NOTES TO THE FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2006 AND 2005.
(In thousands of Reais)
1. Operations
Elekeiroz, a company controlled by Itausa
– Investmentos Itaú S.A.,
has two industrial units, one in Camaçari, BA, and
one in Várzea Paulista, in
the state of
The Company’s activities comprise the production,
trading, import and export of chemicals and petrochemicals, including chemicals
and petrochemicals produced by third parties, and participation in other
companies.
2. Presentation
of the financial statements
The financial statements were prepared in conformity
with the corporate law and the “CVM – Comissão de Valores Mobiliários” (Brazilian
Securities Commission) standards.
3. Summary
of the Main Accounting Practices
a) Income Determination
Revenues and expenses are recognized on the accrual
basis. The provision for income tax
includes the portion relating to fiscal incentives, the reduction resulting therefrom being credited to a specific capital reserve.
b) Short-term Investments in the Money Market
Stated at cost plus the related
earnings up to the balance sheet date, not exceeding market value.
c) Allowance
for Doubtful Accounts
This is set up based on an analysis of credit risk, in
an amount deemed sufficient to cover possible losses on any such accounts.
d) Inventories
Inventories are stated at the average acquisition or
production cost, which does not exceed market value. There are no obsolete
inventories (Note 7).
e) Investments
Investments in subsidiares
are valued 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 (Note 10)
f) Property, Plant and Equipment and
Depreciation
The Property, Plant and Equipment items are stated at
the acquisition or construction cost plus monetary correction (recognition of
the effects of inflation) up to December 31, 1995, including interest accrued
during the construction.
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. (Note 11)
g) 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 on the
straight-line basis, at 10% and 20% p.a. (Note 12).
h) Unamortized Goodwill
This refers to goodwill on acquisition of
subsidiaries, which is amortized in accordance with projected results of the goodwill-originating
businesses (Note 12).
i) Rights
and Obligations
Where applicable, all rights and obligations are
restated based on exchange rates and financial charges under contracts in
force, so that they reflect amounts incurred up to the balance sheet date.(Note 13).
j) 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 partial reduction of
Income Tax due on the operating income of its Camaçari
– BA production unit, at the the rate of 75% until
December 31, 2015. (Note 9 a)
The deferred Income Tax and Social Contribution are
shown under Long-Term Assets and Long-Term Liabilities (Note 9 b).
k) Provision
for Maintenance
As required by CVM Deliberation 489/2005, which
approved IBRACON´s NPC 22 as interpreted by IT
01/2006, the Company changed the practice of setting up provision for
maintenance of its industrial units (Note 21).
l) Reclassifications
and New Pronouncements
In compliance with CVM Deliberations nos 488/05 and 489/05, certain reclassifications were made
in prior year´s financial statements, considering the
compensation of judicial deposits shown under the headings “Parent Company” and
“Consolidated”, against the related liabilities under “provision for taxes and
contributions” and “provision for contingencies” (Note 14).
m) Supplementary
Information
The following statements are presented, by way of
supplementary information: Statement of
Cash Flows on the indirect method – prepared in accordance with IBRACON´s NPC no. 20;
Value-Added Statement – prepared in accordance with CVM Circular no. 01/00.
4. Consolidated
Financial Statements
The consolidated financial statements, which
include the controlled company Castletown Trading
S.A., were prepared in accordance with CVM Instruction 247/96 requiring
elimination of:
a) intercompany
assets and liabilities;
b) shareholding, reserves and
retained earnings of subsidiaries;
c) revenues and expenses, and
unrealized earnings arising from intercompany
businesses.
Summary information on the financial statements of the
subsidiary:
CASTLETOWN
TRADING Dec/2006 Dec/2005 ASSETS Current assets 1.462 1.612 Total
Assets 1.462 1.612 LIABILITIES
AND SHAREHOLDERS´ EQUITY Current liabilities 61 67 Shareholders´ Equity 1.401 1.545 Total Liabilities and
Shareholders´ Equity 1.462 1.612 STATEMENT
OF INCOME Net Operating
Revenues (Expenses) (10) (40) Income (Loss) for the Period (10) (40)
5. Cash and Cash Equivalents/Investments
|
|
Parent Company |
Consolidated |
||
|
|
Dec/2006 |
Dec/2005 |
Dec/2006 |
Dec/2005 |
|
Cash |
11 |
15 |
11 |
15 |
|
Bank Accounts |
1.060 |
2.109 |
1.063 |
2.109 |
|
Interbank Short-Term Investments |
39.869 |
39.909 |
39.869 |
39.909 |
|
Total |
40.940 |
42.033 |
40.943 |
42.033 |
6. Clients – Trade Receivables
|
|
Parent Company |
Consolidated |
||
|
|
Dec/2006 |
Dec/2005 |
Dec/2006 |
Dec/2005 |
|
Local Clients |
66.736 |
58.089 |
66.736 |
58.089 |
|
Foreign Clients |
40.578 |
19.371 |
40.579 |
19.373 |
|
Exchange Discount
Bills |
(5.736) |
- |
(5.736) |
- |
|
Allowance for Doubtful Account |
(892) |
(881) |
(892) |
(881) |
|
Total |
100.686 |
76.579 |
100.687 |
76.581 |
7.
Inventories
|
|
Parent Company e Consolidated |
|
|
|
Dec/2006 |
Dec/2005 |
|
Finished Products |
29.799 |
42.481 |
|
Raw ,Auxiliary and Packaging Materials |
26.728 |
32.630 |
|
Miscellaneous Materials |
11.937 |
10.944 |
|
Total |
68.464 |
86.055 |
8. Tax Credits and Taxes Recoverable
Parent
Company e Consolidated Dec/2006 Dec/2005 Taxes
Recoverable/To be Offset Prepaid
Social Contribution on Profits
302 166 Prepaid Income Tax 816 1.124 ICMS to
be Offset on Acquisition of Assets
3.080 3.575 Accumulated
ICMS Camaçari Credits (*) 32.511 24.315
Accumulated ICMS Export Camaçari Credits
(*) 25.423 15.245 (-)
Provision for Losses on ICMS Camaçari
Credits (*)
(5.805) (6.855)
Accumulated PIS and COFINS Credits
2.646 1.647
Accumulated PIS and COFINS Credits on Acquisition of Assets
2.101 1.887 Other 551 665 Total 61.625 41.769 Stated
as: Current Assets 22.657 40.208 Long-Term Assets 38.968 1.561
(*) Thanks to its
high volume of exports and domestic sales with tax deferral and at lower tax
rates than those applicable to purchases, the Company´s
production unit in
9. Income Tax (IRPJ) and
Social Contribution on Net Income (CSLL)
(a)
Reconciliation of IRPJ and CSLL Expenses
|
|
Parent Company and Consolidated |
||
|
IRPJ and CSLL
Expense Composition |
Dec/2006 |
|
Dec/2005 |
|
Pretax Income |
24.348 |
|
52.919 |
|
( - ) Tax loss and negative basis carryforwards |
(7.304)
|
|
(15.876) |
|
Income Tax and Social
Contribution at 34% |
(5.795) |
|
(12.595) |
|
Permanent additions and exclusions |
516 |
|
127 |
|
Temporary additions and exclusions |
426 |
|
3.568 |
|
Interest on own capital |
1.322 |
|
3.360 |
|
Fiscal incentives |
61 |
|
205 |
|
Income Tax and
Social Contribution |
(3.470) |
|
(5.335) |
|
Current tax |
(1.084) |
|
(5.852) |
|
Deferred tax |
(2.386) |
|
517 |
(b) Deferred
Income Tax and Social Contribution Composition
As required under CVM Deliberation no. 273 and CVM
Instruction no. 371, the Company has recorded as Long-Term Assets R$ 9.953
thousand of deferred tax assets arising from temporary differences. The consolidated deferred tax credits and
obligations (Income Tax and Social Contribution) as of December 31, 2005 can be
summarized as follows:
|
|
|
Consolidated balance Dec/2006 |
|
Temporary Differences comprising: |
|
|
|
Allowance for Doubtful Accounts |
|
303 |
|
Provision for
Labor Contingencies |
|
1.441 |
|
Provision for Tax Contingencies |
|
3.043 |
|
Ámortized Goodwill |
|
951 |
|
Other Provisions |
|
4.215 |
|
Total |
|
9.953 |
Expected
Tax Credit Realization
|
|
|
2007 |
4.044 |
|
2008 |
1.957 |
|
2009 |
3.280 |
|
2010 |
264 |
|
2011 onwards |
408 |
|
Total |
9.953 |
The R$ 100.721 thousand tax losses and R$ 67.505
thousand negative basis are not recorded as assets.
Under the Company´s
Long-Term Liabilities is R$ 2,895 thousand of deferred tax liabilities deriving
from capital gains on credit sale of the Taubaté
production unit (Note 22). This capital
gain is taxed as each installment is paid by the purchaser .
10. Investments
Below, the main information on investments valued on
the equity method and cost as of December 31:
Dec/2006 Dec/2005 a) Valued on the Equity Method CASTLETOWN Trading Shareholders´
Equity 1.545 1.545 Number of Shares Held (Thousand-share lot) 7.350 7.350 Participation (%) 100 100 Results of Equity Accounting (144) (253) Total Investments valued on
the Equity Method 1.401 1.545 b) Valued on the Cost Method Other Investments Valued on the Cost Method 7.276 7.439 Total 8.677 8.984
11. Property, Plant and Equipment
PARENT COMPANY AND CONSOLIDATED Dec/2006 Dec/2005 Annual Restated Accumulated Residual Residual Property,
Plant and Equipment Depreciation Rates Cost Depreciation Value Value Land 11.111 - 11.111
11.141 Buildings 4% 54.859 (27.493) 27.366 28.011 Equipment and Facilities (i) 5% - 10%
292.702 (151.196)
141.506
118.772 Construction Work in Progress
24.067 - 24.067 41.950 Computer
Hardware and Software 20% 5.063 (3.484) 1.579 1.253 Furniture and Fixtures 10% 5.889 (4.415)
1.474 1.505 Vehicless 20% 1.875 (987) 888 841 Other assets 10% and
20% 105 (6) 99 84 Total 395.671 (187.581) 208.090 203.557
(i) Depreciation of
equipment and industrial facilities varies with the volume of production, between 5% a 10% p.a.
12. Deferred
Charges and Unamortized Goodwill
|
|
Parent Company and Consolidated |
|
|
|
Dec/2006 |
Dec/2005 |
|
DEFERRED
CHARGES |
|
|
|
Preoperating expenses : |
|
|
|
Operative Projects |
87.283 |
79.852 |
|
Amortization |
(75.436) |
(72.930) |
|
Net
balance |
11.847 |
6.922 |
|
Projects under way |
4.767 |
13.783 |
|
Total |
16.614 |
20.705 |
|
UNAMORTIZED
GOODWILL |
|
|
|
Goodwill/Discount/Investment Acquisition |
53.072 |
53.072 |
|
Goodwill/Discount Amortization |
(24.314) |
(19.014) |
|
Total |
28.758 |
34.058 |
13.
LOANS
Loans taken for funding investments in expansion and
modernization of facilities, and meeting working capital requirements can be
thus described:
Dec/2006 Dec/2005 Type Charges % Guarantees Amortization Maturity
date Short-term Long- term Short-term Long- term FINAME – BNDES TJLP + 3.50 – 6.50 p.a. Promissory Note Monthly 10/15/2007 20 - 221 20 POC - BNDES TJLP
+ CURRENCY BASKET + 3.35 – 5.35 p.a. Promissory Note Monthly 05/15/2009
4.001
3.696
3.084
5.472 MODERMAQ – FINAME 10.95 p.a. Reservation of Title Monthly 10/15/2010 105 280 87 353 BNDES TJLP
+ CURRENCY BASKET + 2.625 – 3.85 p.a. Surety Monthly and Half-yearly 01/15/2010 15.751 55.568
8.384 53.713 EXIM TJLP + 3.00 p.a. Promissory Note Monthly 12/15/2007
6.643 - - - EXIM – MOEDA ESTRANGEIRA US$ + 10.31 p.a. Promissory Note Monthly 15/12/2007
1.529 - - - CÉDULA CRÉDITO INDUSTRIAL – BNB 11.90 p.a. Reservation of Title Monthly 28/12/2010 16 17.015 13 13.856 COMPROR CDI + 0.09 p.m. Promissory Note Self-Payable
2.198 -
9.863 - Total Parent Company and
Consolidated 30.263
76.559 21.652 73.414
The long-term portion of these loans
mature as follows:
Parent Company
and Consolidated Dec/2006 Dec/2005 2007 - 22.853 2008 39.575 24.374 2009 30.705 26.187 2010 onwards 6.279 - Total 76.559 73.414
14.
Long-Term Taxes Payable and Provision for
Contingencies
Under the Company´s
Long-Term Liabilities is Taxes Payable referring to 100% of tax payments
pending legal decisions, all monetarily restated; and provisions in sufficient
amounts to cover losses, initially deemed probable, on tax-related,
labor-related and civil suits. The
table below shows the amounts of these contingencies, the related provisions
and judicial deposits.
(a) Long-Term
Taxes Payable
|
|
Parent Company and Consolidated |
|
|
|
Dec/2006 |
Dec/2005 |
|
PIS and COFINS |
28.899 |
27.076 |
|
COFINS and Education Allowance |
16.097 |
16.097 |
|
(-) Judicial Deposit |
(16.097) |
(16.097) |
|
IRPJ and CSLL |
6.577 |
6.287 |
|
Other |
6.456 |
6.355 |
|
(-) Judicial Deposit |
(3.752) |
(3.819) |
|
Total Long-Term Taxes Payable |
58.029 |
55.815 |
|
Total
Judicial Deposit |
(19.849) |
(19.916) |
|
Total Net |
38.180 |
35.899 |
(b) Provision for Contingencies
|
|
Parent Company and Consolidated |
|
|
|
Dec/2006 |
Dec/2005 |
|
Labor-Related and Civil |
10.641 |
11.368 |
|
Tax-Related |
13.292 |
13.750 |
|
Total
Judicial Deposit |
(1.321) |
(1.191) |
|
Total Net |
22.612 |
23.927 |
Long-Term
Taxes Payable
The Company has offset credits deriving from a legal
action that questioned the constitutionality of the Decree-Laws nos. 2445 and
2449 of 1988, while keeping this R$ 28.899 thousand offsetting duly provided
for and restated, under
“Long-Term Liabilities”.
This legislation changed PIS determination methods.
Due to legal measures taken to question the lawfulness
of levying the 1% difference in COFINS and Education Allowance rates, up to the
end of December 2006 the Company made judicial deposits totaling R$ 16,097
thousand, in connection therewith, which deposits are fully provided for under
“Long-Term Liabilities”
100% of the Company´s IRPJ
losses and negative CSLL basis of calculation in the amount of R$ 6.577, was
carried forward and kept duly provided for and restated under “Long-Term
Liabilities”.
Labor-Related
and Civil
The Company has recorded provisions in an amount
sufficient to cover losses deemed probable on labor-related and civil suits.
15.
Capital and Interest on Own Capital
a)
Capital Social
The authorized capital as of December 31, 2006 and
2005 comprises 2.100.000.000 book-entry shares, of which 700,000,000 are common
and 1,400,000,000 are preferred.
Capital, subscribed and paid up, in the amount of R$
200,000 thousand (2005 - R$ 200,000 thousand), is composed of 629,703,409
shares (2005 - 630,703,409), without nominal value, of which 290,363,033 are
common (2005 – 290,363,033) and 339,340,376 are preferred (2005 – 339,340,376 ).
b) Dividends
Below, the rights inherent in preferred, non-voting
shares:
a)
priority over
common shares in statutory dividend distribution;
b)
right to
dividends not lower 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.
The dividends were calculated as follows:
|
|
Dec/2006 |
|
|
|
|
Net Income for the Year |
18.828 |
|
(-) Legal Reserve (5%) |
(942) |
|
(=) Basis of calculation |
17.886 |
|
Minimum statutory dividend (25%) |
4.472 |
|
|
|
|
Dividends Declared in the Year: |
|
|
Interest on Own Capital |
5.556 |
|
(-) IRRF (Withholding Tax) |
(831) |
|
(=) Net Yield for the Year |
4.725 |
As permitted by pertinent legislation and
stipulated in the by-laws, the Interest on Own Capital amount, net of income
tax, is being included in statutory dividends.
The gross interest on own capital corresponds to R$ 8.82 por per thousand-share lot.
16.
Financial Income
The financial income is thus composed:
|
|
Parent Company |
Consolidated |
|||||
|
|
Dec/2006 |
Dec/2005 |
Dec/2006 |
Dec/2005 |
|||
|
Financial Revenues |
6.214 |
7.722 |
6.214 |
7.722 |
|||
|
Monetary and Exchange Variation – Assets |
6.349 |
5.046 |
6.349 |
5.046 |
|||
|
Total Financial Revenue |
12.563 |
12.768 |
12.563 |
12.768 |
|||
|
|
|
|
|
|
|||
|
Financial Expenses |
(16.757) |
(12.188) |
(16.757) |
(12.188) |
|||
|
Monetary and Exchange Variation – Liabilities |
(7.966) |
(8.902) |
(8.099) |
(9.114) |
|||
|
Total Financial Expenses |
(24.723) |
(21.090) |
(24.856) |
(21.302) |
|||
|
Net
Financial Income |
(12.160) |
(8.322) |
(12.293) |
(8.534) |
|||
17. 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 Loans – 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.
Below, a summary of the main market risks involving
the business:
Credit Risk – the Company’s sales are not highly concentrated, there being no
clients accounting for over 5% 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, for which the same risk evaluation method applies.
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.
18. Stock Options 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.
All the Company’s employees are entitled to participate
in a definite-contribution plan (“PAI-CD Plan) administered by Fundação Itausa Industrial, a
private pension, not-for-profit entity, which is sponsored by Elekeiroz S.A.,
among others. Given the nature of the
plan, there are no actuarial risks, any existing investment risks lying with
the participants. Under current
regulations, the sponsor is responsible for 100% of the amount contributed by
the participants, or R$ 1,164 thousand in fiscal 2006.
19. Statement of EBITDA
Calculation
Parent Company Consolidated Dec/2006 Dec/2005 Dec/2006 Dec/2005 Operating Income before Financial Income,
Equity Accounting and Goodwill Amortization 35.184 66.568 35.173 66.527 (+) Depreciation and Amortization 19.607 15.963 19.607 15.963 (=) EBITDA 54.791 82.531 54.780 82.490
20.
Insurance Coverage
Based on the nature of the Company´s
assets and the risks inherent therein, the management finds that the insurance coverage
is deemed sufficient to cover possible disasters. The insurance coverage of fixed assets and
inventories against miscellaneous risks amounts to R$ 306,000 thousand at
December 31, 2006. (2005 - R$ 328.000 thousand)
21. Provision for Programmed
Maintenance
As required by IT 01/2006 and IBRACON´s
NPC 22 , as well as CVM Deliberation no. 489/2005, Elekeiroz has changed its
practice of setting up provisions for future maintenance of production
units. As a result of this mandatory
change, as shown below, the provisions for future maintenance were reversed and
so did those relating to prior years, under “Shareholders´ Equity”, and that
for fiscal 2006, under “Income for the Year”:
Parent Company and Consolidated Dec/2006 Provision set up until 05/31/2006 4.771 Reversal: Retained Earnings under Shareholders´
Equity 2.205 (-) Tax
Effects (750) Total – Net 1.455 Income
for the Year 2.566 (-) Tax
Effects (872) Total – Net 1.694
22. Taubaté
– SP Unit
In line with the efforts to streamline and optimize
its activities, without
neglecting client services, Elekeiroz S.A. disposed of its Taubaté-SP
production unit on September 30, 2006, the respective assets sale and write-off
figures being recognized as “Non-Operating Income”.