voltar

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

(Expressed in Thousands of Reais )

1. Operations

The Company’s activities comprise the production , import and export of chemicals and petrochemicals, the marketing, of chemicals and petrochemicals produced by third parties, and participation in other companies.

2. Financial Statements Presentation

The financial statements were prepared in conformity with the corporate law and “CVM – Comissão de Valores Mobiliários” (Brazilian Securities Commission) standards and tax legislation.

The comparability of the December 2002 balances is impaired, as they refer to Ciquine Cia. Petroquímica, into which Elekeiroz S.A. was merged in July 2003 (Note 16). For this reason, proforma statements were prepared (Note 17).

3. Summary of the Main Accounting Practices

a) Short-Term Investments in the Money Market

These are stated at cost plus the related earnings up to the balance sheet date, which is lower than market value.

b) Allowance for Doubtful Accounts

This is set up in an amount deemed sufficient to cover possible losses on any such accounts.

c) Inventories

Inventories are stated at the average acquisition or production cost, which does not exceed market value. There are no obsolete inventories.

d) Investments

Investments in controlled companies are evaluated on the equity method, whereas the other investments are shown at the acquisition cost plus monetary correction (recognition of the effects of inflation) up to December 31, 1995 and adjusted to market value, where applicable.

e) Property, plant and equipment/Depreciation

Depreciation is calculated on the straight-line method at rates that take into account the useful life of assets. For equipment and facilities directly used in the production process this method is supplemented by that based on the number of units produced.

f) Deferred charges

These comprise the industrial units’ deferred organization and expansion costs, as well as expenses incurred on improvement plans and development of corporate management systems, all amortized at 10% and 20% p.a.

g) Amortizable Premium

This refers to premium on the acquisition of controlled companies, which is amortized in accordance with projected results of the premium-originating businesses.

h) Receivables and Payables

All receivables and payables are restated based on exchange rates and financial charges under contracts in force, so they reflect amounts incurred up to the balance sheet date.

i) Income Tax and Social Contribution

Income tax is calculated at 15% on taxable income plus a 10% surtax, whereas Social Contribution rate is 9% on income book value, duly adjusted.

The Company benefits from a 37.5% reduction of Income Tax due on its Camaçari – BA production unit’s operating income, until the end of fiscal 2003.

Deferred taxes are presented in the Long Term Assets (note 12)

4. Consolidated Financial Statements

The consolidated financial statements were prepared in accordance with CVM Instruction 247/96, which require elimination of:

a) Intercompany assets and liabilities;

b) Shareholding, reserves and retained earnings of controlled companies; and

c) Revenues, expenses and unrealized earnings arising from intercompany transactions.

Consolidation includes the financial statements of Castletown Trading S.A., a wholly-owned subsidiary in the periods under examination. The financial statements of the controlled company can be summarized as follows:

CASTLETOWN TRADING S.A.	Dec/2003	Dec/2002
ASSETS
Current Assets	2.291	2.942
Total Assets	2.291	2.942
LIABILITIES
Current Liabilities	279	516
Shareholders’ Equity	2.012	2.426
Total Liabilities	2.291	2.942
STATEMENT OF INCOME
Net Operating Revenue	-	28.843
Cost of Products Sold	-	(28.856)
Financial Income	(1)
Net Operating Revenue	30	267
Income for the Period	29	254

5. Clients – Trade Receivables

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
Local Clients	41.201	18.805	41.201	18.805
Foreign Clients	28.196	23.023	28.375	24.779
Bills of Exchange Discounted	(7.076)	(11.850)	(7.076)	(11.850)
Allowance for Doutbful Accounts	(2.280)	(1.291)	(2.280)	(2.347)
Total	60.041	28.687	60.220	29.387

6. Inventories

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
Finished Products	20.567	18.145	20.567	18.145
Raw, Auxiliary and Packaging Materials	20.749	1.909	20.749	1.909
Miscellaneous Materials	9.868	13.217	9.868	13.217
Total	51.184	33.271	51.184	33.271

7. Investments and related-party transactions

Major information on the controlled and affiliated companies as of December 31:

	Dec/2003			Dec/2002
	SANSUY Particip. Rep. Serv. Ltda. (a)	CASTLETOWN Trading S.A. (b)	Total	Total
Shareholders’ Equity	16.472	2.012	18.484
Number of Shares/Quotas Held (1000-Share/Quota Lot)	136	7.350
Participation (%)	10	100
Results of Equity Accounting	169	(414)	(245)	1.159
Investment as of 12/31/02 and 12/31/03	1.647	2.012	3.659	3.904

(a) Balance sheet as of 11/30/2003.

(b) Balance sheet as of 12/31/2003.

8. Property, plant and equipment

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
Operating
Plots of Land and Buildings	12.585	36.968	12.585	36.968
Equipment and Facilities	274.042	101.865	274.042	101.865
Others	10.186	6.373	10.186	6.673
	296.813	145.206	296.813	145.206
Accumulated Depreciation	(154.857)	(102.033)	(154.857)	(102.033)
	141.956	43.173	141.956	43.173
Construction Work in Progress	10.846	8.843	10.846	8.843
	152.802	52.016	152.802	52.016

9. Deferred Charges and Unamortized Premium

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
DEFERRED CHARGES
Preoperating Expenses :
Operative Projects	80.105	68.400	80.105	68.400
Projects Under Way	4.323	-	4.323	-
Amortization	(69.024)	(64.206)	(69.024)	(64.206)
Total	15.404	4.194	15.404	4.194
UNAMORTIZED PREMIUM
Premium/Discount – Investment Acquisition	53.072	-	53.072	-
Premium Amortization	(8.418)	-	(8.418)	-
Total	44.654	-	44.654	-

10. Financing

The long-term financing, which is used for funding investment in facilities expansion/modernization and in meeting working capital requirements can be summarized as follows:

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
Foreign Currency
US$ (Equivalent in R$)	6.047	11.042	6.047	11.042
Euro (Equivalent in R$)	710	1.445	710	1.445
Local Currency
“TJLP” (Long-term interest rate)	41.469	45.885	41.469	45.885
Currency Basket	661	-	661	-
Working Capital de Giro – CDI + 0,25% p.m.	6.731	-	6.731	-
Working Capital – Interest at 29.21% p.a.		2.853		2.853
Total Financing	55.618	61.225	55.618	61.225
Short-Term Portions	30.052	40.061	30.052	40.061
Long-Term Portions	25.566	21.164	25.566	21.164

Financing agreements, guaranteed by property, plant and equipment items, are subject to exchange variation and/or monetary restatement at official or contracted indices and rates.

The long-term financing contracts mature as follows:

	Parent Company		Consolidated
	Dec/2003	Dec/2002	Dec/2003	Dec/2002
2004	6.478	7.647	6.478	7.647
2005	9.339	6.825	9.339	6.825
2006	8.507	6.692	8.507	6.692
2007 em diante	1.242	-	1.242	-
Total	25.566	21.164	25.566	21.164

11. Financial Instruments

In compliance with “CVM” Instruction no. 235/95, the Company evaluated its assets and liabilities’ book value against the related market value, having found them adequate, for the following reasons:

Short- and Long-Term Financing – The book value was determined based on the interest rate contracted with financial institutions, which reflect market value, and considering the nature and conditions of these operations as well as the size of the Company.

Credit Risk – the Company’s sales are not highly concentrated, there being no clients accounting for over 10% of net sales. Under the Company’s credit policy, limits and terms are established according to liquidity levels, which in turn are determined by rating instruments. Besides the diversification in the domestic market, a substantial portion of products is intended for foreign markets.

Exchange Risk – Because exports represent a substantial part of its revenues, the Company’s working capital requirements are met by export-linked credit lines, with more attractive rates and conditions than those prevailing in the domestic money market.

Price Risk – The Brazilian chemical sector is highly influenced by the globalized market, with prices heavily affected by international demand and supply conditions. As a consequence, the peaks of both selling prices and raw material purchase prices in this sector occur almost simultaneously, which in turn enables maintenance of an average margin capable of sustaining the business;

Interest Rate Risk – Funding is at fixed interest rates under regular market conditions, with restatement and recording at the amount of settlement at the balance sheet date.

12. Deferred Income Tax and Social Contribution

As stipulated by “CVM” Deliberation no.273 and Instruction no.371, the Company recorded temporary differences of R$ 7,244 thousand as deferred tax assets, under “Long-Term Assets”. The deferred consolidated tax and credits and obligations (Income Tax and Social Contribution) as of December 31, 2003 can be summarized as follows:

	Current Consolidated Balance (Dec/2003)
Temporary Differences represented by:
Allowance for Doubtful Accounts	336
Provision for Labor Contingencies	302
Provision for Tax Contingencies	2.616
Amortized Premium	2.008
Other Provisions	1.982
Total	7.244

Tax Credit Realization Forecast
2004	1.043
2005	1.599
2006	2.187
2007 onwards	2.415
Total	7.244

No tax credits have been recognized in connection with tax loss carryforwards in the amount of R$ 122,058 thousand .

13. Taxes and Contributions and Provision for Contingencies

The Company has gone to Court challenging the levying of federal taxes, and accordingly, has recorded and updated provisions for the related contingencies, under Long-Term Liabilities.

In 1992, relying on the “STF” (Supreme Court of Brazil) case law, the Company recorded as Long-Term Assets R$ 8,896 (restated to December 2003) of FINSOCIAL rate difference for the 1989-1992 period.

The Company offset credits granted after winning a legal action that questioned the constitutionality of the decrees-laws 2445 and 2449 of 1988 that modified the “PIS” determination method. The respective provision, in the amount of R$ 22,653 thousand, was maintained and restated under “Long-Term Liabilities”.

Until the end of December 2003, the Company had made judicial deposits in the amount of R$ 17,163 thousand, fully provided for under “Long-Term Liabilities”. These deposits were made in connection with the questioning of a 1% difference in the “COFINS” tax rate and the “CPMF” constitutionality and Education Allowances.

Upon acquisition of Ciquine Companhia Petroquímica by Elekeiroz S.A., in May 2002, the new management set up provisions for tax, environmental and labor risks, based on information provided by the merged company. These provisions, which are detailed in Note 18, were recorded as extraordinary results.

14. CAPITAL

a) Capital

The authorized capital at December 31, 2003 comprises 2,100,000,000 book-entry shares, of which 700,000,000 common and 1,400,000,000 preferred.

Capital, subscribed and paid up in the amount of R$ 164,306 thousand comprises 603,293,965 book-entry shares without nominal value, of which 290,638,065 are common and 339,655,900 are preferred.

b) Treasury Stock

The Company’s 590,556 treasury stocks are the equivalent to 0.09% of total shares issued, because in the stock unification and merger processes, the shareholders exercised their withdrawal rights.

c) Dividends

Below, the rights inherent in preferred , non-voting shares:

a) priority over common shares in statutory dividend distribution;

b) right to dividends always higher than those attributed to common shares;

c) participation in capital increase through reserve and profit capitalization ;

d) priority over common shares in capital reimbursement without premium, in case of liquidation.

e) in the event of disposal of majority shareholding, inclusion in public offer that ensures unit price of 80% of amount paid per voting share included in the majority group;

f) minimum priority dividend of R$ 0.10 per thousand shares, an annual, non-cumulative basis, subject to adjustment in case of split or unification.

All shareholders are entitled to statutory, minimum dividends in the equivalent to twenty five percent (25%) of the income for the year, adjusted in accordance with Law 6.404/76 art. . 202, I “a” and “b” ; II and III

Dividends were calculated as follows:

	R$ thousand
Net Income for the Year	30,576
(-) Legal Reserve (5%)	(1,529)
(=)Basis of calculation	29,047
Minimum Statutory Dividend (25%)	7,262
Dividends Declared in the Year:
Interest on Own Capital	11,020
(-) Income Tax	(1.638)
(=) Net Remuneration in the Year	9,382

As legally permitted and provided for in the Company’s articles of association, the Interest on Own Capital net of income tax, is being included in the statutory dividends. The gross interest on own capital equals R$ 17,50 per thousand-share lot, or 31% of the net income for the year.

15. Stock Option Plan and Pension Plan

With a view to integrating managers and employees into the Company’s growth process in the middle- the and long-run, at the Extraordinary General Shareholders’ Meeting of July 31, 2003 it was deliberated to institute a stock option plan to enable these managers and employees to enjoy any benefits from share appreciation that may result from their work and dedication. The stock option plan will be administered by the Elekeiroz Options Committee, to be formed by members elected by the Administrative Council, every year. By the time these financial statements were completed, this plan had had no effects to be reflected therein.

Elekeiroz S.A. is one of the sponsors of Fundação Itausa Industrial , a private pension, not-for-profit entity whose purpose is to organize and administer private pension or supplementary income plans similar to government-sponsored Social Security Funds. All the Company’s employees are entitled to participate in a definite-contribution plan (“PAI-CD Plan) approved by the Supplementary Social Security Secretariat’s Notification no. 1143/DA JUR/SPC of August 20, 2003. Adherence has just begun and the Company’s contributions total R$ 5,000 this year. Under this plan, the contribution rates of both sponsors and participants are periodically set in accordance with pertinent regulations. Given its rate the Plan involves no actuarial risk, any investment risks lying with the participants.

16. Acquisition of Elekeiroz S/A

At the General Shareholders’ Meetings held on July 31, 2003, the shareholders of former Ciquine Companhia Petroquímica and Elekeiroz S.A. approved the corporate reorganization which was the main event published on June 27, 2003, and accordingly,

a) the four classes of preferred shares of Ciquine (A, B, C and D) were unified into a single new class (PN);

b) Elekeiroz was merged into Ciquine;

c) For commercial reasons, the merging company changed its name to that of the merged company: Elekeiroz S.A.; and

d) The merging company’s articles of association were adjusted to the new corporate reality.

17. Proforma Statements

In order to enhance the comparability impaired by the merger referred to in Note 16, proforma financial statements were prepared as follows:

Balance Sheet – Statements of Elekeiroz S.A. (formerly Ciquine Companhia Petroquímica) compared to the consolidated statements of wound up Elekeiroz S.A. (the merged company) for 2002;

Statement of Income – The merging company’s income for 2003 plus that of the merged company for the months preceding the merger , as compared to the consolidated income of Elekeiroz S.A. for 2002, included in which is the income of Ciquine Petroquímica for the period from May to December.

PROFORMA STATEMENT OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
(Expressed in Thousands of Reais )
	2003	2002
GROSS SALES REVENUE	653.678	429.333
NET SALES REVENUE	541.579	355.307
GROSS INCOME	117.322	81.939
OPERATING INCOME BEFORE FINANCIAL INCOME, EQUITY ACCOUNTING AND PREMIUM AMORTIZATION	67.980	50.660
OPERATING INCOME	52.395	44.666
NET INCOME FOR THE YEAR	37.187	37.033

PROFORMA BALANCE SHEET AS OF DECEMBER 31, 2003 AND 2002
(Expressed in thousands of Reais )
	2003	2002		2003	2002
CURRENT ASSETS	184.191	154.214	CURRENT LIABILITIES	93.925	111.775
Cash and Cash Equivalents/Investments	39.673	26.892	Suppliers – Trade Payables	16.635	20.360
Clients – Trade Receivables	60.220	55.591	Personnel Obligations	7.341	4.811
Inventories	51.184	48.034	Taxes and Accounts Payable	27.945	24.730
Taxes to be Offset	27.215	18.981	Financial Institutions	30.052	47.990
Receivables/Prepaid Expenses	5.899	4.716	Dividends and Participation’s	11.952	13.884
LONG-TERM ASSETS	40.254	32.191	LONG-TERM LIABILITIES	112.016	118.063
Deferred and Recoverable Taxes	18.796	16.861	Financial Institutions	25.566	35.258
Judicial Deposits	19.590	14.023	Provision for Taxes and Contributions	50.776	57.184
Blocked Deposits	1.868	1.307	Provision for Contingencies	35.674	25.621
PERMANENT ASSETS	216.516	227.850	SHAREHOLDERS’ EQUITY	235.020	184.417
Investments	3.656	4.217	Minority Shareholding		2.718
Property, Plant and Equipment	152.802	160.646	Capital	164.306	116.726
Deferred Charges and Unamortized Premium	60.058	62.987	Reserves	70.714	64.973
TOTAL ASSETS	440.961	414.255	TOTAL LIABILITIES	440.961	414.255

18. Extraordinary Results 2002

Having acquired the Company in May 2002, the management performed a review of the accounting procedures in order to make them consistent with those of the parent company. The result was a series of adjustments described below and shown as extraordinary results in the statement of income for the year, in such way as to enable comparability over time.

	R$
Provision for fiscal, environmental and labor contingencies	27.254
Provision para “ICMS”-related contingencies	3.650
Provision for “INSS”-related contingencies	6.039
Write Off of Projects Discontinued (Property, Plant and Equipment and Deferred Charges)	11.310
Write Off of Deferred Charges – unamortized maintenance	5.690
Provision for Maintenance	9.697
Write Off of Monetary Restatement of “ICMS” Credit Balance	5.452
Provision for Devaluation of Investments	2.645
Other Write-Offs/Provisions	4.242
Indemnity and Legal Process Expenses	3.739
Total	79.718

Ricardo Garcia de Souza

Accountant – CRC 1 SP 185363/0 – S “BA”