the end of the respective term of life of said options.
4.6 Notices. All the notices, consents, requests and other communications foreseen herein are made in writing and delivered personally, sent by means of registered letter or a recognized courier service (both with acknowledgement of receipt), in any case with copy by fax, to the address and individuals indicated below:
If to the Controllers:
Odebrecht S.A.
Care of: CEO
Address: Av. Luiz Viana Filho, n.(o)2.841, Paralela, Salvador - BA
Fax: (71) 206-1600
If to PETROQUISA:
Address: Avenida Republica do Chile, n.(o)65, 9(0)andar, sala 902 C
Rio de Janeiro - RJ
Care of: Carlos Alberto de Meira Fontes - President
Fax #s: (21) 2534-2722 and (21) 2262-3628
If to the COMPANY:
Address: Rua Eteno, n.(o)1561, Complexo Basico, Polo Petroquimico - Camacari -
BA
Care of: CEO
Fax: (71) 632-5047
4.6.1 The notices delivered according to Clause 4.6 shall be considered as being given: (i) when delivered, if delivered personally; and (ii) when received, if sent by mail or courier service.
4.6.2 Any Party to the agreement may change the address to which the notice shall be sent by means of a written notice sent to the other Parties to the agreement according to this clause 4.6.
4.7 Consent. PQBA, the COMPANY, NORQUISA sign this Amendment as consenting parties for all purposes and effects of Art. 118 of Law 6.404/76, as amended from time to time. PETROBRAS signs this Amendment only for the purposes of the above Clause 2.2.3.
4.8 Binding Effect. This Amendment is irrevocably signed and binds the Parties by themselves and their heirs and successors under any concept.
4.9 Changes. No change to this Amendment and the Memorandum shall be valid unless if made in writing and signed by all the parties.
4.10 Tolerance, Waiver. No term granted or waiver by any of the Parties to the others in respect to the terms of this Amendment and/or Memorandum shall affect, anyway, this Amendment or the Memorandum or any of the rights or obligations of the Parties foreseen in this Amendment and in the Memorandum, unless in the strict terms of said tolerance or waiver granted.
4.11 Severability. If any of the provisions of this Amendment is considered null, voidable, invalid or inoperative, no other provision of this Amendment shall be affected as a result of it and, therefore, the remaining provisions of this Amendment shall remain in full force and effect as if said null, voidable, invalid or inoperative provision was not contained herein.
4.12 Life. This Amendment shall be in force, automatically and irrespective of any additional formality, on the date on which the incorporation of OPP Produtos Petroquimicos S.A. and 52114 Participacoes S.A. by the COMPANY is approved at a Special General Meeting of Shareholders of the COMPANY held for this purpose.
4.12.1. The Advisers of the COMPANY shall receive the information report about the passive contingencies and active superveniences and respective realizations mentioned in Clause 8.1.2 of the "Protocol and Justification of the Operation of Incorporation of OPP Produtos Petroquimicos S.A. by Copene - Petroquimica do Nordeste S.A." to be submitted to decision of the Special General Meeting mentioned in the above Clause 4.12, it being right that the Advisors shall have, individually, the right to request and receive, from the COMPANY, information about the defense of and/or questions about any prospective Losses (as defined in said Protocol), as well as documentation relating the Losses incurred and the respective indemnification.
And by being thus fair and agreed, the Parties and the Consenting Parties sign this Amendment in 05 (five) counterparts of same text and form, before the undersigned witnesses.
Rio de Janeiro, July 26, 2002.
ODEBRECHT PETROBRAS QUIMICA S.A. - PETROQUISA (signed: illegible) (signed: illegible) Pedro Augusto Ribeiro Novis Carlos Alberto de Meira Fontes (signed: illegible) (signed: illegible) Newton Sergio de Souza Margareth Feijo Brunnet PETROQUIMICA DA BAHIA S.A. NORDESTE QUIMICA S.A. - NORQUISA (signed: illegible) (signed: illegible) Andre Philippe Mattias Lindner Krepel Lucio Jose Santos Junior (signed: illegible) (signed: illegible) Lucio Jose Santos Junior Newton Sergio de Souza COPENE - PETROQUIMICA DO NORDESTE S.A. PETROLEO BRASILEIRO S.A. (signed: illegible) Francisco Roberto Andre Gros Francisco Teixeira de Sa (signed: illegible) Ruy Lemos Sampaio |
Witnesses: 1. (signed: illegible) 2. (signed: illegible) Name: JUSSARA CARVALHO SALUSTINO Name: KATIA (illegible) ID Card (RG): 1865128-30 ID Card (RG): 07175939-3 |
Exhibit 3.05
MEMORANDUM OF UNDERSTANDING
REGARDING SHAREHOLDERS AGREEMENT
By this private instrument and in the best legal form, the contracting parties:
I - ODEBRECHT QUIMICA S.A., hereinafter named ODEBRECHT; a joint stock company, duly organized and existing under the Laws of the Federal Republic of Brazil, with registered offices in the City of Camacari, at Rua Hidrogenio, No. 3342, Suite 01, enrolled before CNPJ/MF under number 57.015.018/000-84, herein represented by its legal representative and;
II - PETROQUIMICA DA BAHIA S.A., hereinafter simply named PQBA, a joint stock company, duly organized and existing under the Laws of the Federal Republic of Brazil, with offices in the City of Salvador, at Avenida Tancredo Neves, No. 1.186, 7th floor (part) enrolled before CNPJ/MF under number 13.943.667/0001-70, herein represented by its legal representative;
Companies jointly or severely named CONTROLLING COMPANY, by itself or any controlling, affiliate or under common control company, and;
III - PETROS - FUNDACAO PETROBRAS DE SEGURIDADE SOCIAL, a private security closed company, duly organized and existing under the Laws of the Federal Republic of Brazil, enrolled before CNPJ/MF under No. 034.053.942/0001-50, with offices at Rua do Ouvidor, 98, in the City of Rio de Janeiro, State of Rio de Janeiro, herein represented under the form of its Bylaws, hereinafter simply named PETROS;
IV - PREVI - CAIXA DE PREVIDENCIA DOS FUNCIONARIOS DO BANCO DO BRASIL, a private security closed company, duly organized and existing under the Laws of the Federal Republic of Brazil, enrolled before CNPJ/MF under No. 33.754.482/0001-24, with offices at Praia de Botafogo, No. 501 - 3rd and 4th floors, in the City of Rio de Janeiro, State of Rio de Janeiro, herein represented under the form of its Bylaws, hereinafter simply named PREVI;
Hereinafter jointly named the "Parties",
WHEREAS:
1) The CONTROLLING COMPANY intends to acquire the stockholding at Norquisa S.A. (hereinafter named "NORQUISA") and at Copene Petroquimica do Nordeste S.A. (hereinafter named "COPENE" or "Company"), which shall confer to the CONTROLLING COMPANY, severely or under agreement with the other shareholders, the direct or indirect control of COPENE;
2) Petrobras Quimica S.A. - Petroquisa entered, with the CONTROLLING COMPANY, a Memorandum of Understandings, on 07/03/01, setting forth the
terms and conditions to govern the future COPENE's Shareholders Agreement;
3) PETROS holds today the stockholding with COPENE, corresponding to 5.72% (five point seventy two percent) of the Company's voting capital;
4) PREVI holds today, the stockholding at COPENE, corresponding to 5.82% (five point eighty two percent) of the Company's voting capital;
5) Once the acquisition of the direct or indirect control of COPENE by the CONTROLLING COMPANY is completed, the Parties intend to consolidate its adjustments through the entering of a shareholders agreement between PETROS, PREVI, Petroquisa and the direct controller of COPENE (hereinafter named "COPENE's Shareholders Agreement");
6) The parties, hereby, intend to set forth the basic terms and conditions to govern the future COPENE's Shareholders Agreement.
The parties decide to formalize this Memorandum of Understandings, with the objective to set forth the basic terms and conditions governing the future COPENE's Shareholders Agreement.
FIRST CLAUSE - OBJECT
1.1. Through this Memorandum of Understandings, the Parties, from now on, agree that, in the event the CONTROLLING COMPANY acquires COPENE's direct or indirect stockholding, the CONTROLLING COMPANY shall enter or shall cause the companies holding the COPENE'S direct stockholding to enter the Shareholders Agreement with Petroquisa, PETROS and PREVI, which shall include, among others, the basic terms and conditions established under this Memorandum of Understandings.
SECOND CLAUSE - DECISIONS OF GENERAL MEETING
2.1. According to the provisions under item 8.5 below, the CONTROLLING COMPANY agrees, hereunder, to confer to PETROS and PREVI, from the date of acquisition of COPENE's stockholding, the direct right to veto power, to be jointly exercised by PETROS and PREVI, at the decisions taken during shareholders general meetings, whenever any of the subject matters below are discussed. The right to veto power now foreseen shall be included in the future Shareholders Agreement, when PETROS and PREVI, together with PETROQUISA shall exercise it.
a) modification to the rights conferred to the shares existing under the bylaws, negatively effecting the value of COPENE's common or preferred shares.
b) alteration, increasing or decreasing of the company's objects, except those which may be required to allow COPENE to operate as an integrated petrochemical company;
c) increase of the number of members of COPENE's Administration Council.
d) decrease of the number of members of COPENE's Administration Council, currently elected upon nomination by PETROS and PREVI, that is to say, two councilors, provided the stockholding defined under article 8.5 below is maintained;
e) increase of COPENE's capital, upon payment through the assets or rights, unless said assets or rights are related to COPENE's object and the evaluation of said assets or rights is done, under the terms of the 8th Article of Law number 6.404/76, by an investment bank selected by the CONTROLLING COMPANY, from a list of five prime banks appointed by Petroquisa, PETROS and PREVI;
f) merger, split up, incorporation of COPENE into another company or of another company into COPENE, which may imply the unjustified dilution of PETROS' and/or PREVI's shareholding , with the integration of the second-generation companies into COPENE understood as justified; among which are included the second-generation companies controlled by the CONTROLLING COMPANY, provided it is performed based on the procedures foreseen under the previous item;
g) COPENE's dissolution or liquidation.
First Paragraph - Notwithstanding the provisions under items (e) and (f) of this clause, it is understood that the Parties shall make, under the same criteria, the evaluation of the second-generation companies of which they are shareholders, direct or indirectly, with the purpose of integration to COPENE.
Second Paragraph - Whenever the process of integration of companies to COPENE imply in capital increase, the Parties shall be ensured the preemptive right to the acquisition or subscription of new shares, in such way that the opportunity for the maintenance of the percentile of the respective shareholding previous to the integration is ensured, provided the CONTROLLING COMPANY have ensured COPENE's control in the general meetings and the majority of members of the respective administration council.
THIRD CLAUSE - DECISIONS OF THE ADMINISTRATION COUNCIL
3.1 Observed the provisions under the Second Clause and under the item 8.5 below, the CONTROLLING COMPANY agrees, hereunder, to confer to PETROS and PREVI, from the acquisition of COPENE's control, the right to
veto power, to be jointly exercised by PETROS and PREVI, in the decisions taken in COPENE's Administration Council's meetings, whenever any of subject matter established below are discussed. The right to veto power foreseen hereunder shall be included in the future Shareholders Agreement, when PETROS and PREVI, together with PETROQUISA shall exercise it.
a) acquisition, disposition or burden of goods of the permanent assets or the execution of contracts under whatever nature, in operations contemplating values above 30% (thirty percent) of COPENE's net equity, except, in any case, those operations inherent to the performance of COPENE's object, requiring PETROS' and PREVI's approval;
b) the entering of juridical business with companies directly or indirectly controlled, controlling, controlled by the controlling companies, of any of the Parties and, further, affiliated companies, including of acquisition of interest in said companies, unless the evaluation according to the terms under item 2.1, sub-item "e" above is effected;
c) whatever motion or proposal causing COPENE not to comply with any of the financial indexes below:
(i) indebtedness index (Projected Net Debt/EBITDA) under 3.5;
(ii) projected profits coverage index (EBITDA/Total profits) above
3.0;
(iii)debt service coverage index, except the trade finance lines
(EBITDA/{Profits + Amortization}) higher than 1.75;
All indexes are obtained in consideration to the recent history and projections. The market and prices projections shall be performed by internationally known companies under said specialties, while the projections of floating interest rate shall be performed through Investment Banks.
FORTH CLAUSE - PRIOR MEETINGS
4.1. In order to previously deliberate the subject matters established under Clauses Second and Third above and therefore, ensure the exercise of the right of veto power provided hereunder, the Parties, hereby, establish the holding of the Meetings Previously to COPENE's General Meetings and Administration Council Meetings called to deliberate about said subject matters.
4.2. The decisions taken in Prior Meetings shall comprise voting agreements and shall bind the vote of the Parties in the respective General Meeting and the voting guidance to the Councilors in the respective Administration Council's Meetings of COPENE and, shall be rigorously observed by the Company.
FIFTH CLAUSE - ACQUISITION OF THE OPERATIONAL NORDESTE ASSETS
5.1. The CONTROLLING COMPANY intends to acquire within the Auction foreseen to take place on July 25, 2001, the assets of Banco Economico S.A., in extrajudicial liquidation, in the Camacari Petrochemical Pole.
5.2. The Parties understand that the Operational Nordeste Assets, which may be acquired by the CONTROLLING COMPANY in said Auction, are according to COPENE's interests, with its acquisition by the same being therefore recommended.
5.3. The Operational Nordeste Assets, for the effects hereunder, comprise the direct or indirect equity holdings below:
(i) 100% of the shares representing the corporate stocks of Conepar - Companhia Nordeste de Participacoes (hereinafter named "Conepar"), that, in turn, is the holder, among other assets, of 35% of the voting capital and 30.99% of the total capital of Politeno Industria e Comercio S.A. and 66.67% of the voting capital and 42.64% of the total capital of Polialden Petroquimica S.A. (hereinafter named "Polialden"); and
(ii) 100% of the issued shares of Proppet S.A. (hereinafter named "Proppet").
5.3.1 The interest of Conepar's capital to be acquired may not be 100% of the capital, in the event BNDES does not exercise the joint sale right of its stockholding (Class "B" preferred shares) foreseen under Conepar's Shareholders Agreement.
5.4 The price to be paid by COPENE for the Operational Nordeste Assets shall be, observing the corporate uncrossing, equal to the value (i) of the higher offer among the offers of third parties, others than the buyer of Nordeste Assets, object of the Auction or, (ii) in the event no valid offers from third parties exist, the value of the minimum price of the Operational Nordeste Assets for the purposes of the Auction, and, in whatever case, the price to be paid by COPENE for the Operational Nordeste Assets shall not be above US$ 750,000,000.00 (seven hundred and fifty million US dollars). "Binding Price" used in the auction held on December 2000.
5.4.1. In up to 90 (ninety) days after the acquisition of the Operational Nordeste Assets by COPENE, a complete evaluation of said assets shall be performed by a financial institution named according to the terms under item 5.4.2. The evaluation work will use the prices projections of resins and raw materials and the macroeconomic data contained within the formation of the discount rates used in the evaluations attached hereto (Annex I and annex II), hereinafter named "Attached Evaluations". Under the hypothesis the evaluation concludes that the price of the assets are lower than the amount
effectively paid by COPENE, the balance shall be returned by the CONTROLLING COMPANY to COPENE, according to the Item 5.4.3. below.
5.4.2The financial institution effecting the evaluation provided under item
5.4.1. shall be selected by COPENE's Councilors, except those elected under
the CONTROLLING COMPANY's indication, among the five prime banks suggested
by the CONTROLLING COMPANY. The CONTROLLING COMPANY shall not include,
among the five prime banks to be suggested for the evaluation, the
following institutions, due to impediment caused by conflict of interests,
CS First Boston Garantia, UBS Warburg and Morgan Stanley. In the event the
difference of the value of the evaluation performed by the selected
financial institution is above 10% (ten percent) of the average of Attached
Evaluations, another financial institution shall be selected by PETROS and
PREVI, among the four remaining banks, to arbitrate the value between the
Attached Evaluations and the evaluation made in the form hereunder.
5.4.3In the event the difference appointed under the terms of this Clause is (i) equal or less than 5% (five percent) of the price effectively paid by COPENE, the value shall be returned, in cash, to COPENE by ODEBRECHT, within the term of 30 (thirty) days; and (ii) if it is higher than 5% (five percent) of the price effectively paid by COPENE, the value shall be returned, in cash, to COPENE, by ODEBRECHT, within the term of 01 (one) year, remunerated at the same cost of the debt assumed by COPENE at the acquisition of the Operational Nordeste Assets.
5.4.3.1. Once the difference between the price effectively paid by COPENE and the price of the evaluations made in the form under the item 5.4.2. above is indicated by the named financial institution, ODEBRECHT shall offer a guarantee at the value of the difference verified within the term of 05 (five) working days. The guarantees may be offered under the form of credit insurance granted by a prime insurance company, banking bail bond issued by a prime financial institution or real guarantee, duly attached to the evaluation of a prime international audit company. In the event the guarantee is not presented within the term established hereunder, except in the events of force majeure, ODEBRECHT shall be incurred under a daily fine of 0.5% on the value of the difference verified, until the presentation of the guarantees or return of the difference. After 30 (thirty) days have elapsed with no presentation of guarantees, the advance maturity of the debt shall occur, with the value being considered net and correct, and the debt may be executed.
5.4.3.2. The difference referred to under item 5.4.3. (ii) above shall be compensated within the term of 01 (one) year, in the context of integration of the second-generation companies, controlled by the CONTROLLING COMPANY to COPENE.
5.4.4. The CONTROLLING COMPANY shall transfer the guarantees of the seller of said assets at the Auction, in whole and by the time of the acquisition of Operational Nordeste Assets by COPENE.
SIXTH CLAUSE - THE COMPANY'S BASIC PRINCIPLES
6.1. The Parties commit themselves to adopt the following basic directions for COPENE's management:
i) COPENE's Board of Directors shall be constituted by competent professionals with the responsibility to reach high competition and international productivity standards;
ii) the dividend politics shall have the distribution of results as objective, which shall not be under 50% (fifty percent) of the year's available net profit, provided the required and sufficient internal reserves are maintained for the effective operation and development of COPENE's businesses; and
iii) the adoption of commercial politics ensuring the regular and continuous supply of raw material and utilities under competitive bases, compatible to the national and international market, so as to comply with COPENE's interests.
SEVENTH CLAUSE - DURATION
7.1. This Memorandum of Understandings shall be effective on this date, with the Second, Third and Forth Clauses effective from the date of acquisition of the control over COPENE by the CONTROLLING COMPANY, severely or upon agreement with other shareholders, and remaining in force (i) for 20 (twenty) years or (ii) until the entering of the future COPENE's shareholders agreement, by the CONTROLLING COMPANY or its owned companies, and, PETROS and PREVI what happens first.
7.2. During the term of duration hereof and the future Shareholders Agreement, the Parties shall abstain to vote over whatever issues which may place them under conflict of interests situation before COPENE, under the legal form.
7.3. This Memorandum of Understandings shall be considered automatically revoked, with no burden to any of the Parties, in the event the CONTROLLING COMPANY does not acquire COPENE's (direct or indirect) control until 12/30/2001.
EIGHTH CLAUSE - GENERAL PROVISIONS
8.1. No common association, partnership or any other kind of organization or corporate entity between PETROS and PREVI and the CONTROLLING COMPANY is established under this Memorandum of Understandings.
8.2. This Memorandum of Understandings represents the complete understanding between the Parties, in respect to the object hereunder and substitutes in full, any and all rights and/or obligations arising from other instruments and/or verbal agreements, relative to the purchase and sale of shares issued by COPENE or to the exercise of the right to vote in the General Meeting and COPENE's Administration Council Meeting.
8.3. It is ensured hereunder, to PETROS and/or PREVI, the right to regulate, among themselves, and/or with other closed private security entities, the preemptive right for the alienation and transfer of the shares issued by COPENE and held by said entities, as well as the right to vote for the election of the Fiscal and Administration Councils of the Company.
8.4. The Parties hereby agree that COPENE's Shareholders Agreement shall provide the foresight of the joint sale right ("Tag Along") of the stockholding, severely considered, held by all the shareholders on COPENE's capital in the event of sale and transfer of COPENE's direct or indirect control to third parties, under the same conditions offered by the buying third part(ies) to COPENE's controlling shareholders.
8.5. The right to veto power ensured hereunder to PETROS and PREVI shall be in
force while PETROS and PREVI hold, together with other private security
closed entities, at least 15% (fifteen percent) of COPENE's common shares.
In the event PETROS and PREVI have their stockholding diluted due to the
integration of second-generation companies controlled by ODEBRECHT and/or
by PQBA, the right to veto power shall be maintained for the term of 3
(three) years, with the right to rearrangement of their stockholding
protected within said period, so as to ensure the right to veto power
established hereunder.
8.6. So as to the right to veto power ensured hereunder to the shares under PETROS and PREVI's title be transferred to third parties, PETROS and/or PREVI, as the case may be, shall grant the preemptive right to the CONTROLLING COMPANY, which shall be exercised within the term of 15 (fifteen) days from the date of the proposal, except when the transfer of shares under PETROS and PREVI's title is done to (i) another closed private security entity; or (ii) a company which is not a CONTROLLING COMPANY competitor. The preemptive right shall be exercised under the same sale price, term and conditions as to third parties. In the event the preemptive right shall not be exercised, the CONTROLLING COMPANY shall authorize the third party adhesion hereto.
NINTH CLAUSE - ARBITRATION
9.1. All questions arising or relative hereto, which are not solved under specific execution, under the terms of the 118th Article, 3rd paragraph of law no. 6.404/76 c/c articles 461, 632 and 639 and following of the Civil Proceedings Code, shall be submitted and solved under definite form upon arbitration. The arbitration shall be done in the city of Rio de Janeiro, State of Rio de Janeiro and shall be conducted, in the Portuguese language, by an arbitration court comprising 03 (three) arbitrators, indicated according to the arbitration norms of UNCITRAL.
9.2. The arbitration judgment shall be announced within the term of 6 (six) months, from the date of the institution of the arbitration or from the replacement of any arbitrator and shall observe the provisions under articles 26 and 32 of the Law number 9.307, of September 23, 1996. For the purposes of execution of the arbitration judgment, if it is the case, the courts of the city of Rio de Janeiro are hereby elected, with the abdication of any other one, the most privileged it may be.
9.3. The Brazilian laws shall be applicable by the arbitration court, for the solution of the litigation.
9.4. Each one of the Parties bears the right to access to court: (i) to oblige the other Party to adopt the arbitration; (ii) in order to obtain the legal measures focusing the protection of its rights previously to the institution of the arbitration, with said measures not able to be considered as a waiver to the arbitration solution; and (iii) so as to execute whatever solution of the arbitrators, including the arbitration judgment.
9.5. The provisions under the item 9.1 above do not apply to the questions relative to interpolation, application or execution of the issues provided hereunder, relative to rights and obligations susceptible to specific execution, under the terms of the articles 118 of the Law 6.404/76 c/c 461, 632, 639 and following of the civil Proceedings Code, with the courts of the county of the Capital of the State of Rio de Janeiro hereby elected, with the abdication of any other one, the most privileged it may be.
And, being thus fair and agreed, the contracting Parties sign this Memorandum of Understandings in 4 (four) counterparts of same tenor and form, before the undersigned witnesses.
Rio de Janeiro, July 20, 2001. (s.) illegible (s.) illegible Odebrecht Quimica S.A. Petroquimica da Bahia S.A. (s.) illegible (s.) illegible Fundacao Petrobras de Caixa de Previdencia dos |
Seguridade Social - PETROS Funcionarios do Banco do Brasil PREVI Witnesses: (s.) illegible Adiano Maia (s.) illegible Juliana Baptista Marcal |
Exhibit 4.03
SECOND AMENDMENT OF THE NAPHTHA SUPPLY AGREEMENT ENTERED INTO
BETWEEN PETROBRAS AND BRASKEM (COPENE'S NEW DESIGNATION -
PETROQUIMICA DO NORDESTE S.A.)
Parties:
PETROLEO BRASILEIRO S.A.--PETROBRAS, a mixed-capital company with headquarters in the City of Rio de Janeiro, State of Rio de Janeiro, at Avenida Republica do Chile, 65, enrolled with the Corporate Taxpayers Registry of the Ministry of Finance under No. 33.000.167/0001-01, hereinafter referred to as PETROBRAS, represented by the Executive-Manager of Marketing and Commercialization of Supplies; and
BRASKEM S.A., a stock company, with headquarters at Rua Eteno No. 1561, Polo Petroquimico de Camacari-BA, enrolled with the Corporate Taxpayers Registry of the Ministry of Finance under No. 42.150.391/0001-70, hereby represented by means of its By-laws, hereinafter referred to as simply BRASKEM;
And as consenting intervenient:
OPP QUIMICA S.A., a Brazilian joint-stock company, with headquarters at Rua Eteno No. 1582, Polo Petroquimico de Camacari, Camacari-BA, enrolled with the Corporate Taxpayers Registry (CNPJ) under No. 16.313.363/0001-17, hereby represented by means of its By-laws, hereinafter referred to as simply OPP;
WHEREAS:
(1) BRASKEM is an integrated petrochemical company, which main raw material is petrochemical naphtha;
(2) PETROBRAS is Braskem's main supplier of naphtha, and the commercial relationship between them is governed by the Naphtha Supply Agreement entered into between the parties (the "Naphtha Supply Agreement"); and
(3) The parties are willing to amend the Naphtha Supply Agreement to negotiate the establishment of a mortgage collateral in accordance with Article I, below;
The parties enter into this amendment of the Naphtha Supply Agreement (the "Amendment") that will be governed by the following articles and conditions:
ARTICLE I - COLLATERAL
1.1 The parties acknowledge that BRASKEM has a revolving credit limit up to R$ 570,000,000.00 (five hundred and seventy million reais) with PETROBRAS (the "Credit Limit"), represented by full intent of PETROBRAS in connection with BRASKEM due to the commercial relationship between both of them.
1.2 As Credit Limit collateral, and contrary to the maintenance of current commercial conditions practiced in the context of the Naphtha Supply Agreement, to BRASKEM, through its full subsidiary OPP, commit to provide in first and special mortgage the real estates described and listed in the draft of the Mortgage Indenture (the "Mortgage Indenture"), contained in the "Exhibit 1" of this instrument, with all current and future accretions and improvements.
1.3 For purpose of the provisions of the above-mentioned Article 2.2, it is now agreed between the Parties that the Mortgage Indenture shall be dully accepted and with all legal regulations up to seven (7) business days as of the signature of this Amendment.
1.4 With no consequence to the provisions of the Mortgage Indenture, it shall be considered legally due the whole amount payable in the context of the Naphtha Supply Agreement, in event of default, by BRASKEM, in payment of any invoices not remedied in up to fifteen (15) days as of the default.
1.5 Invoices paid after the maturity date shall be monetarily corrected "pro rata tempore" based on variance of the General Price Index to Market--IGP-M, published by Fundacao Getulio Vargas--FGV--measured between maturity and payment dates, plus 1% each month and a 10% fine added to the total debt, in addition to court costs and fees, now fixed in twenty percent (20%) on the sentence amount, in case of judicial collection, which may be effected through executive means.
ARTICLE II - GENERAL PROVISIONS
2.1 All terms and conditions of the Naphtha Supply Agreement not exclusively amended by this amendment remain in effect.
2.2 The jurisdiction elected to settle any disputes arising from or executed by the present instrument is the Foro Central da Comarca da Capital do Estado do Rio de Janeiro (Central Jurisdiction of the Capital of the Judicial District of Rio de Janeiro), excluding any other jurisdictions.
In witness whereof, BRASKEM, PETROBRAS and OPP enter into this Amendment of the Naphtha Supply Agreement in three (3) counterparts of equal form, before two witnesses undersigned, irrevocably and irreversibly, bound by themselves and their successors.
Rio de Janeiro, February 24 2003
PETROLEO BRASILEIRO S.A.--PETROBRAS
(Illegible signature)
BRASKEM S.A.
(Illegible signature)
OPP QUIMICA S.A.
Witnesses:
(Signature)
Name: Marcelo (Illegible) Rabello Pinna
Bearer of the Identity Card (R.G.) No. 3442117188-27
Enrolled with the Individual Taxpayers Registry No. 552.699.237-34
Exhibit 4.04
PROTOCOL AND JUSTIFICATION OF THE OPERATION OF INCORPORATION OF OPP PRODUTOS
PETROQUIMICOS S.A. BY COPENE - PETROQUIMICA DO NORDESTE S.A.
Made by and between
COPENE - PETROQUIMICA DO NORDESTE S.A., a company with headquarters at Rua Eteno no. 1.561, city of Camacari, state of Bahia, enrolled at the CNPJ/MF under # 42.150.391/0001-70, NIRE # 29.300.006.939, herein represented according to its By-laws, hereinafter simply referred to as "INCORPORATOR";
and
OPP PRODUTOS PETROQUIMICOS S.A., a company with headquarters at Rua Eteno no. 1.582, sala 02, city of Camacari, state of Bahia, enrolled at the CNPJ/MF under # 04.406.103/0001-70, NIRE # 29.300.025.291, herein represented according to its By-laws, hereinafter simply referred to as "INCORPORATED";
INCORPORATOR and INCORPORATED are jointly referred to as "PARTIES",
and also
ODEBRECHT S.A., a joint stock company with headquarters at Av. Luiz Viana Filho, no. 2.841, Paralela, Salvador, BA, enrolled at the CNPJ/MF under # 15.105.588/0001-15, herein represented by its Directors, Pedro Augusto Ribeiro Novia and Newton Sergio de Souza hereinafter simply referred to as "ODEBRECHT";
with the purpose of promoting the incorporation into an already existing company, according to articles 224 and 225 of Law # 6.404 dated December 15, 1976.
Whereas:
(i) Groups Odebrecht and Mariani won the bid of the so-called Economico S.A. Empreendimentos Assets, implemented on July 25, 2001, thus starting to hold the control of Nordeste Quimica S.A. - Norquisa, which, in its turn, controls the INCORPORATOR;
(ii) On July 31, 2001, Groups Odebrecht and Mariani disclosed their intention to integrate to the INCORPORATOR certain second generation assets with a view to obtain relevant synergies that the new scale can provide and, simultaneously, eliminate prospective conflicts of corporate interest;
(iii)The INCORPORATED is a holding company that holds, either directly or indirectly, a relevant stockholding in the "Chemical and Petrochemical Assets of Group Odebrecht", which are comprised, among others, of the following investments: (a) 100% of the voting capital and 81.28% of the total capital of OPP QUIMICA S.A., producer of polyethylene and polypropylene; (b) 64,4% of the voting capital and 36,3% of the total capital of TRIKEM S.A., producer of PVC and chlorine-soda; and (c) 29.5% of the voting and total capital of COPESUL - COMPANHIA PETROQUIMICA DO SUL, a center of raw materials of the Pole of Triunfo;
(iv) According to the terms of the "Memoranda of Understanding for the Execution of Agreement of COPENE Shareholders" entered into between the Groups Odebrecht and Mariani, on the one hand, and Petrobras Quimica S.A. - Petroquisa ("Petroquisa"), Petros - Fundacao Petrobras de Seguridade Social ("Petros") and Previ - Caixa de Previdencia dos Funcionarios do Banco do Brasil ("Previ"), as relevant minority shareholders of the INCORPORATOR, on the other hand, the process of evaluation of the INCORPORATED and INCORPORATOR, for the purposes of determining the respective exchange ratio, was prepared, according to the terms of art. 8th of Law 6404/76, by an independent appraiser chosen from a list of five first class banks appointed by Petroquisa, Petros and Previ. This way, the independent appraiser chosen according to this system was Credit Lyonnais Securities (USA) Inc. ("Credit Lyonnais"), which started, on October 29, 2001, the works of evaluation with the support of consultants experienced in the market of petrochemicals, law firms (legal and tax aspects) and also industrial and environmental consultants; and
(v) In this context, the evaluations of the INCORPORATED and also of the INCORPORATOR, for the purposes of determining the shares exchange ratio, were conducted by Credit Lyonnais based on its respective economic values verified according to the methodology of discounted cash flow. The reference date of the evaluations was May 31, 2002 and the period of projection of the cash flow was from 2002 to 2011, the results being validated by the comparison with multiples of market of other national and international companies of similar features;
The managements of the PARTIES hereby propose the incorporation of the INCORPORATED by the INCORPORATOR by signing this Protocol and Justification of the Incorporation ("Protocol") whit the purpose of establishing, according to articles 224 and 225 of Law # 6.404 dated December 15, 1976, the following terms and conditions:
1. PURPOSE OF THE OPERATION. INTEREST OF THE PARTIES IN ITS ACCOMPLISHMENT
1.1 The purpose of the operation proposed in this Protocol is to reach the
provisions of WHEREAS of this Protocol in a way to provide all the PARTIES with
(a) gains of synergy arising out of the corporate integration of second
generation chemical and petrochemical companies with the center of raw
materials, i.e., the INCORPORATOR; and (b) alignment of the interests of the
shareholders of the INCORPORATOR and INCORPORATED.
2. INCORPORATION BASES
2.1 The INCORPORATOR shall perform the incorporation of the INCORPORATED and the accounting net assets of the latter shall be transferred to the equity of the INCORPORATOR, which shall succeed it according to law (universal descent) ("Incorporation").
2.2 The balances of credit and debit accounts of the INCORPORATED shall be transferred to the accounting books of the INCORPORATOR, paying attention to the proper adaptations.
2.3 The evaluation of the INCORPORATED, for the purposes of the respective accounting entries into the INCORPORATOR, was carried out at book value by the specialized company mentioned in the following
item 3.1, on the reference date established in the following item 3.3, based on the criteria foreseen in Law # 6.404 dated December 15, 1976, for the elaboration of financial statements.
2.4 The assets, rights and obligations of the INCORPORATED to be transferred to the INCORPORATOR are those described in details in the evaluation report, at book value, of the net assets of the INCORPORATED to be transferred to the INCORPORATOR.
2.5 The INCORPORATOR's management shall be in charge of practicing all acts necessary to implement the Incorporation, and all the costs and expenses related to said implementation shall run on its account.
2.6 The INCORPORATED shall be dissolved in full right.
3. EVALUATION OF THE EQUITY OF THE INCORPORATED AND REFERENCE DATE OF THE EVALUATION
3.1 The indication and appointment of the specialized company PricewaterhouseCoopers Auditores Independentes, a civil company with headquarters in the city of Sao Paulo at Av. Francisco Matarazzo, no. 1.700, from the 7th to the 11th floors and from the 13th to the 20th floors, Torre Torino, with branch in the city of Salvador at Rua Miguel Calmon, no. 555, 9(0) andar, secondarily registered at the Regional Board of Accountancy of the State of Bahia under # CRC 2SP000160/O-5 "S" BA and enrolled at the Tax Roll of Legal Entities of the Treasury Department under # 61.562.112/0004-73, with articles of Incorporation filed at the 4th Registry of Documents of Sao Paulo, SP, on September 17, 1956, and further amendments registered at the 2nd Registry of Documents of Sao Paulo, SP, the last of them being filed (microfilm) under # 68.444 on April 15, 2002, represented by its partner, Mr. Marco Aurelio de Castro e Melo, Brazilian, married, accountant, bearer of the identity card (RG) # 16.951.877-SSP/SP, enrolled at the CPF under # 078.020.188-46 and at the Regional Council of Accountancy of the State of Bahia under # CRC 1SP153070/O-3 "S" BA, domiciled in the city of Salvador, Rua Miguel Calmon, no. 555, 9(0) andar, as the person in charge of preparing the accounting evaluation report regarding the net assets of the INCORPORATED to be transferred to the INCORPORATOR ("Accounting Evaluation Report"), shall be ratified by the Special General Meeting of the INCORPORATOR and INCORPORATED, under the terms of article 227, section 1st of Law # 6.404 dated December 15, 1976.
3.2 PricewaterhouseCoopers Auditores Independentes is a company specialized in accounting evaluations and its experts, at the PARTIES' managements request, have proceeded to (i) evaluate the equity of the INCORPORATED at the book value, based on the elements appearing on the Balance Sheets of the INCORPORATED prepared on May 31, 2002 ("Reference Date of Incorporation"), the results realized by the Incorporation being already calculated, thus constituting the value of the net assets to be transferred to the INCORPORATOR, and (ii) elaborate the Accounting Evaluation Report, which is the Exhibit 3.2 attached to this Protocol, the values being subject to previous analysis and approval of the shareholders of the INCORPORATOR, according to the law.
4. FULL AMOUNT OF THE NET ASSETS TO BE INCORPORATED
4.1 Based on the Accounting Evaluation Report and according to the provisions of the following clause 5.1, the value of the accounting net assets of the INCORPORATED to be transferred to the INCORPORATOR is of R$ 582.895.431,13.
5. TREATMENT OF EQUITY VARIATIONS UNTIL THE INCORPORATION DATE
5.1 The equity variations verified between the Reference Date of the Incorporation and the effective incorporation, with exclusion of the results originated by the very incorporation, shall be accounted directly in the INCORPORATOR.
6. DISTRIBUTION OF THE SHARES RESULTING FROM THE INCORPORATION - EXCHANGE RATIO
6.1 As a result of the Incorporation, the shareholders of the INCORPORATED shall receive shares of the INCORPORATOR at the proportions specified below. The ratio of exchange of shares of the INCORPORATED for shares of the INCORPORATOR was established based on the economic values of each one of the PARTIES appearing in the Economic Evaluation Report referred to in the following item 6.4:
--------------------------------------------------------------------------------------------------------------------- Company Current number Economic value of Economic value (in R$) "Standard" lot Exchange of shares issued the company (in R$) per "standard" lot of of shares ratio (*) shares --------------------------------------------------------------------------------------------------------------------- INCORPORATOR (+) 1.737.796.398 1.694.682.729,04 975,19 1.000 - --------------------------------------------------------------------------------------------------------------------- INCORPORATED 723.453.689 1.448.114.623,98 2.001,67 1.000 2.052592 --------------------------------------------------------------------------------------------------------------------- (+) Amount of shares of the INCORPORATOR, not considering the 54.620.037 shares on treasury. (*) Quantity of shares of the INCORPORATOR that shall be received per each share held in the INCORPORATED. |
6.1.1 Notwithstanding the fact that the INCORPORATED holds 81,28% of the total capital of OPP QUIMICA S.A., for the purposes of evaluation, the ownership of 100% of these Chemical and Petrochemical Assets of Group Odebrecht was considered, considering the option to purchase this remaining interest in the capital of OPP QUIMICA S.A. at a fixed price, which option shall remain valid after the Incorporation, and said price has been fully considered in the indebtedness of the INCORPORATED, for the purposes of determining the exchange ratio mentioned in this Clause.
6.1.2 Notwithstanding the fact that the INCORPORATED holds 36,3% of the total capital of TRIKEM S.A., for the purposes of evaluation, the ownership of 38,1% of these Chemical and Petrochemical Assets of Group Odebrecht was considered, considering the option to purchase this remaining interest in the capital of OPP QUIMICA S.A. at a price equal to the corrected price of alienation, still lacking payment by Copesul - COMPANHIA PETROQUIMICA DO SUL, which option shall be perfectly formalized and registered before the Registry of Documents before the Incorporation, with a forecast that it shall remain valid after the Incorporation, under the penalty of being disregarded, for the purposes of evaluating and, as a consequence, determining the exchange ratio subject of this Clause.
6.2 The economic values of the INCORPORATOR and INCORPORATED used as basis of the exchange ratio established in the Economic Evaluation Report, as defined below, include the value attributed to the passive contingencies of the companies involved and of the Chemical and Petrochemical Assets of Group Odebrecht, as appearing in their respective financial statements and/or indicated briefly in an exhibit to the Economic Evaluation Report, weighted according to the probabilities that the considered contingencies might be incurred, according to the opinion of legal consultants hired for this purpose and of JP Meio Ambiente, in respect to the contingencies of environmental nature. For conservatism reasons, active superveniences of the INCORPORATED, of the Chemical and Petrochemical Assets of Group Odebrecht
and of the INCORPORATOR were not considered for the purposes of defining their respective economic values.
6.2.1 ODEBRECHT as controller of the PARTIES involved, declares that the values of the passive contingencies of the INCORPORATED and of the companies controlled, either directly or indirectly, by the INCORPORATED, identified in the exhibit to the Economic Evaluation Report (as defined below), are reflected in the audited financial statements of the INCORPORATED.
6.2.2 In compensation for the non-utilization of active superveniences of the INCORPORATED for the purposes of determining its economic value by the time of the incorporation, the rights arising out of an eventual credit that might be acknowledged by a legal decision in the action # 2001.34.00.029764-8, in progress at the 8th Federal Court of Brasilia and action # 99.0000.152-8, in progress at the 15th Federal Court of Rio de Janeiro, both of them against Centrais Eletricas Brasileiras S.A. - Eletrobras, shall be assigned to the sole shareholder of the INCORPORATED, being that said assignment, for all legal effects, shall be effective from the incorporation.
6.3 The shareholder of the INCORPORATED shall not exercise the right of recess in the Incorporation. It is also worth pointing out that the INCORPORATED issued subordinate debentures on May 31, 2002, convertible into preferred shares issued by it, which shall be held by only one debenture holder. In compliance with article 231 of Law 6404/76, the holder of the debentures issued by the INCORPORATED has already consented to the Incorporation, as appearing in the "Private Instrument of Deed of Private Issue of Subordinate and Convertible Debentures, without Guarantees, of OPP Produtos Petroquimicos S.A." ("Deed of Issue of Debentures OPP-PP"). The indebtedness of the INCORPORATED represented by the debentures subject of the Deed of Issue of Debentures OPP-PP was fully considered in its evaluation and, therefore, for the purposes of determining the exchange ratio mentioned in this clause.
6.4 At the meeting of the Managing Board of the INCORPORATOR held on October 31,
2001, the Board of Directors ratified the hiring of Credit Lyonnais, with office
at 1301 Avenue of the Americas, as the investment bank in charge of performing
(i) the economic evaluation of the PARTIES for the purposes mentioned in the
above item 6.1 and (ii) the elaboration of the Economic Evaluation Report
constituting exhibit 6.4 attached to this Protocol, and said appointment is
subject to ratification by the Special General Meeting of the INCORPORATOR and
the values, appearing in the Economic Evaluation Report, subject to previous
analysis and approval by the shareholders of the INCORPORATOR, according to the
law.
7. INCORPORATOR'S CAPITAL INCREASE
7.1 As a result of the Incorporation, the corporate capital of the INCORPORATOR shall increase from the current R$ 1.201.589.666,71 to R$ 1.784.485.097,84, therefore an increase of R$ 582.895.431,13. The increase of the corporate capital of the INCORPORATOR will be made upon the issue of 1.484.955.464 new shares, being 535.763.077 common shares and 949.192.387 class A preferred shares, with the same rights and advantages attributed according to the by-laws of the INCORPORATOR.
7.2 The Incorporation of the INCORPORATED shall occur at the same General Meeting that shall approve the incorporation, by the INCORPORATOR, of 52114 Participacoes S.A., a holding company that holds 100% of the "Chemical and Petrochemical Assets of Group Mariani". In this context, the corporate capital of the INCORPORATOR, by the end of the process of Incorporation, is estimated to be R$ 1.845.398.533,72
divided into 1.226.091.148 common shares and 2.172.222.076 preferred shares, being 2.160.764.336 class A preferred shares and 11.457.740 class B preferred shares.
7.3 Considering that the INCORPORATED issued debentures convertible into preferred shares, as mentioned in the above item 6.3, as a result of the Incorporation, the INCORPORATOR shall appear as issuer of said debentures. As provided for in clause 3.6.8 of the Deed of Issue of Debentures OPP-PP, the criteria of conversion to be applied to this conversion of the debentures into shares representing the corporate capital of the INCORPORATOR shall be changed by means of an amendment to the Deed of Issue of Debentures OPP-PP and shall take into account the terms and conditions of the incorporation of the INCORPORATED by the INCORPORATOR. In view of the amendment, clause 3.6.1 of the Deed of Issue of Debentures OPP-PP shall read as follows: "The Debentures may be converted at any time, at the discretion of the debenture holders, at their Par Value added by Compensation, at the conversion price of R$ 975,19/thousand shares of the Issuer. Said price of conversion shall be corrected according to the same criteria of correction of the Par Value. In the operations of conversion where there is no equivalence of values and the debenture holder becomes the creditor of an amount lower than the amount of a share of the Issuer, the Issuer, simultaneously to the conversion, shall pay, in cash, the value of the fraction of share payable to the debenture holder." The debentures shall be convertible into class A preferred shares of the INCORPORATOR, up to the limit allowed by the structure of capital of the INCORPORATOR by that time and, from then on, the proportion of 1/3 and 2/3 between common and preferred shares shall be observed.
7.4 It is also worth pointing out that, as foreseen in clause 3.6.9 of the Deed of Issue of Debentures OPP-PP, if the Incorporation is approved by the shareholders of the INCORPORATED and INCORPORATOR, the holders of the debentures on the date of the Incorporation shall be obliged to grant to the shareholders of the INCORPORATOR, holders of common or preferred shares, the right to purchase a part of the debentures, at the proportion of the corporate capital of the INCORPORATOR held by each one after the Incorporation. The right to purchase debentures to be granted by the debenture holders may be exercised by the shareholders of the INCORPORATOR within the non-extendable term of 30 (thirty) days as of the publishing of notice to the shareholders of the INCORPORATOR about the granting of the right to purchase debentures. The purchase price of the debentures subject of the purchase option shall be the Par Value (as defined in the Deed of Issue of Debentures OPP-PP) added by Compensation (as defined in clause 3.14 of the Deed of Issue of Debentures OPP-PP) they deserve, up front and in national currency. For the purposes of establishing the purchase price of the debentures, the Compensation will be calculated pro rata temporis from the Date of Issue (as defined in the Deed of Issue of Debentures OPP-PP) until the date of purchase of said debentures.
7.5 Finally, as a result of the Incorporation and of the amendment to the Deed of Issue of Debentures OPP-PP, as proposed in the above item 7.3, the authorized capital established in the first paragraph of article 4th of the By-laws of the INCORPORATOR shall be amended in order to include the value of the increase in the corporate capital of the INCORPORATOR in case the right to convert debentures into shares of the INCORPORATOR is exercised, under the terms to be established in the annex to the Deed of Issue of Debentures OPP-PP.
8. INDEMNIFICATION
8.1 ODEBRECHT herein irrevocably commits itself to indemnify, defend and hold INCORPORATOR harmless in respect to any and all loss, damage, cost, fine, penalty or expense (including interests, fine, monetary correction, lawyer's fees and legal costs)("Loss") that might be incurred by the INCORPORATOR
and/or its controlled companies, either direct or indirect, as a result of any and all obligation, either contingent or absolute, arising out of the INCORPORATED and/or its controlled companies, either direct or indirect, including, but not limited to labor, tax, environmental, social security, civil, insurance and/or financial nature ones resulting from agreements executed, acts practices, facts or omissions occurred before and/or on the date of approval of the Incorporation by the shareholders of the INCORPORATOR at the General Meeting referred to in the above Clause 7.2 ("SGM Date"), observing that ODEBRECHT's obligation to indemnify the INCORPORATOR does not include the obligations appearing in the Economic Evaluation Report and/or its respective exhibits of legal and environmental audit, provided, in any case, the provisions of the following clauses 8.2 and 8.2.1 and 8.2.2 are observed.
8.1.1 The indemnification referred to in the above Clause 8.1, subject to the provisions of clauses 8.2 and 8.2.1, shall be paid by ODEBRECHT to the INCORPORATOR in cash, within the term of 30 (thirty) days from the date on which the INCORPORATOR and/or the direct or indirect controlled companies of the INCORPORATED, as the case might be, effectively incur(s) in Loss or make(s) the disbursement related to the respective Loss, whatever occurs first. The indemnifications foreseen herein will be added by all taxes, costs and expenses eventually falling or incurred in a way that the equity and value of the INCORPORATOR are reconciled as if the Loss had not been incurred.
8.1.2 Every semester, the INCORPORATOR shall make available to its shareholders represented in the Managing Board and to the members of the Managing Board a report informing (i) the credits received in view of the active superveniences of the INCORPORATED and their controlled companies, either direct or indirect, transferred to the INCORPORATOR and (ii) the Losses incurred and indemnifications paid under the terms of this Clause, it being right that shareholders holding, jointly or individually, at least 5% (five per cent) of the voting capital of the INCORPORATOR shall be entitled to, during the 30 (thirty) days following the delivery of said report, request and receive, from the INCORPORATOR, information about the defense and/or questions about any prospective Losses, as well as the documentation related to Losses incurred and to the respective indemnification.
8.2 ODEBRECHT's obligation to indemnify set forth in the above Clause 8.1 is subject to the following limitations and ODEBRECHT is in charge of indemnifying the INCORPORATOR for Losses: (i) at a value proportional to the stockholding of the INCORPORATED in its direct or indirect controlled company(ies) if the Loss is incurred by this Asset, provided that, in the case of OPP QUIMICA S.A. and of TRIKEM S.A., the indemnification payable shall correspond to 100% (one hundred per cent) and 38.1% (thirty-eight point one per cent), respectively, of the Loss incurred; (ii) whose individual value is equal to or higher than R$ 25.000.000,00 (twenty-five million reais), annually corrected by the IGP-M, provided that, if there are multiple Losses related to or arising out of one or a series of occurrences or events of the same nature, the value of the Losses resulting from each one of these events shall be added for the purposes of determining if they meet the limit established in this item (ii); and (iii) that are claimed, filed or collected from the INCORPORATOR and/or the direct or indirect controlled companies of the INCORPORATED, by whom it may concern, by any means admitted in court or thereout, during the term of 5 (five) years from the SGM Date.
8.2.1 ODEBRECHT's obligation to indemnify the INCORPORATOR under the terms of this Clause shall be reduced by the value of the "Credits Used - Active Superveniences" existing on the date on which the Loss is incurred, up to the limit of this value. For the purposes foreseen herein, "Credits Used - Active Superveniences" mean effective credits already used by the INCORPORATOR and/or its controlled companies, either direct or indirect, net of income tax, contributions and other deductions incurred on
account of or with a view to their reception or acknowledgement, related to facts or acts occurred until the SGM Date, in any case arising out of the active superveniences of the INCORPORATED or its controlled companies, either direct or indirect, expressly related in the Exhibit - Economic Evaluation Report, and, also, whose constitution or acknowledgement has arisen out of a final legal decision transited in rem judicatam. The partial or total liquidation of any ODEBRECHT obligation of indemnifying the INCORPORATOR upon the deduction by Credits Used - Active Superveniences, under the terms of this Clause, shall be effected under resolution, to the extent that, if an action for rescission is proposed in respect to any of the Credits Used - Active Superveniences used and this action manages to deconstitute it by any means and at any time, ODEBRECHT shall indemnify the INCORPORATOR in full for the Loss payable, whose original value shall be added by the variation of the Interbanking Deposit Certificates - CDI from the date on which the Loss has been incurred until the date of the effective indemnification.
8.2.2 If the value of the Credits Used - Active Superveniences is higher than the amount of the Loss, ODEBRECHT shall have a creditor balance deductible from its eventual obligation of indemnifying the INCORPORATOR, corresponding to the difference between (i) the Credits Used - Active Superveniences and (ii) the Loss, being that said creditor balance shall be used exclusively for the purposes of deducting eventual Losses verified during the life of this Clause 8. After the end of the indemnification term foreseen in this Clause 8 and the liquidation of the Losses, an eventual creditor balance shall be automatically extinct for all legal effects.
9. CONCLUSION
9.1 Messrs. Shareholders of the INCORPORATED and INCORPORATOR, these are the norms and procedures that, according to the law, we have formulated in order to rule this operation of incorporation, which the respective Boards of Directors consider as being of corporate interest.
Camacari, July 26, 2002.
COPENE - PETROQUIMICA DO NORDESTE S.A.
(signed: illegible)
(signed: illegible)
OPP PRODUTOS PETROQUIMICOS S.A.
(signed: illegible)
(signed: illegible)
ODEBRECHT S.A.
(signed: illegible)
(signed: illegible)
BRASKEM S/A (signed: illegible), Fidelis Rocco Sarno, General Secretary Stamp: JUCEB ----- It is according to its original. (signed: illegible), clerk On 08/16/02 |
Annex:
Exhibit 4.05
PROTOCOL AND JUSTIFICATION OF THE OPERATION OF INCORPORATION OF 52114
PARTICIPACOES S.A. BY COPENE - PETROQUIMICA DO NORDESTE S.A.
Made by and between
COPENE - PETROQUIMICA DO NORDESTE S.A., a company with headquarters at Rua Eteno
n.o 1.561, city of Camacari, state of Bahia, enrolled at the CNPJ/MF under #
42.150.391/0001-70, NIRE # 29.300.006.939, herein represented according to its
By-laws, hereinafter simply referred to as "INCORPORATOR";
and
52114 PARTICIPACOES S.A., a company with headquarters at Rua do Rosario n.o 99, 9o andar (part), in the city and state of Rio de Janeiro, enrolled at the CNPJ/MF under # 03.987.071/0001-18, NIRE # 33.300.266.381, herein represented according to its By-laws, hereinafter simply referred to as "INCORPORATED";
INCORPORATOR and INCORPORATED are jointly referred to as "PARTIES",
and also
PRONOR PETROQUIMICA S.A., a joint stock company with headquarters in the city of Salvador, state of Bahia, at Rua Hidrogenio, n.o 2318, part, enrolled at the CNPJ/MF under # 13.552.070/0001-02, herein represented by its Director, Lucio Jose Santos Junior, Brazilian, single, economist, bearer of the identity card (RG) # 08146034-16 SSP/BA, enrolled at the CPF/MF under # 030.943.088-72, and Andre Philippe Mattias Lindner, Brazilian, married, administrator, bearer of the identity card (RG) # 07.637129-3, enrolled at the CPF/MF under # 003.679.127-08, hereinafter simply referred to as "PRONOR";
with the purpose of promoting the incorporation into an already existing company, according to articles 224 and 225 of Law # 6.404 dated December 15, 1976.
Whereas:
(i) Groups Odebrecht and Mariani won the bid of the so-called Economico S.A. Empreendimentos Assets, implemented on July 25, 2001, thus starting to hold the control of Nordeste Quimica S.A. - Norquisa, which, in its turn, controls the INCORPORATOR;
(ii) On July 31, 2001, Groups Odebrecht and Mariani disclosed their intention to integrate to the INCORPORATOR certain second generation assets with a view to obtain relevant synergies that the new scale can provide and, simultaneously, eliminate prospective conflicts of corporate interest;
(iii)The INCORPORATED is a holding company that holds, either directly or indirectly, a relevant stockholding in the "Chemical and Petrochemical Assets of Group Mariani", which are comprised of the following investment: (a) 95,48% of the voting capital and 92,29% of the total capital of NITROCARBONO S.A., a company whose main activity is the production of caprolactam (CPL);
(iv) According to the terms of the "Memoranda of Understanding for the Execution of Agreement of COPENE Shareholders" entered into between the Groups Odebrecht and Mariani, on the one hand, and Petrobras Quimica S.A. - Petroquisa ("Petroquisa"), Petros - Fundacao Petrobras de Seguridade Social ("Petros") and Previ - Caixa de Previdencia dos Funcionarios do Banco do Brasil ("Previ"), as relevant minority shareholders of the INCORPORATOR, on the other hand, the process of evaluation of the INCORPORATED and INCORPORATOR, for the purposes of determining the respective exchange ratio, was prepared, according to the terms of art. 8th of Law 6404/76, by an independent appraiser chosen from a list of five first class banks appointed by Petroquisa, Petros and Previ. This way, the independent appraiser chosen according to this system was Credit Lyonnais Securities (USA) Inc. ("Credit Lyonnais"), which started, on October 29, 2001, the works of evaluation with the support of consultants experienced in the market of petrochemicals, law firms (legal and tax aspects) and also industrial and environmental consultants; and
(v) In this context, the evaluations of the INCORPORATED and also of the INCORPORATOR, for the purposes of determining the shares exchange ratio, were conducted by Credit Lyonnais based on its respective economic values verified according to the methodology of discounted cash flow. The reference date of the evaluations was May 31, 2002 and the period of projection of the cash flow was from 2002 to 2011, the results being validated by the comparison with multiples of market of other national and international companies of similar features;
The managements of the PARTIES hereby propose the incorporation of the INCORPORATED by the INCORPORATOR by signing this Protocol and Justification of the Incorporation ("Protocol") whit the purpose of establishing, according to articles 224 and 225 of Law # 6.404 dated December 15, 1976, the following terms and conditions:
1. PURPOSE OF THE OPERATION. INTEREST OF THE PARTIES IN ITS ACCOMPLISHMENT
1.1 The purpose of the operation proposed in this Protocol is to reach the
provisions of WHEREAS of this Protocol in a way to provide all the PARTIES with
(a) gains of synergy arising out of the corporate integration of second
generation chemical and petrochemical companies with the center of raw
materials, i.e., the INCORPORATOR; and (b) alignment of the interests of the
shareholders of the INCORPORATOR and INCORPORATED.
2. INCORPORATION BASES
2.1 The INCORPORATOR shall perform the incorporation of the INCORPORATED and the accounting net assets of the latter shall be transferred to the equity of the INCORPORATOR, which shall succeed it according to law (universal descent) ("Incorporation").
2.2 The balances of credit and debit accounts of the INCORPORATED shall be transferred to the accounting books of the INCORPORATOR, paying attention to the proper adaptations.
2.3 The evaluation of the INCORPORATED, for the purposes of the respective accounting entries into the INCORPORATOR, was carried out at book value by the specialized company mentioned
in the following item 3.1, on the reference date established in the following item 3.3, based on the criteria foreseen in Law # 6.404 dated December 15, 1976, for the elaboration of financial statements.
2.4 The assets, rights and obligations of the INCORPORATED to be transferred to the INCORPORATOR are those described in details in the evaluation report, at book value, of the net assets of the INCORPORATED to be transferred to the INCORPORATOR.
2.5 The INCORPORATOR's management shall be in charge of practicing all acts necessary to implement the Incorporation, and all the costs and expenses related to said implementation shall run on its account.
2.6 The INCORPORATED shall be dissolved in full right.
3. EVALUATION OF THE EQUITY OF THE INCORPORATED AND REFERENCE DATE OF THE EVALUATION
3.1 The indication and appointment of the specialized company PricewaterhouseCoopers Auditores Independentes, a civil company with headquarters in the city of Sao Paulo at Av. Francisco Matarazzo, n.o 1.700, from the 7th to the 11th floors and from the 13th to the 20th floors, Torre Torino, with branch in the city of Salvador at Rua Miguel Calmon, n.o 555, 9o andar, secondarily registered at the Regional Board of Accountancy of the State of Bahia under # CRC 2SP000160/O-5 "S" BA and enrolled at the Tax Roll of Legal Entities of the Treasury Department under # 61.562.112/0004-73, with articles of Incorporation filed at the 4th Registry of Documents of Sao Paulo, SP, on September 17, 1956, and further amendments registered at the 2nd Registry of Documents of Sao Paulo, SP, the last of them being filed (microfilm) under # 68.444 on April 15, 2002, represented by its partner, Mr. Marco Aurelio de Castro e Melo, Brazilian, married, accountant, bearer of the identity card (RG) # 16.951.877-SSP/SP, enrolled at the CPF under # 078.020.188-46 and at the Regional Council of Accountancy of the State of Bahia under # CRC 1SP153070/O-3 "S" BA, domiciled in the city of Salvador, Rua Miguel Calmon, n.o 555, 9o andar, as the person in charge of preparing the accounting evaluation report regarding the net assets of the INCORPORATED to be transferred to the INCORPORATOR ("Accounting Evaluation Report"), shall be ratified by the Special General Meeting of the INCORPORATOR and INCORPORATED, under the terms of article 227, ss. 1st of Law # 6.404 dated December 15, 1976.
3.2 PricewaterhouseCoopers Auditores Independentes is a company specialized in accounting evaluations and its experts, at the PARTIES' managements request, have proceeded to (i) evaluate the equity of the INCORPORATED at the book value, based on the elements appearing on the Balance Sheets of the INCORPORATED prepared on July 1st, 2002, being that the investment in Nitrocarbono S.A. was audited with the reference date May 31, 2002 ("Reference Date of Incorporation"), the results realized by the Incorporation being already calculated, thus constituting the value of the net assets to be transferred to the INCORPORATOR, and (ii) elaborate the Accounting Evaluation Report, which is the Exhibit 3.2 attached to this Protocol, the values being subject to previous analysis and approval of the shareholders of the INCORPORATOR, according to the law.
4. FULL AMOUNT OF THE NET ASSETS TO BE INCORPORATED
4.1 Based on the Accounting Evaluation Report and according to the provisions of the following clause 5.1, the value of the accounting net assets of the INCORPORATED to be transferred to the INCORPORATOR is of R$ 60.913.435,88.
5. TREATMENT OF EQUITY VARIATIONS UNTIL THE INCORPORATION DATE
5.1 The equity variations verified between the Reference Date of the Incorporation and the effective incorporation, with exclusion of the results realized by the very Incorporation, shall be appropriated by the INCORPORATOR, being transferred to its accounting books, with the necessary changes being made.
6. DISTRIBUTION OF THE SHARES RESULTING FROM THE INCORPORATION - EXCHANGE RATIO
6.1 As a result of the Incorporation, the shareholders of the INCORPORATED shall receive shares of the INCORPORATOR at the proportions specified below. The ratio of exchange of shares of the INCORPORATED for shares of the INCORPORATOR was established based on the economic values of each one of the PARTIES appearing in the Economic Evaluation Report referred to in the following item 6.4:
--------------------------------------------------------------------------------------------------------------------- Company Current number of Economic value of Economic value (in R$) "Standard" lot Exchange shares issued the company (in R$) per "standard" lot of of shares ratio(*) shares --------------------------------------------------------------------------------------------------------------------- INCORPORATOR(+) 1.737.796.398 1.694.682.729,04 975,19 1.000 - --------------------------------------------------------------------------------------------------------------------- INCORPORATED 135.608.491 117.940.845,14 869,72 1.000 0,891841 --------------------------------------------------------------------------------------------------------------------- |
(+) Amount of shares of the INCORPORATOR, not considering the 54.620.037 shares
on treasury.
(*) Quantity of shares of the INCORPORATOR that shall be received per each share
held in the INCORPORATED.
6.2 The economic values of the INCORPORATOR and INCORPORATED used as basis of the exchange ratio established in the Economic Evaluation Report, as defined below, include the value attributed to the passive contingencies of the companies involved and of the Chemical and Petrochemical Assets of Group PRONOR, as appearing in their respective financial statements and/or indicated briefly in an exhibit to the Economic Evaluation Report, weighted according to the probabilities that the considered contingencies might be incurred, according to the opinion of legal consultants hired for this purpose and of JP Meio Ambiente, in respect to the contingencies of environmental nature. For conservatism reasons, active superveniences of the INCORPORATED, of the Chemical and Petrochemical Assets of Group Mariani and of the INCORPORATOR were not considered for the purposes of defining their respective economic values.
6.2.1 PRONOR as controller of the "Chemical and Petrochemical Assets Mariani", declares that the values of the passive contingencies of the INCORPORATED and of the companies controlled, either directly or indirectly, by the INCORPORATED, identified in the exhibit to the Economic Evaluation Report (as defined below), are reflected in the audited financial statements of the INCORPORATED, when applicable according to the accounting principles generally accepted in Brazil.
6.3 The shareholder of the INCORPORATED shall not exercise the right of recess in the Incorporation.
6.4 At the meeting of the Managing Board of the INCORPORATOR held on October 31,
2001, the Board of Directors ratified the hiring of Credit Lyonnais, with office
at 1301 Avenue of the Americas, as the investment bank in charge of performing
(i) the economic evaluation of the PARTIES for the purposes mentioned in the
above item 6.1 and (ii) the elaboration of the Economic Evaluation Report
constituting exhibit 6.4 attached to this Protocol, and said appointment is
subject to ratification by the Special General Meeting of the INCORPORATOR and
the values, appearing in the Economic Evaluation Report, subject to previous
analysis and approval by the shareholders of the INCORPORATOR, according to the
law.
7. INCORPORATOR'S CAPITAL INCREASE
7.1 As a result of the Incorporation, the corporate capital of the INCORPORATOR shall increase from the current R$ 1.201.589.666,71 to R$ 1.262.423.102,59, therefore an increase of R$ 60.913.435,88. The increase of the corporate capital of the INCORPORATOR will be made upon the issue of 120.941.326 new shares, being 43.634.909 common shares and 77.306.417 class A preferred shares, with the same rights and advantages attributed according to the by-laws of the INCORPORATOR.
7.2 The Incorporation of the INCORPORATED shall occur at the same General Meeting that shall approve the incorporation, by the INCORPORATOR, of OPP PRODUTOS PETROQUIMICOS S.A., a holding company that holds a relevant stockholding in the "Chemical and Petrochemical Assets of Group Odebrecht". In this context, the corporate capital of the INCORPORATOR, by the end of the process of Incorporation, is estimated to be R$ 1.845.398.533,72 divided into 1.226.091.148 common shares and 2.172.222.076 preferred shares, being 2.160.764.336 class A preferred shares and 11.457.740 class B preferred shares.
8. INDEMNIFICATION
8.1 PRONOR, already qualified, herein irrevocably commits itself to indemnify, defend and hold INCORPORATOR harmless in respect to any and all loss, damage, cost, fine, penalty or expense (including interests, fine, monetary correction, lawyer's fees and legal costs)("Loss") that might be incurred by the INCORPORATOR or by any companies controlled, either directly or indirectly, by the INCORPORATOR, as a result of any and all obligation, either contingent or absolute, arising out of the INCORPORATED and/or its controlled companies, either direct or indirect, including, but not limited to labor, tax, environmental, social security, civil, insurance and/or financial nature ones resulting from agreements executed, acts practices, facts or omissions occurred before and/or on the date of approval of the Incorporation by the shareholders of the INCORPORATOR at the General Meeting referred to in the above Clause 7.2 ("SGM Date"), observing that PRONOR's obligation to indemnify the INCORPORATOR does not include the obligations appearing in the Economic Evaluation Report and/or its respective exhibits of legal and environmental audit, provided, in any case, the provisions of the following clauses 8.2 and 8.2.1 and 8.2.2 are observed.
8.1.1 The indemnification referred to in the above Clause 8.1, subject to the provisions of clauses 8.2 and 8.2.1, shall be paid by PRONOR to the INCORPORATOR in cash, within the term of 30 (thirty) days from the date on which the INCORPORATOR or its direct or indirect controlled companies, including those arising out of the INCORPORATED, as the case might be, effectively incur(s) in Loss or make(s) the disbursement related to the respective Loss, whatever occurs first. The indemnifications foreseen herein will be added by all taxes, costs and expenses eventually falling or incurred in a way that the equity and value of the INCORPORATOR are reconciled as if the Loss had not been incurred.
8.1.2 Every semester, the INCORPORATOR shall make available to its shareholders represented in the Managing Board and to the members of the Managing Board a report informing (i) the credits received in view of the active superveniences of the INCORPORATED and their controlled companies, either direct or indirect, transferred to the INCORPORATOR and (ii) the Losses incurred and indemnifications paid under the terms of this Clause, it being right that shareholders holding, jointly or individually, at least 5% (five per cent) of the voting capital of the INCORPORATOR, as well as the shareholder PRONOR, irrespective of its direct or indirect interest in the voting capital of the INCORPORATOR, shall be entitled to, during the 30 (thirty) days following the delivery of said report, request and receive, from the INCORPORATOR, information about the defense and/or questions about any prospective Losses, as well as the documentation related to Losses incurred and to the respective indemnification.
8.2 PRONOR's obligation to indemnify set forth in the above Clause 8.1 is subject to the following limitations and PRONOR is in charge of indemnifying the INCORPORATOR for Losses: (i) at a value proportional to the stockholding of the INCORPORATED in the company it controls, either directly or indirectly, if the Loss is incurred by this company; (ii) whose individual value is equal to or higher than R$ 25.000.000,00 (twenty-five million reais), annually corrected by the IGP-M, provided that, if there are multiple Losses related to or arising out of one or a series of occurrences or events of the same nature, the value of the Losses resulting from each one of these events shall be added for the purposes of determining if they meet the limit established in this item (ii); and (iii) that are claimed, filed or collected from the INCORPORATOR and/or companies it controls, either directly or indirectly, by whom it may concern, by any means admitted in court or thereout, during the term of 5 (five) years from the SGM Date.
8.2.1 PRONOR's obligation to indemnify the INCORPORATOR under the terms of this Clause shall be reduced by the value of the "Credits Used - Active Superveniences" existing on the date on which the Loss is incurred, up to the limit of this value. For the purposes foreseen herein, "Credits Used - Active Superveniences" mean effective credits already used by the INCORPORATOR and/or its controlled companies, either direct or indirect, net of income tax, contributions and other deductions incurred on account of or with a view to their reception or acknowledgement, related to facts or acts occurred until the SGM Date, in any case arising out of the active superveniences of the INCORPORATED or its controlled companies, either direct or indirect, expressly related in the Exhibit - Economic Evaluation Report, and, also, whose constitution or acknowledgement has arisen out of a final legal decision transited in rem judicatam. The partial or total liquidation of any PRONOR obligation of indemnifying the INCORPORATOR upon the deduction by Credits Used - Active Superveniences, under the terms of this Clause, shall be effected under resolution, to the extent that, if an action for rescission is proposed in respect to any of the Credits Used - Active Superveniences used and this action manages to deconstitute it by any means and at any time, PRONOR shall indemnify
the INCORPORATOR in full for the Loss payable, whose original value shall be added by the variation of the Interbanking Deposit Certificates - CDI from the date on which the Loss has been incurred until the date of the effective indemnification.
8.2.2 If the value of the Credits Used - Active Superveniences is higher than the amount of the Loss, PRONOR shall have a creditor balance deductible from its eventual obligation of indemnifying the INCORPORATOR, corresponding to the difference between (i) the Credits Used - Active Superveniences and (ii) the Loss, being that said creditor balance shall be used exclusively for the purposes of deducting eventual Losses verified during the life of this Clause 8. After the end of the indemnification term foreseen in this Clause 8 and the liquidation of the Losses, an eventual creditor balance shall be automatically extinct for all legal effects.
9. OTHER PROVISIONS
9.1 In the context of the Incorporation of 52114 into the INCORPORATOR, in case of indirect alienation of the stockholding of Nitrocarbono S.A., an open company controlled by 52114, the INCORPORATOR shall respect and comply with the provisions of article 254-A of Law # 6.404/76, amended by Law # 10.303/2001, and Instruction CVM # 361/2002.
10. CONCLUSION
10.1 Messrs. Shareholders of the INCORPORATED and INCORPORATOR, these are the norms and procedures that, according to the law, we have formulated in order to rule this operation of incorporation, which the respective Boards of Directors consider as being of corporate interest.
Camacari, July 26, 2002.
COPENE - PETROQUIMICA DO NORDESTE S.A.
(signed: illegible)
(signed: illegible)
52114 PARTICIPACOES S.A.
(signed: illegible)
(signed: illegible)
PRONOR PETROQUIMICA S.A.
(signed: illegible)
(signed: illegible)
Seal: BOARD OF TRADE OF THE STATE OF BAHIA - JUCEB
I hereby certify the record on 08/20/2002, under # 96392385, protocol
02/177685-7 Company: 29 3 0000693 9
BRASKEM S/A (signed: illegible), Fidelis Rocco Sarno, General Secretary Stamp: JUCEB It is according to its original. (signed: illegible), clerk On 08/16/02 |
Exhibit 4.06
PROTOCOL AND JUSTIFICATION OF THE OPERATION OF INCORPORATION OF NITROCARBONO
S.A. BY BRASKEM S.A.
Made by and between
BRASKEM S.A., a company with headquarters at Rua Eteno n.o 1.561, city of Camacari, state of Bahia, enrolled at the CNPJ/MF under # 42.150.391/0001-70, herein represented according to its By-laws, hereinafter simply referred to as "INCORPORATOR";
and
NITROCARBONO S.A., a company with headquarters at Rua Hidrogenio n.o 2.318, city of Camacari, state of Bahia, enrolled at the CNPJ/MF under # 13.558.218/0001-08, herein represented according to its By-laws, hereinafter simply referred to as "INCORPORATED";
INCORPORATOR and INCORPORATED are jointly referred to as "PARTIES",
with the purpose of promoting the incorporation into an already existing company, according to articles 224, 225 and 264 of Law # 6.404 dated December 15, 1976.
Whereas:
(i) The INCORPORATOR holds 49.957.106 common shares and 87.906.743 class A preferred shares and 1.576 class B preferred shares issued by the INCORPORATED, which shares represent 100% of the corporate capital entitled to vote and 93,83% of the total capital of the INCORPORATED;
(ii) the operation of incorporation of the INCORPORATED by the INCORPORATOR will represent gains of synergies to the PARTIES, result in the simplification of the current structure by consolidating the activities of the PARTIES in a single company, with consequent reduction of financial, operational costs, rationalization of the activities of the PARTIES; and
(iii) the reports on (a) accounting evaluation of the equity of the PARTIES, and (b) evaluation, at market prices, of the equities of the PARTIES, prepared and delivered by the specialized company, are according to the applicable laws and regulations and to the operation of incorporation this Protocol and Justification is about.
The Board of Directors of the PARTIES, in the best form of law, hereby proposes the incorporation of the INCORPORATED by the INCORPORATOR by signing this Protocol and Justification of the incorporation ("Protocol and Justification") whit the purpose of establishing, according to articles 224, 225 and 264 of Law # 6.404 dated December 15, 1976, as well as Instruction CVM # 319 dated December 3, 1999, and subject to the provisions of items 9.1 and 9.2, the following terms and conditions related to said operation of incorporation.
1. INCORPORATION BASES
1.1 The INCORPORATOR will perform the incorporation of the INCORPORATED and the equity of the latter will be transferred to the equity of the INCORPORATOR, which will succeed it according to law (universal descent) ("Incorporation").
1.2 The evaluations of the equities of the INCORPORATED and INCORPORATOR, for the purposes of the respective accounting entries into the INCORPORATOR, determination of ratio of substitution of the shares of the INCORPORATED for shares of the INCORPORATOR and calculation of the value of reimbursement of the shares issued by the INCORPORATED, in case of eventual exercise of the right of withdrawal the shareholders of the INCORPORATED are entitled to, were carried out at book value by the specialized company mentioned in item 2.1, on the reference date established in item 2.2, based on the criteria foreseen in Law # 6.404 dated December 15, 1976 and according to the criteria established in the instruction CVM # 319/99 for the elaboration of financial statements.
1.3 The balances of credit and debit accounts of the INCORPORATED will be transferred to the accounting books of the INCORPORATOR, paying attention to the proper adaptations.
1.4 The assets, rights and obligations of the INCORPORATED comprising the equity to be transferred to the INCORPORATOR are those described in details in the evaluation report, at book value.
1.5 The INCORPORATOR's management will be in charge of practicing all acts necessary to implement the Incorporation, and all the costs and expenses related to said implementation will run on its account.
1.6 The INCORPORATED will be dissolved in full right.
2. EVALUATIONS AND REFERENCE DATE OF THE INCORPORATION
2.1 The indication and appointment of the specialized company PricewaterhouseCoopers Auditores Independentes, a civil company with headquarters in the city of Sao Paulo at Av. Francisco Matarazzo, n.o 1.700, from the 7th to the 11th floors and from the 13th to the 20th floors, Torre Torino, with branch in the city of Salvador at Rua Miguel Calmon, n.o 555, 9o andar, secondarily registered at the Regional Board of Accountancy of the State of Bahia under # CRC 2SP000160/O-5 "S" BA and enrolled at the Tax Roll of Legal Entities of the Treasury Department under # 61.562.112/0004-73, with articles of Incorporation filed at the 4th Registry of Documents of Sao Paulo, SP, on September 17, 1956, and further amendments registered at the 2nd Registry of Documents of Sao Paulo, SP, the last of them being filed (microfilm) under # 68.444 on April 15, 2002, represented by its partner, Mr. Marco Aurelio de Castro e Melo, as the person in charge of preparing (i) the accounting evaluation reports regarding the equities of the INCORPORATED and INCORPORATOR, for the purposes of accounting entries of the INCORPORATOR, in order to determine the ratio of substitution of the shares, as well as to the eventual exercise of the right of withdrawal ("Accounting Evaluation Reports"), and (ii) the evaluation reports of the equities of the PARTIES, according to the same criteria, at market prices and on the same Reference Date of the Incorporation ("Reports on Evaluation at Market Prices"), under the terms of art. 264 and respective ss.s of Law # 6.404, shall be ratified by the Special General Meeting of the INCORPORATOR and INCORPORATED, under the terms and for the purposes of article 227, ss. 1st of Law # 6.404 dated December 15, 1976.
2.2 PricewaterhouseCoopers Auditores Independentes is a company specialized in evaluating companies of the size of the INCORPORATED and INCORPORATOR and, at the PARTIES' management request, it
has proceeded to (i) evaluate the equities of the INCORPORATED and INCORPORATOR at the book value, based on the elements appearing on the Balance Sheets of the PARTIES prepared on December 31, 2002 ("Reference Date of Incorporation"), (ii) evaluate the equities of the PARTIES according to the same criteria, at market prices and on the same Reference Date, (iii) elaborate the Accounting Evaluation Reports, which are the Exhibits A and B attached to this Protocol and Justification, the values being subject to previous analysis and approval of the shareholders of the PARTIES, according to the law, (iv) elaborate the Reports on Evaluation at Market Prices, which are the Exhibits C and D attached to this Protocol and Justification, the values being subject to previous analysis and approval of the shareholders of the PARTIES, according to the law.
3. FULL AMOUNT OF THE EQUITY TO BE INCORPORATED
3.1 According to the accounting evaluation of the INCORPORATED, the book value of the equity of the INCORPORATED to be transferred to the INCORPORATOR is of R$ 604.288,85, provided the provisions of Clause 4 below are observed.
4. TREATMENT OF EQUITY VARIATIONS UNTIL THE INCORPORATION DATE
4.1 The equity variations verified from the Reference Date of the Incorporation will be apportioned by the INCORPORATOR, being transferred to its accounting books, and the necessary changes will be made, irrespective of the fact that the INCORPORATOR may continue, provisionally, to conduct the operations on its behalf until the formalization of all the records and obtaining of all the authorizations demanded by the applicable legislation.
5. RATIO OF SUBSTITUTION OF THE SHARES FOR THE PURPOSES OF INCORPORATION
5.1 As a result of the incorporation, the shareholders of the INCORPORATED will receive, in substitution for their shares representing the corporate capital of the INCORPORATED, shares issued by the INCORPORATOR, according to the following ratio of substitution established based on the book values of the shares of the PARTIES verified as provided for in the above item 2.1, appearing on the Accounting Evaluation Reports.
------------------------------------------------------------------------------------------------------------------- Company Current Book value of Book value Book Ratio of Ratio of "Standard" number of the company (in (in R$) per value exchange exchange lot of shares issued R$) "standard" (in R$) common preferred shares lot of per shares shares preferred "standard" shares (++) lot of common shares ------------------------------------------------------------------------------------------------------------------- INCORPORATOR (+) 3.398.313.224 1.871.636.903,02 550,75 550,75 - - 1.000 ------------------------------------------------------------------------------------------------------------------- INCORPORATED 146.932.713 604.288,86 4,11 4,11 0,007 0,007 1.000 ------------------------------------------------------------------------------------------------------------------- |
(+) Amount of shares of the INCORPORATOR, not considering the 53.007.864 shares
on treasury.
(++) Book value per "standard" lot of preferred shares, irrespective of their
class.
6. VERIFICATION OF THE RATIO OF SUBSTITUTION OF THE SHARES FOR THE PURPOSES OF
ART. 264 OF LAW # 6.404/76
6.1 In compliance with the provisions of said article 264 of Law # 6.404/76, the table below shows the theoretical ration of substitution of common shares and class A preferred shares issued by the INCORPORATED for, respectively, common shares and class A preferred shares issued by the INCORPORATOR, established based on the values of the equities of the PARTIES, evaluated according to the same criteria, at market prices, on the Reference Date of the Incorporation, as appearing on the Reports on Evaluation at Market Prices, exclusively for the purposes of the comparison foreseen in said article of Law # 6.404/76.
-------------------------------------------------------------------------------------------------------------------- Company Current Book value of Book value Book Ratio of Ratio of "Standard" number of the company (in (in R$) per value exchange exchange lot of shares issued R$) "standard" (in R$) common preferred shares lot of per shares shares preferred "standard" shares (++) lot of common shares -------------------------------------------------------------------------------------------------------------------- INCORPORATOR (+) 3.398.313.224 4.647.165.000,00 1.367,49 1.367,49 - - 1.000 -------------------------------------------------------------------------------------------------------------------- INCORPORATED 146.932.713 75.891.375,74 516,50 516,50 0,378 0,378 1.000 -------------------------------------------------------------------------------------------------------------------- |
(+) Amount of shares of the INCORPORATOR, not considering the 53.007.864 shares
on treasury.
(++) Book value per "standard" lot of preferred shares, irrespective of their
class.
7. REIMBURSEMENT VALUE
7.1 The reimbursement value of the shares of the shareholders of the INCORPORATED dissenting from the Incorporation was defined based on the evaluation of the accounting equity of the INCORPORATED, under the terms of art. 45 of Law # 6.404/76, and is as follows:
----------------------------------------------------------------------------------------------------------- Book value of the INCORPORATED (in Book value per lot of 1.000 Book value per lot of 1.000 R$) common shares for the purposes of preferred shares for the purposes reimbursement (in R$): of reimbursement (in R$)(+): ----------------------------------------------------------------------------------------------------------- 604.288,86 4,11 4,11 ----------------------------------------------------------------------------------------------------------- |
(++) Book value per "standard" lot of preferred shares, irrespective of their class.
7.2 Under the terms of the provisions of art. 264, ss. 3rd of Law # 6.404/76, the dissenting shareholders of the INCORPORATED wishing to exercise the right of withdrawal because of the Incorporation may choose to receive the price of reimbursement of their shares based on (i) their book value established in the above item 7.1, under the terms of art. 45 of Law # 6.404/76; or (ii) the value of the equity of the INCORPORATED evaluated at market prices established in item 6.1 of this Protocol and Justification.
8. INCORPORATOR'S CAPITAL INCREASE
8.1 Based on the Accounting Evaluation Report mentioned in item 2.1 and in order to support the issue of shares of the INCORPORATOR, the corporate capital of the INCORPORATOR will be increased in R$ 37.284,62, not considering the INCORPORATOR's interest in the INCORPORATED's corporate capital.
8.2 The INCORPORATOR's corporate capital increase will be realized by means of the issue of 68 new shares, being 2 common shares and 66 class A preferred shares, all of them with the same rights and advantages attributed according to the by-laws of the INCORPORATOR, to be attributed to the shareholders of the INCORPORATED, in substitution for the shares issued by the INCORPORATED that will be extinct, as per the ratio of substitution established in item 5.1 of this Protocol and Justification, and the shares issued according to this item will participate fully in the results of this corporate year.
8.3 The Incorporation of the INCORPORATED shall occur at the same General
Meeting that will approve the incorporation, by the INCORPORATOR, of ECONOMICO
S.A. EMPREENDIMENTOS (ESAE) and of OPP QUIMICA S.A.. In this context, the
corporate capital of the INCORPORATOR, by the end of the process of
incorporation of those companies, is estimated to be R$ 1.871.713.164,92 divided
into 1.226.091.150 common shares and 2.172.222.142 preferred shares, being
2.160.764.402 class A preferred shares and 11.457.740 class B preferred shares,
and Article 4th of the by-laws of the INCORPORATOR will read as follows:
"Article 4th - The Corporate Capital is of R$ 1.871.713.164,92 divided into
3.398.313.292 shares, being 1.226.091.150 common shares, 2.160.764.402 class A
preferred shares and 11.457.740 class B preferred shares.
8.4 The shares issued by the INCORPORATOR to be attributed to the shareholders of the INCORPORATED in substitution for the shares that will be extinct will deserve the same rights of the shares issued by the INCORPORATOR, as now outstanding. The preferences and advantages of the class A preferred shares issued by the INCORPORATOR, as established in article 9th of its by-laws, are as follows:
a) class A preferred shares, as well as class B preferred shares, are not entitled to vote, however, they entitle their holders to priority in receiving a minimum, non-cumulative dividend of 6% (six per cent) on its unitary value, according to the profits available for distribution to shareholders. Unitary value of shares means the division of the corporate capital by the total outstanding shares;
b) since the dividend mentioned in the above line "a" is paid for the class A and class B preferred shares, and for the common shares issued by the INCORPORATOR, the class A preferred shares will compete, on the same conditions, with the common shares in the distribution of the remaining profit;
c) the class A preferred shares and the common shares will participate in the distribution, by the INCORPORATOR, of shares resulting from incorporation of reserves to the corporate capital;
d) the class A and class B preferred shares are assured priority in the reimbursement of capital; and
e) all the classes and types of shares issued by the INCORPORATOR will deserve the rights of joint sale ("tag along") in case of alienation of the control of the INCORPORATOR, at the same price per share paid to the alienator(s). The right of joint sale shall not apply if the transfer of the control of the INCORPORATOR occurs: (a) in view of a decision or legal act such as pledge or adjudication in execution or (b) in view of the final decision of the regulatory boards, including the Administrative Committee of Economic Defense - CADE.
8.5 The shares of the INCORPORATED's capital belonging to the INCORPORATOR will be extinct based on art. 226, ss. 1st of Law # 6.404 dated December 15, 1976.
9. SPECIAL CONDITIONS
9.1 The operation of Incorporation proposed in this Protocol and Justification will be informed to the Auditing Committees of the INCORPORATED and INCORPORATOR, Managing Board of the PARTIES, and submitted to the shareholders of the PARTIES at General Meetings, provided the legal terms for call are observed.
9.2 If the managing boards understand that the payment of the value of the reimbursement of the shares to the dissenting shareholders of the INCORPORATED exercising the right of withdrawal will risk the financial stability of the INCORPORATOR, General Meetings of the Shareholders of the PARTIES will be called immediately, according to the legal terms, in order to analyze the now proposed operation and, is applicable, revert the whole incorporation process.
10. CONCLUSION
10.1 Messrs. Shareholders of the INCORPORATED and INCORPORATOR, these are the norms and procedures that, according to the law, we have formulated in order to rule this operation of incorporation, which the respective Boards of Directors consider as being of corporate interest.
Camacari, March 10, 2003.
BRASKEM S.A.
(signed: illegible)
Mauricio Roberto de Carvalho Ferro - Director
(signed: illegible)
Paul Elie Altit - Director
NITROCARBONO S.A.
(signed: illegible)
Roberto Brisco Paraiso Ramos - CEO
(signed: illegible)
Paul Elie Altit - Director
Annex:
Exhibit 6.01
Earnings per share
The following table provides a reconciliation of the numerators and denominators used in computing earnings per share and the allocation of distributed and undistributed income between common and preferred stockholders under the two-class method of computing earnings per share as required by SFAS No. 128.
Weighted average number Per thousand Net income of shares shares (whole (loss) (thousands) US dollars) --------------- --------------- ------------- 2002 Basic and diluted loss available to common shareholders (460,037) 1,198,834 (383.74) =============== =============== ============= 2001 Basic and diluted loss available to common shareholders (50,244) 881,548 (57.00) =============== =============== ============= 2000 Net income 188,050 Less dividends declared and paid in current period: Preferred class A (29,865) Preferred class B (257) --------------- Total undistributed earnings 157,928 =============== Income allocated to: Preferred class A To satisfy 6% minimum dividend requirement (6,915) Pro-rata share of excess shared with common shareholders 96,239 Preferred class B To satisfy 6% minimum dividend requirement (15) --------------- Basic income available to common shareholders 68,617 646,693 106.10 =============== =============== ============= Effect of conversion of preferred class B to preferred class A 0.03 --------------- Diluted income available to common shareholders 68,617 646,693 106.10 =============== =============== ============= |
Basic and diluted earnings per share are the same in 2002 and 2001 because the effects of conversion of convertible debentures (Note 9) would be antidilutive. No dilutive securities existed in 2000.
.
.
.
Exhibit 8.01
Percentage of Percentage of jurisdiction voting stock economic of owned by interest owned Name of subsidiary incorporation Parent parent by parent ------------------------------------------------------------------------------------------------------------------------------ Significant subsidiaries Cetrel S.A. Empresa de Protecao Ambiental Brazil Braskem S.A. 21.09 21.08 Copene Monomeros Especiais S.A. Brazil Braskem S.A. 100.00 87.24 Copene Participacoes S.A. Brazil Braskem S.A. 100.00 100.00 Copesul - Companhia Petroquimica do Sul Brazil Braskem S.A. 23.67 23.67 Norcell S.A. Brazil Braskem S.A. 76.52 86.15 Odebrecht Quimica S.A. Brazil Braskem S.A. 100.00 98.40 Petroflex Industria e Comercio S.A. Brazil Braskem S.A. 20.14 20.12 Polialden Petroquimica S.A. Brazil Copene Participacoes S.A. 66.67 42.64 Politeno Industria e Comercio S.A. Brazil Copene Participacoes S.A. 35.00 34.66 Tegal Terminal De Gases Ltda. Brazil Braskem S.A. 84.36 84.36 Trikem S.A. Brazil Odebrecht Quimica S.A. 64.43 41.51 |
Exhibit 10.01
BRASKEM S.A.
SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jose Carlos Grubisich Filho, Chief Executive Officer of Braskem S.A. (the "Company"), hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
1. the Company's annual report on Form 20-F for the year ended December 31, 2002, to which this statement is filed as an exhibit (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 30, 2003 /s/ Jose Carlos Grubisich Filho ------------------------------- Jose Carlos Grubisich Filho Chief Executive Officer |
Exhibit 10.02
BRASKEM S.A.
SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Paul Elie Altit, Chief Financial Officer of Braskem S.A. (the "Company"), hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
1. the Company's annual report on Form 20-F for the year ended December 31, 2002, to which this statement is filed as an exhibit (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: June 30, 2003 /s/ Paul Elie Altit ------------------- Paul Elie Altit Chief Financial Officer |