Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ______ No ___X___
Braskem S.A.
and Subsidiaries
Financial Statements
at December 31, 2005 and 2004
and Report of Independent Auditors
1 | We have audited the accompanying balance sheets of Braskem S.A. and the consolidated balance sheets of Braskem S.A. and its subsidiaries as of December 31, 2005 and 2004, and the related statements of income, of changes in shareholders equity and of changes in financial position of Braskem S.A., as well as the related consolidated statements of income and of changes in financial position, for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements. The audits of the financial statements at and for the years ended December 31, 2005 and 2004 of the jointly-controlled entities Politeno Indústria e Comércio S.A. and Petroflex Indústria e Comércio S.A., which are recorded under the equity method, were conducted by other independent auditors. Our opinion, insofar as it relates to the amou
nts of these investments and the profits generated by them, of R$ 223,783 thousand and R$ 45,560 thousand, respectively, in 2005 and R$ 203,465 thousand and R$ 61,451 thousand, respectively, in 2004, is based solely on the opinions of the other independent auditors. |
2 | We conducted our audits in accordance with approved Brazilian auditing standards, which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly, our work included, among other procedures: (a) planning our audit taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the Companies, (b) examining, on a test basis, evidence and records supporting the amounts and disclosures in the financial statements, and (c) assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. |
2
3 |
In our opinion, based on our audit and on the reports issued by other independent auditors, the financial statements audited by us present fairly, in all material respects, the financial position of Braskem S.A. and of Braskem S.A. and its subsidiaries at December 31, 2005 and 2004, and the results of operations, the changes in shareholders equity and the changes in financial position of Braskem S.A., as well as the consolidated results of operations and of changes in financial position, for the years then ended, in accordance with accounting practices adopted in Brazil. |
4 |
As described in Notes 17(c) and 20 to the financial statements, Braskem S.A. and certain subsidiaries are parties to significant lawsuits which seek exemption from payment of social contribution on net income and a lawsuit regarding the validity of Clause 4 of the Collective Labor Agreement of the Union of the Employees of Petrochemical, Plastic Chemicals and Related Companies of the state of Bahia (SINDIQUÍMICA). Based on the opinion of its outside legal advisors and Company management, no material losses are expected from these disputes. Accordingly, these financial statements do not include any provisions to cover the possible effects of these lawsuits. |
5 |
Based on the decision of the Federal Supreme Court (STF), the management of the former indirect subsidiary OPP Química S.A., merged into Braskem S.A. in March 2003, recorded an Excise Tax (IPI) credit in the amount of R$ 1,030,125 thousand in the results for the year ended December 31, 2002. Although the National Treasury has filed an appeal of certain aspects of this decision, as described in Note 9(i), management has concluded, based on the opinion of its legal advisors that this appeal cannot significantly alter the receivable recorded by the subsidiary. |
6 |
The Company belongs to a group of companies comprising the Braskem Group and carries out financial and commercial transactions, in significant amounts, with its subsidiaries and other Group companies, under the conditions described in Note 8 to the financial statements. |
3
7 |
As described in Note 1(b) to the financial statements, the Company and some of its subsidiaries are involved in a broad business and corporate restructuring process, intended to give the industry a more adequate capital structure, greater profitability, competitiveness and economies of scale. The Company and some of its subsidiaries are being, and will continue to be, affected by economic and/or corporate changes resulting from this process, the outcome of which will determine how the operations of the Company and its subsidiaries will develop. Additionally, this process and the matters described in Note 2 have affected the comparability between the financial statements as of December 31, 2005 and the financial statements of the prior year. |
8 |
As described in Notes 11, 12, and 13 to the financial statements, the Company and some of its subsidiaries recognized in their financial statements goodwill on the acquisition of investments based on the fair values of fixed assets and the expected future profitability of the investees. These goodwill balances are being amortized in accordance with the period of return defined in the independent valuation reports and the financial projections prepared by management. The maintenance of the goodwill balances, and the current amortization criteria in the financial statements of future years will depend upon the realization of the projected cash flows and income and expenses used by the valuers in determining the fair values, as well as the future profitability of the investees. |
9 |
Our audits were conducted for the purpose of forming an opinion on the basic financial statements, referred to in the first paragraph, taken as a whole. The statements of cash flows and added value, presented in Attachments I and II to provide supplementary information about the Company and its subsidiaries, are not a required part of the basic financial statements, in accordance with accounting practices adopted in Brazil. This information has been subjected to the auditing procedures described in paragraph 2 and, in our opinion, is fairly presented in all material respects in relation to the financial statements taken as a whole. |
Salvador, February 6, 2006 |
PricewaterhouseCoopers | Marco Aurélio de Castro e Melo | |
Auditores Independentes | Contador CRC 1SP153070/O-3 "S" BA | |
CRC 2SP000160/O-5 "F" BA |
4
Braskem S.A. and Subsidiaries
Balance Sheets at December 31Parent company | Consolidated | |||||||
(Reclassified) | (Reclassified) | |||||||
Assets | 2005 | 2004 | 2005 | 2004 | ||||
Current assets | ||||||||
Cash and cash equivalents | 1,461,090 | 1,556,869 | 2,135,740 | 1,793,955 | ||||
Marketable securities | 3,503 | 145,794 | 21,599 | |||||
Trade accounts receivable | 963,333 | 1,265,921 | 1,493,312 | 1,630,629 | ||||
Inventories | 1,250,072 | 1,259,557 | 1,567,453 | 1,562,414 | ||||
Taxes recoverable | 263,677 | 381,774 | 324,868 | 476,011 | ||||
Deferred income tax and social contribution | 2,406 | 10,651 | ||||||
Dividends and interest on capital receivable | 43,979 | 93,279 | ||||||
Insurance indemnifications | 15,141 | 20,230 | 15,141 | 20,230 | ||||
Advances to suppliers | 37,255 | 26,460 | 40,038 | 31,636 | ||||
Prepaid expenses | 41,622 | 50,609 | 48,800 | 57,752 | ||||
Other accounts receivable | 35,863 | 35,596 | 44,333 | 63,372 | ||||
4,115,535 | 4,690,295 | 5,817,885 | 5,668,249 | |||||
Long-term receivables | ||||||||
Marketable securities | 636,303 | 61,422 | 325 | 61,961 | ||||
Trade accounts receivable | 47,479 | 18,247 | 49,676 | 23,146 | ||||
Inventories | 71,817 | 47,669 | 75,783 | 50,369 | ||||
Taxes recoverable | 395,975 | 175,894 | 559,423 | 251,260 | ||||
Deferred income tax | 277,250 | 301,527 | 292,600 | 315,302 | ||||
Judicial deposits and compulsory loan | 34,899 | 29,173 | 36,522 | 28,934 | ||||
Related parties | 57,181 | 745,765 | 40,560 | 35,181 | ||||
Other accounts receivable | 22,328 | 1,108 | 27,257 | 9,111 | ||||
1,543,232 | 1,380,805 | 1,082,146 | 775,264 | |||||
Permanent assets | ||||||||
Investments | ||||||||
Subsidiaries | 2,024,713 | 3,474,144 | 6,206 | 5,838 | ||||
Associated companies |
25,761 | 4,851 | 25,761 | 4,851 | ||||
Other investments |
8,364 | 8,364 | 34,212 | 35,820 | ||||
Property, plant and equipment | 5,279,334 | 4,823,535 | 5,964,156 | 5,457,558 | ||||
Deferred charges | 1,911,002 | 2,209,529 | 2,660,385 | 3,102,687 | ||||
9,249,174 | 10,520,423 | 8,690,720 | 8,606,754 | |||||
Total assets | 14,907,941 | 16,591,523 | 15,590,751 | 15,050,267 | ||||
5
Braskem S.A. and Subsidiaries
Balance Sheets at December 31
In thousands of reais
Parent company | Consolidated | |||||||
(Reclassified) | (Reclassified) | |||||||
Liabilities and stockholders equity | 2005 | 2004 | 2005 | 2004 | ||||
Current liabilities | ||||||||
Suppliers | 2,529,824 | 2,282,592 | 2,580,173 | 2,059,977 | ||||
Loans and financing | 612,227 | 1,435,094 | 895,004 | 1,785,945 | ||||
Debentures | 9,295 | 4,969 | 9,295 | 4,969 | ||||
Investment fund in credit rights | 225,387 | 22,431 | ||||||
Salaries and social charges | 100,603 | 72,243 | 135,961 | 98,526 | ||||
Taxes and contributions | 167,131 | 158,546 | 192,169 | 179,656 | ||||
Income tax and social contribution | 10,810 | 23,581 | 19,002 | 51,468 | ||||
Dividends and interest on capital payable | 290,953 | 183,873 | 299,175 | 191,648 | ||||
Advances from customers | 34,784 | 24,844 | 42,027 | 47,944 | ||||
Related parties | 1,147,804 | 3,081 | 8 | |||||
Insurance premiums payable | 2,638 | 52,657 | 3,203 | 53,205 | ||||
Other accounts payable | 27,820 | 55,111 | 39,620 | 99,523 | ||||
3,786,085 | 5,441,314 | 4,444,097 | 4,595,300 | |||||
Long-term liabilities | ||||||||
Suppliers | 29,746 | 74,107 | 29,746 | 74,107 | ||||
Loans and financing | 3,331,415 | 3,315,086 | 2,857,472 | 3,059,571 | ||||
Debentures | 1,599,347 | 1,167,870 | 1,599,347 | 1,167,870 | ||||
Investment fund in credit rights | 404,122 | 201,766 | ||||||
Taxes and contributions | 1,158,471 | 1,011,831 | 1,324,358 | 1,216,148 | ||||
Deferred income tax | 8,525 | 9,115 | 10,445 | 11,656 | ||||
Related parties | 3,372 | 671,381 | 3,044 | 115,764 | ||||
Provision for loss on investments | 199,797 | 535,604 | 9,280 | |||||
Private pension plans | 58,554 | 58,606 | 65,116 | 64,779 | ||||
Other accounts payable | 59,873 | 41,329 | 98,785 | 63,350 | ||||
6,449,100 | 6,884,929 | 6,401,715 | 5,975,011 | |||||
Deferred income | ||||||||
Negative goodwill on the purchase of investments | 25,655 | 30,250 | 87,941 | 93,230 | ||||
Minority interests | 121,232 | 203,093 | ||||||
Stockholders equity | ||||||||
Capital | 3,402,968 | 3,402,968 | 3,402,968 | 3,402,968 | ||||
Capital reserves | 396,821 | 344,782 | 396,821 | 344,782 | ||||
Treasury stock | (1,905) | (1,905) | (15,015) | (15,015) | ||||
Revenue reserves | 849,217 | 489,185 | 750,992 | 450,898 | ||||
4,647,101 | 4,235,030 | 4,535,766 | 4,183,633 | |||||
Total liabilities and stockholders equity | 14,907,941 | 16,591,523 | 15,590,751 | 15,050,267 | ||||
6
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and Subsidiaries
Statements of OperationsParent company | Consolidated | |||||||
(Reclassified) | ||||||||
2005 | 2004 | 2005 | 2004 | |||||
Gross Sales | ||||||||
Domestic market | 12,736,053 | 12,136,932 | 14,099,136 | 13,579,361 | ||||
Foreign market | 2,395,862 | 1,957,624 | 2,944,199 | 2,620,838 | ||||
Deductions | ||||||||
Taxes, freights and returns | (3,639,630) | (3,312,950) | (3,968,255) | (3,810,710) | ||||
Net Sales | 11,492,285 | 10,781,606 | 13,075,080 | 12,389,489 | ||||
Cost of products sold and services rendered | (9,276,273) | (8,120,344) | (10,361,716) | (9,222,970) | ||||
Gross profit | 2,216,012 | 2,661,262 | 2,713,364 | 3,166,519 | ||||
Operating expenses (income) | ||||||||
Selling | 199,638 | 229,488 | 261,880 | 290,967 | ||||
General and administrative | 437,909 | 314,577 | 510,082 | 373,329 | ||||
Directors fees | 10,469 | 10,111 | 15,092 | 12,735 | ||||
Equity in the earnings of subsidiaries and assoc.cos. | ||||||||
Equity in the results | (222,129) | (169,952) | (1,287) | (663) | ||||
Amortization of goodwill (negative goodwill), net | 385,717 | 283,988 | 152,539 | 152,729 | ||||
Exchange variation | (21,341) | 8,767 | (3,629) | 9,645 | ||||
Tax incentives | (39,225) | (44,979) | ||||||
Provision (reversal) for losses on subsidiaries | (280,702) | (124,434) | 7,500 | |||||
Other | 1,844 | (3,059) | 1,423 | (16,615) | ||||
Depreciation and amortization | 370,389 | 370,124 | 355,563 | 359,741 | ||||
Financial expenses | 552,804 | 1,074,796 | 675,757 | 1,307,249 | ||||
Interest on capital | 270,000 | 170,000 | 270,000 | 170,000 | ||||
Reversal of interest on capital | (270,000) | (170,000) | (270,000) | (170,000) | ||||
Financial income | 62,109 | 26,072 | 33,619 | (68,632) | ||||
Other operating income, net | (69,891) | (34,283) | (22,753) | (42,994) | ||||
1,426,816 | 1,986,195 | 1,939,061 | 2,340,012 | |||||
Operating profit | 789,196 | 675,067 | 774,303 | 826,507 | ||||
Non-operating expenses, net | (24,865) | (26,544) | (25,156) | (29,820) | ||||
Income before income tax | ||||||||
and social contribution | 764,331 | 648,523 | 749,147 | 796,687 | ||||
Provision for income tax and social contribution | (54,869) | (92,341) | (147,737) | (226,470) | ||||
Deferred income tax and social contribution | (23,687) | 136,497 | (29,641) | 141,375 | ||||
Income before minority | ||||||||
interests | 685,775 | 692,679 | 571,769 | 711,592 | ||||
Minority interests | 54,068 | (24,565) | ||||||
Net income for the year | 685,775 | 692,679 | 625,837 | 687,027 | ||||
Net income per thousand shares | ||||||||
at year end - R$ | 1.894 | 7.650 | ||||||
7
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and subsidiaries
Statements of Changes in Stockholders EquityCapital reserves | Revenue reserves | |||||||||||||||
Retained earnings | ||||||||||||||||
Tax | Legal | Retention | Treasury | (accumulated | ||||||||||||
Capital | incentives | Other | reserve | of profits | stock | déficit) | Total | |||||||||
At December 31, 2003 | 1,887,422 | 743,758 | 557 | (10,137) | (463,281) | 2,158,319 | ||||||||||
Capital increase (Notes 19 (a)) | 1,515,546 | 1,515,546 | ||||||||||||||
Exchange of shares (Note 1(g)) | 8,232 | 8,232 | ||||||||||||||
Absorption of accumulated deficit (Note 18(a)) | (463,281) | 463,281 | ||||||||||||||
Tax incentives | 63,748 | 63,748 | ||||||||||||||
Dividends prescribed | 684 | 684 | ||||||||||||||
Net income for the year | 692,679 | 692,679 | ||||||||||||||
Appropriation of net income: | ||||||||||||||||
Legal reserve | 34,634 | (34,634) | ||||||||||||||
Dividends proposed | (34,178) | (34,178) | ||||||||||||||
Retention of profits | 454,551 | (454,551) | ||||||||||||||
Interest on capital | (170,000) | (170,000) | ||||||||||||||
At December 31, 2004 | 3,402,968 | 344,225 | 557 | 34,634 | 454,551 | (1,905) | 4,235,030 | |||||||||
Tax incentives | 52,039 | 52,039 | ||||||||||||||
Net income for the year | 685,775 | 685,775 | ||||||||||||||
Appropriation of net income: | ||||||||||||||||
Legal reserve | 34,289 | (34,289) | ||||||||||||||
Dividends proposed (Note 19(d)) | (55,743) | (55,743) | ||||||||||||||
Retention of profits | 325,743 | (325,743) | ||||||||||||||
Interest on capital (Note 19(e)) | (270,000) | (270,000) | ||||||||||||||
At December 31, 2005 | 3,402,968 | 396,264 | 557 | 68,923 | 780,294 | (1,905) | 4,647,101 | |||||||||
8
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and Subsidiaries
Statements of Changes in Financial PositionParent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
(Reclassified) | ||||||||
Financial resources were provided by: | ||||||||
Operations | ||||||||
Net income for the year | 685,775 | 692,679 | 625,837 | 687,027 | ||||
Expenses (income) not affecting working capital: | ||||||||
Depreciation, amortization and depletion | 766,340 | 720,432 | 841,493 | 798,033 | ||||
Equity in the earnings of subsidiaries and associated companies | ||||||||
Equity in the results | (222,129) | (169,952) | (1,287) | (663) | ||||
Amortization of goodwill (negative goodwill), net | 385,717 | 283,988 | 152,539 | 152,729 | ||||
Provision (reversal) for losses on investments | (280,702) | (124,434) | 7,500 | |||||
Exchange variation on investments | (21,341) | 8,767 | (3,629) | 9,645 | ||||
Tax incentives | (39,225) | (44,979) | ||||||
Increase (decrease) in interests in investments and other | 2,293 | (2,576) | 2,188 | (16,030) | ||||
Disposals of permanent assets | 1,067 | 2,368 | 5,056 | 5,513 | ||||
Provision for loss of permanent assets | 18,199 | 18,199 | ||||||
Interest, long-term monetary and exchange variations, net | (42,513) | (63,646) | (54.369) | (99,465) | ||||
Deferred income tax | 23,687 | (136,497) | 29,641 | (141,375) | ||||
Minority interests | (54,068) | 24,565 | ||||||
Assignment of right to use | (58,240) | (3,640) | ||||||
Other | (27,031) | 22,171 | (26,088) | 39,015 | ||||
Total funds provided | 1.212.923 | 1.251.499 | 1.474.448 | 1,439.714 | ||||
Stockholders | ||||||||
Capital payment | 1,210,950 | 2,531 | 1,210,950 | |||||
Exchange of treasury stock | 8,232 | 8,232 | ||||||
Advance for future capital increase | 157 | 211 | ||||||
1,219,182 | 2.688 | 1,219,393 | ||||||
Third parties | ||||||||
Loans and financing in long-term liabilities | 1,206,300 | 2,763,808 | 1,606,197 | 2,843,926 | ||||
Transfer from long-term receivables to current assets | 10,520 | 505,337 | 46,850 | 509,993 | ||||
Increase in long-term liabilities | 12,697 | 103,526 | 429,911 | 351,878 | ||||
Decrease in long-term receivables | 59,618 | 35,322 | 123,347 | 44,601 | ||||
Increase in current account liabilities, net | 45,569 | 39,403 | ||||||
Dividends receivable | 336,684 | 192,295 | 2,000 | |||||
Tax incentives | 52,039 | 63,748 | 91,422 | 112,562 | ||||
Net working capital (CCL) of merged companies | 1,010,274 | |||||||
CCL of companies added to/excluded from consolidation | 26,354 | |||||||
Other | 2,286 | 685 | 5,821 | 684 | ||||
2,735,987 | 3,704,124 | 2,305.548 | 3,889,998 | |||||
Total funds provided | 3,948,910 | 6,174,805 | 3,782.684 | 6,549,105 | ||||
9
Braskem S.A. and Subsidiaries
Statements of Changes in Financial Position
In thousands of reais
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Financial resources were used for: | ||||||||
Dividends proposed and interest on capital payable | 325,743 | 204,178 | 331,300 | 209,833 | ||||
Transfer from long-term to current liabilities | 21,915 | 434,318 | 316,070 | 48,388 | ||||
Settlement of financing in long-term liabilities | 900,000 | 617,228 | 1,347,059 | |||||
Decrease in current account liabilities, net | 117,823 | 55,531 | ||||||
Redemption of shares | 9,068 | |||||||
Transfer from long-term to current financing | 481,145 | 2,072,035 | 504,231 | 2,168,329 | ||||
Decrease in long-term liabilities | 3,078 | 119,079 | 3,141 | 126,066 | ||||
Increase in long-term receivables | 976,908 | 67,070 | 507,647 | 123,629 | ||||
Permanent assets | ||||||||
Investments | 121,739 | 75,015 | 22,463 | 23,648 | ||||
Property, plant and equipment | 706,814 | 368,349 | 815,803 | 442,286 | ||||
Deferred charges | 231,099 | 509,823 | 237,071 | 549,395 | ||||
Net working capital of merged company | 162,582 | |||||||
Total funds used | 2,868,441 | 4,912,449 | 3,481,845 | 5,094,164 | ||||
Increase in working capital | 1,080,469 | 1,262,356 | 300,839 | 1,454,941 | ||||
Changes in working capital | ||||||||
Current assets | ||||||||
At the end of the year | 4,115,535 | 4,690,295 | 5,817,885 | 5,668,249 | ||||
At the beginning of the year | 4,690,295 | 2,536,998 | 5,668,249 | 4,092,495 | ||||
(574,760) | 2,153,297 | 149,636 | 1,575,754 | |||||
Current liabilities | ||||||||
At the end of the year | 3,786,085 | 5,441,314 | 4,444,097 | 4,595,300 | ||||
At the beginning of the year | 5,441,314 | 4,550,373 | 4,595,300 | 4,474,487 | ||||
(1,655,229) | 890,941 | (151,203) | 120,813 | |||||
Increase (decrease) in working capital | 1,080,469 | 1,262,356 | 300,839 | 1,454,941 | ||||
10
The accompanying notes are an integral part of these financial statements.
Braskem S.A. and Subsidiaries
Notes to the Financial Statements1 Operations
(a) Braskem S.A. ("Braskem" or the "Company"), with headquarters in Camaçari - BA, and 13 production units located in the States of Alagoas, Bahia, São Paulo and Rio Grande do Sul, engages in the production of basic petrochemicals such as ethene, propene, benzene, and caprolactama, in addition to gasoline and and LPG (cooking gas). The thermoplastic resin segment includes polyethine,e polypropilene, PVC and Polyethilene Teraftalato (PET). The Company also engages in the import and export of chemicals, petrochemicals, fuels, as well as the production and supply of utilities such as steam, water, compressed air and electric power to the companies in the Camaçari Petrochemical Complex in Bahia (Northeast Petrochemical Complex), and the rendering of services to those companies. The Company also invests in other companies, either as a partner or shareholder.
The Company's operations are structured in four Business Units: Basic Petrochemicals, Polyolefins, Vinyls and Business Development. Each unit is responsible for its full business cycle.
(b) Formation of Braskem
Since its inception on August 16, 2002, the Company has undergone a major corporate restructuring process, disclosed to the market through material event notices. The main recent events during 2004 and 2005 can be summarized as follows:
.. The Extraordinary General Meeting held on January 12, 2004 approved the partial spinoff of Odebrecht Química S.A. ("Odequi") with the transfer and merger of the spun-off portion into Braskem. The spun-off assets corresponded to the entire interest of Odequi in Trikem S.A. ("Trikem"), corresponding to 64.43% and 41.02% of its voting and total capital, respectively. The amount of the spun-off portion of Odequi was R$ 1,082,648, according to the appraisal report issued by independent experts based on the balance sheet of Odequi at October 31, 2003. Because of the mentioned partial spin-off, 11,066,514 common shares of Odequi held by the Company were canceled.
.. On January 15, 2004 the Shareholders approved the merger of Trikem into Braskem based on the book value of shareholders equity of the merged company at October 31, 2003, in the amount of R$ 656,040. The exchange ratio of Trikem shares for Braskem shares was determined by independent experts based on the respective net equities at market values as of October 31, 2003.
After the merger of Trikem the Company's capital increased by R$ 304,596 through the issue of 8,136,165,484 Class A preference shares, to R$ 2,192,018, dividided into
11
Braskem S.A. and Subsidiaries
Notes to the Financial Statements25,730,061,841 common, 51,230,857,903 Class A preference, and 229,154,800 Class B preference shares (Note 19(a)).
.. Following the acquisition of 100% of the shares from minority shareholders, on March 31, 2004, the Extraordinary General Meeting approved the merger of the then subsidiary COPENE MONÔMEROS ESPECIAIS S.A. (Monômeros), based on the appraisal report of the value of shareholders equity at December 31, 2003, in the amount of R$ 115,832. The equity variances of Monômeros in the first quarter of 2004 were taken to the Company's income as an equity adjustment.
.. On December 14, 2004, the Board of Directors approved the use of 505,050,433 Class A preference shares of the Company, held in treasury, to be exchanged for 47,846,610 preferred shares issued by the subsidiary Polialden Petroquímica S.A. ("Polialden"). On this transaction, the Company recorded negative goodwill of R$ 28,842. The Brazilian Securities Commission (CVM) approved the exchange of stock outside the stock market or over-the-counter market.
.. On December 15, 2004, the Company acquired from its subsidiary Braskem Overseas Inc. (Overseas), formerly Odequi Overseas Inc., 514,322 preference shares, representing 3.94% of the total capital of the subsidiary Odequi. Following the acquisition, the Company holds 100% of the capital of Odequi.
.. In order to obtain a capital structure more appropriate for the operations of the subsidiary Braskem Importação e Exportação Ltda. (Braskem Importação), formerly OQPA Importação e Exportação Ltda., at December 31, 2004, the Company increased the capital of this subsidiary by R$ 99,215, with the issue of 99,215,010 quotas, by capitalizing the receivable held in current account in the amount of R$ 98,215 and R$ 1,000 from its own funds. This transaction generated: (i) goodwill of R$ 98,999, fully amortized; (ii) reversal of the provision for loss in investee for the same amount.
.. In February 2005, under the Share Purchase and Sale Agreement entered into with Petrobras Química Petroquisa S.A. ( Petroquisa ), the Company acquired 23,465,165 shares corresponding to 13.74% of the capital of CINAL, for R$ 13,402. On this transaction, the Company recorded goodwill of R$ 433, fully amortized due to lack of economic justification.
12
Braskem S.A. and Subsidiaries
Notes to the Financial Statements.. The Extraordinary General Meeting, held on March 31, 2005, approved the merger of subsidiary Odequi, based on the appraisal report of the value of shareholders equity, issued by independent appraisers, at December 31, 2004, in the amount of R$ 1,340,749. The equity variations in the first quarter of 2005 were taken to Braskem's income as an equity adjustment.
.. On April 25, 2005, the Company increased the capital of Braskem Incorporated Limited (Braskem Inc), current corporate name of CPN Incorporated Limited (CPN Inc) by US$ 40.000 thousand (equal to R$ 101,400), from US$ 95 thousand to US$ 40.095 thousand, with the issue of 40,000,000 quotas, by capital contribution in cash. This transaction generated: (i) goodwill of R$ 6,579, fully amortized; and (ii) reversal of the provision for loss in the investee of the same amount.
.. The Extraordinary General Meeting held on May 30, 2005, approved a capital increase of Braskem Participações S.A. ( Braskem Participações), current corporate name of Copene Participações S.A., by R$ 266, with no issue of shares, by verifying the market value of Braskem Importação issued quotas.
.. At a meeting held on June 22, 2005, the Boards of Directors of the Company and Petroquisa approved capital expenditures of US$ 240 million to build a plant for the production of polypropilene in Paulínia, São Paulo. The investment will be made by the joint venture formed at the time of the organization of Petroquímica Paulínia S.A. (Petroquímica Paulínia), on September 16, 2005.
.. On April 29, 2005, as disclosed in a Relevant Event notice, Odebrecht S.A. (Odebrecht), Nordeste Química S.A. - Norquisa, ODBPAR Investimentos S.A. and Petroquisa executed the Second Amendment to the Braskem Shareholders Agreement, with the Company and Petróleo Brasileiro S.A. Petrobras (Petrobras), as intervening parties. Under this amendment, Petroquisa was granted an option to increase its share in the voting capital of the Company by up to 30%, through the subscription of new shares.
Should the option be exercised, the new shares will be paid by Petroquisa through: (i) percentage holding in petrochemical companies located at the Triunfo Petrochemical Complex, in Rio Grande do Sul, and (ii) percentage holding in other petrochemical companies considered of a strategic nature by the Company ((i) and (ii) are collectively referred to as Assets).
13
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsIf the value of the Assets is not sufficient for Petroquisa to attain the percentage defined for it in the voting capital of the Company, within the limit of 30%, Odebrecht, ODBPAR and Norquisa will be obliged to meet the shortfall by selling shares to Petroquisa, under the same Asset valuation terms provided for in the Amendment. If the value of the Assets gives rise to new common shares in excess of the limit of 30% interest of Petroquisa in the voting capital of the Company, then the difference will be paid up by Petroquisa through Class A preference shares.
The Option shares will be valued according to the economic value of the Company, determined based on the discounted cash flow methodology, with no control premium. Assets will also be valued in accordance with the economic value of the companies involved, determined based on the discounted cash flow for the same base date.
On September 29, 2005, in accordance with the timing set forth in the Second Amendment, Petroquisa identified the following assets to be assessed for payment of the Option Shares, should the Option be exercised:
- 15.63% of the total capital of Copesul Companhia Petroquímica do Sul (Copesul);
- 85.04% of the total capital of Petroquímica Triunfo S.A.; and
- 40.00% of the total capital of Petroquímica Paulínia.
Odebrecht accepted the assets identified by Petroquisa to be contributed to the Company, as provided for in the Second Amendment.
The parties also agreed that the time period for the exercise of the Option, originally December 31, 2005, be postponed to March 31, 2006, while all other Second Amendment provisions remained unaltered.
.. On October 18, 2005, the Company sold to Braskem Distribuidora Ltda. (Braskem Distribuidora) 900,000 shares in Braskem Cayman Limited (Cayman), representing 100% of its capital, for R$ 174,696, with no goodwill.
.. On October 31, 2005, the Company sold to Cayman 100% of the shares in Lantana and Overseas for R$ 50, in accordance with the valuation by experts. This transaction gave rise to a goodwill of R$22, fully amortized.
.. On November 30, 2005, the Company increased the capital of Braskem Distribuidora from R$ 3,542 to R$ 316,490, by the realization of credits held by the Company with the subsidiary, in the amount of R$ 312,948. This transaction gave rise to a goodwill of R$ 223,647 thousand, fully amortized.
14
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsThe Company and its subsidiaries, as participants in the restructuring process of the Brazilian petrochemical industry, may be affected by economic and/or corporate aspects as a result of the outcome of this process.
(c) Initial Public Offer of Shares ("Global Offer")
On April 1, 2004, the Board of Directors approved the initial public offer of Class A preference shares in Brazil and overseas, through the increase in capital within the authorized capital limit.
On September 22 and 27, 2004, the Board of Directors approved the issues of 12,285,000,000 and 1,170,000,000 shares, respectively, in the amount of R$ 90.00 per thousand shares, to be subscribed in Brazil and US$ 31.38 per thousand shares, to be subscribed overseas.
Financial settlement occurred on September 28, 2004, after the payment of capital in the amount of R$ 1,210,950 (Note 19(a)).
(d) Reverse-split of shares and split of American Depositary Shares ("ADS")
In order to improve negotiations and increase the liquidity of the Companys shares, the Extraordinary General Meeting, held on March 31, 2005, approved the reverse split of shares, including all types and classes, in the proportion of 250 shares for each share. As a result, the split of the ADS of Porsken was also approved, in the proportion of 2 ADS for each existing ADS.
Shareholders were given a 30-day period, as from April 5, 2005, to adjust their positions. After this date, the remaining share fractions were rounded and auctioned on the São Paulo Stock Exchange (Bovespa). The auction proceeds were transferred to the shareholders on a pro rata basis, through current account deposits.
As from May 16, 2005, the shares are quoted and traded in unit batches on Bovespa and the New York Stock Exchange (NYSE), as a reverse split and split of shares, respectively.
15
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(e) Corporate governance
In February 2003, Braskem enrolled in Level 1 of Differentiated Corporate Governance of the Bovespa, which mainly commits the Company to improvements in providing information to the market and in the dispersion of shareholdings, and attained with the Global Offer (Note 1(c)) approximately 47% of the free float. The Company intends to reach Level 2 of Bovespas Governance in due time.
On December 2, 2005, the Company was one of 28 companies selected to comprise the first Corporate Sustainability Index (ISE) focused on the financial market. The index, designed by Bovespa, together with capital market professional entities, as well as Fundação Getúlio Vargas, Instituto Ethos and Ministry of Environment, is intended to provide investors with a portfolio option made up of shares in companies known for their social responsibility commitment and corporate sustainability. The index also aims at fostering and encouraging other businesses to engage in sound corporate practices.
(f) Administrative Council for Economic Defense - CADE
In accordance with Article 54, § 3 of Law 8,884/94, the concentration resulting from the change in control of Braskem was notified in a timely manner to the anti-trust authorities. In July 2002, the Secretariat for Economic Monitoring of the Finance Ministry (SEAE) issued a favorable opinion on the transaction. In May 2003, the favorable opinion of the Secretariat for Economic Rights (SDE) was published without any restrictions. The transaction was submitted for the review and analysis of the Administrative Council for Economic Defense (CADE), and in November 2003 CADE Prosecution Service also approved the transaction without any restrictions. In February 2004, the transaction was examined by the Federal Department of Public Prosecution, which also recommended the approval of the transaction. On September 14, 2005, CADE approved the transaction by unanimous vote, with no restrictions.
2 Presentation of the Financial Statements
The financial statements were prepared in accordance with the accounting practices adopted in Brazil and also in compliance with the standards and procedures determined by the Brazilian Securities Commission (CVM).
16
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsPursuant to CVM Deliberation 489/05, the Company now states contingent liabilities net of the corresponding judicial deposits. Until December 31, 2004, judicial deposits were fully stated in long-term receivables. Accordingly, in the 2004 balance sheet, the amount of R$ 131,416 (consolidated R$ 170,263) has a contra entry in Taxes and contributions under long-term liabilities (Note 16).
To improve the presentation and comparison between the financial statements for years 2005 and 2004, the consolidated statements for 2004 were adjusted to reflect: (i) the merger of Special Purpose Entities (Entidades de Propósito Específico -EPEs); (ii) the partial merger of Petroflex Indústria e Comércio S.A. (Petroflex); and (iii) the elimination of the partial merger of Companhia de Desenvolvimento Rio Verde (CODEVERDE).
The comparison of the Company financial statements with the previous year must take into account the merger of Odequi (Note 1 (b)), carried out on March 31, 2005. The balance sheet of Odequi as of December 31, 2004, base date of the merger, is shown below:
Odebrecht Química S.A.
Balance sheet
Assets | Dec/04 | Liabilities | Dec/04 | |||
Current assets | Current assets | |||||
Cash and cash equivalents | 2 | Financing | 196,992 | |||
Interest on capital receivable | 7,911 | Taxes payable | 4,731 | |||
Taxes recoverable | 13,274 | Interest on capital payable | 219 | |||
Related companies | 1,095,808 | |||||
201,942 | ||||||
1,116,995 | Long-term liabilities | |||||
Long-term asset | Related companies | 12 | ||||
Related companies | 342,289 | Taxes payable | 17,502 | |||
342,289 | 17,514 | |||||
Permanent | Stockholders' equity | |||||
Investments - Copesul | 95,420 | Capital | 1,276,547 | |||
Deferred charges | 5,501 | Legal reserve | 5,554 | |||
Revenue reserves | 58,648 | |||||
100,921 | ||||||
1,340,749 | ||||||
Total liabilities and | ||||||
Total assets | 1,560,205 | stockholders' equity | 1,560,205 | |||
17
Braskem S.A. and Subsidiaries
Notes to the Financial Statements
3 Significant Accounting Practices
(a) Use of estimates
In the preparation of the financial statements, it is necessary to use estimates to record certain assets, liabilities and transactions. The financial statements of the Company and its subsidiaries include, therefore, various estimates regarding the selection of the useful lives of property, plant and equipment, deferred charges amortization periods, as well as provisions for contingencies, income tax and other similar amounts.
(b) Determination of net income
Net income is determined on the accrual basis of accounting.
Sales revenues are recognized when the risk and product title are transferred to customers. This transfer occurs when the product is delivered to customers or carriers, depending on the type of sales.
The provisions for income tax and Value-Added Tax on Sales and Services (ICMS) are recorded gross of the tax incentive portions, with the amounts related to tax exemption and reduction recorded in a capital reserve.
In accordance with the requirements of CVM Deliberation 273 and Instruction 371, the deferred income tax is stated at probable realizable value, expected to occur as described in Note 17 (b).
Monetary and foreign exchange variations on assets and liabilities are classified in Financial income and Financial expenses, respectively.
The Company has recognized in financial results for the year the market value of derivative contracts relating to liabilities indexed to foreign currency or international interest rates. At December 31, 2005, the Company had outstanding derivative contracts, all of them indexed to foreign currency financing, these contracts had a negative market value of R$ 24,966 (consolidated negative value of R$ 15,790). At December 31, 2004, the Company had no outstanding contracts.
Earnings per share are calculated based on the number of outstanding shares on the balance sheet date.
18
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(c) Current assets and long-term receivables
Cash and cash equivalents comprise primarily cash deposits and marketable securities or investments maturing within 90 days (Note (4)).
Marketable securities are valued at the lower of cost or market, including accrued income earned to the balance sheet date. Derivative instruments are valued at their adjusted fair values, based on market quotations for similar instruments against future exchange and interest rates.
The allowance for doubtful accounts is set up at an amount considered sufficient to cover estimated losses on the realization of the receivables, taking into account the Company's loss experience, and includes amounts in litigation. For a better calculation of the doubtful accounts the Company analyzes, on a quarterly basis, the amounts and characteristics of trade accounts receivable.
Inventories are stated at average purchase or production cost, which is lower than replacement cost or realization value. Imports in transit are stated at the accumulated cost of each import. Inventories of consumable materials (Warehouse) are classified in current assets or long-term receivables, considering their history of consumption.
Deferred income tax is recognized upon favorable scenarios for its realization. Periodically, the amounts recorded are revalued in accordance with CVM Deliberation 273/98 and CVM Instruction 371/02.
Other assets are shown at realizable values, including, where applicable, accrued income and monetary variations, or at cost in the case of prepaid expenses.
19
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(d) Permanent assets
These assets are stated at cost plus restatements for inflation through December 31, 1995 considering the following:
.. investments in subsidiaries, jointly-controlled entities and associated companies are accounted for on the equity method, plus unamortized goodwill/negative goodwill. Goodwill is calculated as the difference between the amount paid and the book value of net assets acquired. Goodwill is based on the expected future profitability of the investees and appreciation of the assets, and is amortized over a period of up to 10 years. Goodwill in merged companies is transferred to property, plant and equipment and deferred charges, when based on asset appreciation and future profitability of the investees, respectively. Other investments are carried at the cost of acquisition;
.. interests in foreign subsidiaries are accounted for by the equity method and foreign exchange variances on assets is recorded in a separate account under operating profits. Balance sheet and income statement accounts are converted into Brazilian currency at the exchange rates ruling as of the financial statement date, according to CVM Deliberation 28 of February 5, 1986;
.. property, plant and equipment is shown at acquisition or construction cost and, as from 1997, includes capitalized interest incurred during the construction or expansion of production capacity of the plants;
.. depreciation of property, plant and equipment is recorded on the straight-line basis at the rates mentioned in Note 12;
.. amortization of deferred charges is recorded over a period of up to ten years, as from the time benefits begin to accrue;
.. programmed maintenance shutdowns are carried out at intervals from one to six years. Expenses that increase the useful lives of assets or result in higher production efficiency are recorded in deferred charges and amortized in production cost until the beginning of the next maintenance shutdown.
20
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(e) Current and long-term liabilities
These are stated at known or estimated amounts, including accrued charges and monetary and exchange adjustments, as applicable.
The provision for loss in subsidiaries is recorded based on the net unsecured liabilities (excess of liabilities over assets) of these companies, and is recorded as a long-term liability against the equity results.
Defined benefit pension plans are accounted for based on the calculations made by independent actuaries, which in turn are based on assumptions provided by the Company.
The provisions are recorded based on (i) current legislation (even when management believes that this legislation may be considered unconstitutional); (ii) the need to eliminate contingent gains arising from the offset of credits resulting from litigation; and (iii) estimated payments of indemnities considered probable.
(f) Deferred income
Deferred income includes negative goodwill of merged companies, supported by the expected future profitability.
21
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(g) Consolidated financial statements
The consolidated financial statements include the financial statements of the Company and its subsidiaries and jointly-controlled entities, joint ventures and Special-purpose Companies (EPEs) in which the Company has direct or indirect share control, as shown below:
Direct interest in | ||||||||
total capital - % | ||||||||
Head office | ||||||||
(country) | 2005 | 2004 | ||||||
Subsidiaries |
||||||||
Cayman | (i) (xvi) | Cayman Isl. | 100.00 | |||||
Braskem Importação | (ii) | Brazil | 100.00 | |||||
Braskem Inc. | (iii) | Cayman Isl. | 100.00 | 100.00 | ||||
Braskem International Ltd. ("Braskem International") | (iv) | Bahamas | 100.00 | 100.00 | ||||
Braskem Participações | Brazil | 100.00 | 100.00 | |||||
CINAL | (v) | Brazil | 86.82 | 63.03 | ||||
Braskem Distribuidora | (vi) | Brazil | 100.00 | 100.00 | ||||
CPP - Companhia Petroquímica Paulista ("CPP") | (vii) | Brazil | 79.70 | 90.71 | ||||
Investimentos Petroquímicos Ltda. ("IPL") | (viii) | Brazil | 100.00 | |||||
Lantana | (xvii) | Bahamas | 100.00 | |||||
Odequi | (ix) | Brazil | 100.00 | |||||
Overseas | (xvii) | Cayman Isl. | 100.00 | |||||
Polialden | Brazil | 63.68 | 63.68 | |||||
Tegal Terminal de Gases Ltda. ("Tegal") | Brazil | 90.79 | 90.79 | |||||
Jointly-controlled entities | (xi) | |||||||
CETREL S.A. - Empresa de Proteção Ambiental ("CETREL") | (xii) | Brazil | 48.02 | 40.56 | ||||
COPESUL | (xiii) | Brazil | 29.46 | 23.67 | ||||
Politeno Indústria e Comércio S.A. ("Politeno") | (xiv) | Brazil | 33.96 | 33.88 | ||||
Petroflex | (x) | Brazil | 20.12 | 20.12 | ||||
Petroquímica Paulínia | (xviii) | Brazil | 93.75 | |||||
Special-purpose entities |
(xv) | |||||||
Chemical Fundo de Investimento em Direitos Creditórios | ||||||||
(Fundo Chemical) | (xix) | Brazil | 11.58 | 10.65 | ||||
Chemical Fundo de Investimento em Direitos Creditórios | ||||||||
(Fundo Chemical II) | (xix) | Brazil | 9.09 | |||||
CSAM Orion Fund Limited (Orion) | (xx) | Cayman Isl. | 100.00 | |||||
Fundo Parin | Guernsey | 100.00 | ||||||
Guardian-Protected Cell Company (Guardian) | Guernsey | 100.00 | 100.00 | |||||
Sol-Fundo de Aplicação em Cotas de Fundos de Investimento | ||||||||
(FIQ Sol) | Brazil | 100.00 | 100.00 |
22
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsInterest in total capital - % | ||||||||
Head office | ||||||||
(country) | 2005 | 2004 | ||||||
Direct subsidiary of Poliaden | ||||||||
Poliaden America Inc. ("Poliaden America") | USA | 100.00 | 100.00 | |||||
Direct subsidiary of Braskem Participações | ||||||||
IPL | (viii) | Brazil | 100.00 | |||||
Direct subsidiary of Copesul | ||||||||
COPESUL International Trading Inc. | Bahamas | 100.00 | 100.00 | |||||
Direct subsidiary of IPL | ||||||||
Braskem Importação | (ii) | Brazil | 100.00 | |||||
Direct subsidiary of Braskem Distribuidora | ||||||||
Cayman | (xvi) | Cayman Islands | 100.00 | |||||
Direct subsidiaries of Cayman | ||||||||
Overseas | (xvii) | Cayman Islands | 100.00 | |||||
Lantana | (xvii) | Bahamas | 100.00 |
(i) | Braskem Cayman Ltd (Cayman) is the new corporate name of CPC Cayman Ltd. | |
(ii) | In May 2005, 100% of this investment was contributed as capital increase to Braskem Participações and, in July 2005, 100% of this investment was contributed to IPL . |
|
(iii) | Braskem Incorporated Ltd (Braskem Inc) is the new corporate name of CPN Incorporated Ltd. | |
(iv) | Braskem International Ltd is the new corporate name of Odequi Investments Ltd. This subsidiary is being wound up. | |
(v) | In February 2005, the Company shares of CINAL held by Petroquisa and, in June 2005, the Company increased its holding as a result of the redemption of Class B shares by this subsidiary. | |
(vi) | Braskem Distribuidora Ltda. (Braskem Distribuidora) is the new corporate name of CPN Distribuidora de Combustíveis Ltda. | |
(vii) | Change in participation in September 2005, as a result of the disproportionate capitalization of advances for future capital increases. | |
(viii) | In July 2005, 100% of this investment was contributed to Braskem Participações. | |
(ix) | Company merged on March 31, 2005. | |
(x) | Investment consolidated on a pro rata basis, as a result of the new position in the investee management. | |
(xi) | Investments consolidated on a pro rata basis, pursuant to CVM Instruction 247/96. | |
(xii) | Change in interest in September 2005, as a result of the disproportionate capitalization of advances for future capital increases and cancellation of preference shares. On a consolidated basis, the interest in Cetrel, including the shares held by Polialden and CINAL, is 52.95%. In spite of this interest, the Company maintains the joint control as a result of by-laws provisions. | |
(xiii) | Following the merger of Odequi, direct interest in the capital of Copesul is equal to 29.46%. | |
(xiv) | The jointly-controlled subsidiary Politeno issued new shares through the capitalization of the tax incentive reserve, increasing Braskems interest. | |
(xv) | In August 2004, CVM issued Instruction 408/04 providing for the inclusion of EPEs in the consolidated financial statements of publicly-held companies. Subsequently, on February 25, CVM Circular Letter 01/2005 provided additional information to support the concept of activities subject to consolidation. |
|
(xvi) | Investment sold to Braskem Distribuidora on October 18, 2005. | |
(xvii) | Investment sold to Cayman on October 31, 2005. | |
(xviii) | Subsidiary under joint control with Petroquisa, according to by-laws provisions. Upon completion of the transaction, Braskem interest in this joint venture will amount to 60% (Notes 1(b) and 11(b)). |
|
(xix) | Interest corresponding to subordinated quotas held by Braskem. | |
(xx) | Fund wound up in the 4th quarter of 2005. |
23
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsIn the consolidated financial statements, the intercompany investments and the equity adjustment, as well as 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 sheets and statements of operations, respectively. Minority interests correspond to the respective participations in the capital of CINAL, CPP, Polialden and Tegal.
Goodwill not eliminated on consolidation is reclassified to a specific account in permanent assets, in accordance with CVM Instruction 247/96. Negative goodwill is reclassified to "Deferred income.
For a better presentation of the consolidated financial statements, the cross-holding between the subsidiary Braskem Participações and the Company, which arose from the corporate restructuring, was reclassified to treasury shares. Considering the reverse split of shares (Note 1(d)), the subsidiary Braskem Participações now holds 580,331 common and 290,165 Class A preferred shares, representing 0.24% of the Companys total capital.
Pursuant to paragraph 1, Article 23 of CVM Normative Instruction 247/96 and authorization by CVM Letter SNC 003/2006, the Company has not consolidated on a pro rata basis, in its financial statements for the year ended 2005 compared to 2004, the financial statements of jointly-controlled subsidiary CODEVERDE. This subsidiary is in a pre-operating stage. Its information does not show significant changes and does not lead to distortions in the Company's consolidated financial statements.
24
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsCODEVERDE adjusted balance sheet (unaudited) is summarized as follows:
2005 | 2004 | |||
Assets | ||||
Current assets | 405 | 182 | ||
Long-term receivables | 88 | 74 | ||
Permanent assets | 43,480 | 42,606 | ||
Total assets | 43,973 | 42,862 | ||
Liabilities and stockholders equity | ||||
Current liabilities | 100 | 61 | ||
Long-term liabilities | 1,059 | 991 | ||
Stockholders equity | 42,814 | 41,810 | ||
Total liabilities and stockholders equity | 43,973 | 42,862 | ||
The reconciliation between the parent company and consolidated shareholders equity and the net income for the year is as follows:
Stockholders equity | Net income for the year | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Parent company |
4,647,101 | 4,235,030 | 685,775 | 692,679 | ||||
Cross holding classified as treasury shares | (13,110) | (13,110) | ||||||
Effects of EPEs consolidation | (3,830) | 3,830 | (3,830) | |||||
Exclusion of profits in subsidiaries inventories | (5,188) | (5,946) | 758 | (5,946) | ||||
Exclusion of the gain on the sale of investment between related | ||||||||
parties | (38,476) | (38,476) | ||||||
Exclusion of the gain on financial transactions between related | ||||||||
parties | (14,044) | (14,044) | ||||||
Reversal of amortization of goodwill on the sale of investments | ||||||||
between related parties | 14,085 | 9,965 | 4,120 | 4,124 | ||||
Exclusion of the gain on the assignment of right of use between | ||||||||
related parties | (54,602) | (54,602) | ||||||
Consolidated | 4,535,766 | 4,183,633 | 625,837 | 687,027 | ||||
The balance sheets and statements of income of jointly-controlled subsidiaries and EPEs can be summarized as follows:
25
Braskem S.A. and subsidiaries
Notes to the Financial StatementsCopesul | CETREL (i) |
Petroflex (i) |
||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||
Assets | ||||||||||||
Current assets | 907,875 | 753,989 | 24,337 | 27,760 | 499,468 | 591,246 | ||||||
Long-term receivables | 154,906 | 294,830 | 15,007 | 12,937 | 29,121 | 35,719 | ||||||
Permanent assets | 1,125,823 | 1,158,752 | 111,503 | 108,287 | 384,339 | 330,415 | ||||||
Total assets | 2,188,604 | 2,207,571 | 150,847 | 148,984 | 912,928 | 957,380 | ||||||
Liabilities and stockholders equity | ||||||||||||
Current liabilities | 701,645 | 745,668 | 20,911 | 26,402 | 474,929 | 363,671 | ||||||
Long-term liabilities | 246,450 | 307,102 | 31,945 | 65,982 | 159,108 | 337,963 | ||||||
Stockholders equity | 1,240,509 | 1,154,801 | 97,991 | 56,600 | 278,891 | 255,746 | ||||||
Total liabilities and stockholders equity | 2,188,604 | 2,207,571 | 150,847 | 148,984 | 912,928 | 957,380 | ||||||
Statement of income | ||||||||||||
Net sales | 5,552,571 | 5,374,145 | 98,218 | 81,769 | 1,373,204 | 1,305,961 | ||||||
Cost of goods sold and services rendered | (4,610,378) | (4,417,605) | (79,561) | (64,099) | (1,088,881) | (1,043,316) | ||||||
Gross profit | 942,193 | 956,540 | 18,657 | 17,670 | 284,323 | 262,645 | ||||||
Operating income (expenses), net | (151,133) | (155,349) | (11,129) | (25,279) | (160,756) | (134,042) | ||||||
Non operating income (expenses), net | 5,406 | (805) | 270 | (1,054) | (1,503) | 471 | ||||||
Net income (loss) before income tax and | ||||||||||||
social contribution |
796,466 | 800,386 | 7,798 | (8,663) | 122,064 | 129,074 | ||||||
Income tax and social contribution | (230,503) | (241,969) | (725) | (33,742) | (30,475) | |||||||
Net income (loss) for the year | 565,963 | 558,417 | 7,073 | (8,663) | 88,322 | 98,599 | ||||||
(i) Financial statements excluding the revaluation reserve. |
26
Braskem S.A. and subsidiaries
Notes to the Financial StatementsPetroquímica | ||||||
Politeno | Paulínia | |||||
2005 | 2004 | 2005 | ||||
Assets | ||||||
Current assets | 294,271 | 303,379 | 7,500 | |||
Long-term receivables | 164,016 | 144,394 | ||||
Permanent assets | 191,251 | 191,303 | 58,240 | |||
Total assets | 649,538 | 639,076 | 65,740 | |||
Liabilities and stockholders equity | ||||||
Current liabilities | 148,935 | 155,886 | ||||
Long-term liabilities | 11,000 | 32,695 | 17,740 | |||
Stockholders equity | 489,603 | 450,495 | 48,000 | |||
Total liabilities and stockholders equity | 649,538 | 639,076 | 65,740 | |||
Statement of income | ||||||
Net sales | 1,169,853 | 1,119,386 | ||||
Cost of goods sold and services rendered | (950,170) | (865,385) | ||||
Gross profit | 219,683 | 254,001 | ||||
Operating income (expenses), net | (116,885) | (112,891) | ||||
Non operating income (expenses), net | (5,640) | (11) | ||||
Net income (loss) before income tax and | ||||||
social contribution |
97,158 | 141,099 | ||||
Income tax and social contribution | (33,787) | (44,606) | ||||
Net income for the year | 63,371 | 96,493 | ||||
27
Braskem S.A. and subsidiaries
Notes to the Financial StatementsFundo | Fundo | |||||||||||||||||
Parin | Guardian | FIQ Sol | Fundo Chemical | Chemical II | Orion | |||||||||||||
2005 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||
Assets | 560,575 | 1,002,769 | 994,348 | 545,649 | 402,081 | 228,373 | 226,151 | 444,550 | 553,721 | |||||||||
Liabilities | 187 | 469 | 7 | 19 | 339 | 33 | ||||||||||||
Stockholders equity | 560,388 | 1,002,300 | 934,348 | 545,642 | 402,062 | 228,034 | 226,151 | 444,517 | 553,721 | |||||||||
Total liabilities and stockholders equity | 560,575 | 1,002,769 | 934,348 | 545,649 | 402,081 | 228,373 | 226,151 | 444,550 | 553,721 | |||||||||
Net income for the year | 9,300 | 48,497 | 19,325 | 70,580 | 92,391 | 39,024 | 3,830 | 4,518 | 31,429 | |||||||||
28
Braskem S.A. and subsidiaries
Notes to the Financial Statements(h) Supplementary information
In order to improve information provided to the market, the Company presents its Statements of Cash Flow and Added Value as supplementary information (Attachments I and II).
4 Cash and Cash Equivalents
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Cash and banks | 110,759 | 137,431 | 141,953 | 151,915 | ||||
Financial investments | ||||||||
Domestic | 641,285 | 387,613 | 740,552 | 525,063 | ||||
Abroad | 709,046 | 1,031,825 | 1,253,235 | 1,116,977 | ||||
1,461,090 | 1,556,869 | 2,135,740 | 1,793,955 | |||||
The domestic investments are mainly represented by quotas of a Braskem exclusive fund, which, in turn, holds quotas of domestic investment funds, such as fixed income investment funds, multiportfolio funds, investment fund quotas in credit rights, and other fixed-income securities. Foreign investments mainly comprise an investment fund portfolio, regularly reassessed for risk by the Company. The fund amounts are highly liquid and are recorded at realizable values.
The Company maintains cash and cash equivalents sufficient to cover: (i) its working capital needs; (ii) investments anticipated in the business plan; and (iii) adverse conditions that may reduce the available funds.
Such funds are allocated in order to: (i) have a return compatible with the maximum volatility determined by the investment and risk policy; (ii) obtain a high spread of the consolidated portfolio; (iii) avoid the credit risk arising from the concentration in a few securities; and (iv) follow the market interest rate changes both in Brazil and abroad.
29
Braskem S.A. and subsidiaries
Notes to the Financial Statements5 Marketable Securities
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Current assets | ||||||||
Subordinated quotas of investment fund | ||||||||
credit rights | 3,913 | 4,664 | ||||||
Derivative transactions | 3,466 | 19,792 | ||||||
Investment and other funds | 37 | 122,089 | 16,935 | |||||
3,503 | 145,794 | 21,599 | ||||||
Long-term receivables | ||||||||
Investment funds | 551,235 | |||||||
Associated company shares held for sale | 22,138 | 22,138 | ||||||
Debentures with share in profit | 7,305 | 7,201 | 7,201 | |||||
Subordinated quotas of investment fund - | ||||||||
credit rights | 66,791 | 27,867 | 3,109 | |||||
Securitization reserve | 24,955 | |||||||
FINOR and other securities | 10,972 | 4,216 | 325 | 4,558 | ||||
636,303 | 61,422 | 325 | 61,961 | |||||
Total | 639,806 | 61,422 | 146,119 | 83,560 | ||||
Associated company shares held for sale correspond to the book value of shares in Borealis Brasil S.A. ("Borealis"), representing 20% of its total capital. In June 2005, the balance of such investment was transferred to permanent assets, in the line Interests in associated companies line, as the decision to sell the shares was reversed.
Investment funds comprise a portfolio of foreign investment funds, the risk of which is regularly reassessed by the Company. These funds are recorded at realizable value.
Investment fund resources under long-term receivables refers to transactions to finance subsidiaries included in the consolidated financial statements.
30
Braskem S.A. and subsidiaries
Notes to the Financial Statements6 Trade Accounts Receivable
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Customers | ||||||||
Domestic market | 602,783 | 890,711 | 1,300,926 | 1,254,153 | ||||
Foreign market | 480,974 | 439,722 | 360,564 | 537,560 | ||||
Advances on bills of exchange delivered | (64) | (31,243) | (82,941) | |||||
Allowance for doubtful accounts | (72,945) | (46,201) | (87,259) | (54,997) | ||||
1,010,812 | 1,284,168 | 1,542,988 | 1,653,775 | |||||
Long-term receivables | (47,479) | (18,247) | (49,676) | (23,146) | ||||
Current assets | 963,333 | 1,265,921 | 1,493,312 | 1,630,629 | ||||
The Company has introduced an additional policy for realizing domestic trade accounts, by selling its receivables to investment funds with credit rights, which pay the Company earlier than the normal maturity of these customer receivables. On December 12, 2005, the Company completed the issue of a new Receivables Fund (Fundo Chemical II), in the amount of R$ 400,000, maturing within 36 months and to be amortized as from the 31st month, managed by Banco Bradesco, at the contractual rate of 103.75% of CDI.
The subordinated quotas held by Braskem were eliminated upon consolidation, while senior quotas held by investors are stated in current and long-term liabilities, as Investment fund in credit rights, in the amounts of R$ 225,387 and R$ 404,122, respectively (2004 R$ 22,431 and R$ 201,766).
During 2004, urecoverable receivables reflected in the provisions in the amount of R$ 95,358 (consolidated R$ 102,383) were written off.
Changes in the allowance for doubtful accounts are as follows:
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
At the beginning of the year | 46,201 | 54,666 | 54,997 | 105,705 | ||||
Additions classified as selling expenses | 33,322 | 47,393 | 38,878 | 52,719 | ||||
Addition by merger of subsidiaries | 39,896 | |||||||
Reversal of allowance/recovery | (6,663) | (6,730) | (387) | |||||
Write-off of unrecoverable accounts | (95,358) | (14) | (102,383) | |||||
Exchange variation | 85 | (396) | 128 | (657) | ||||
At the end of the year | 72,945 | 46,201 | 87,259 | 54,997 | ||||
31
Braskem S.A. and subsidiaries
Notes to the Financial Statements7 Inventories
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Finished products | 673,609 | 653,684 | 798,984 | 780,913 | ||||
Work-in-process | 43,704 | 43,788 | 49,519 | 47,883 | ||||
Raw materials,production inputs and packaging | 265,614 | 310,264 | 407,946 | 428,717 | ||||
Warehouse (*) | 303,749 | 255,943 | 347,233 | 291,396 | ||||
Advances to suppliers | 43,715 | 51,799 | 47,333 | 70,961 | ||||
Imports in transit and others | 8,430 | 4,595 | 10,166 | 5,762 | ||||
Provision for adjustment to realization value | (16,932) | (12,847) | (17,945) | (12,849) | ||||
Total | 1,321,889 | 1,307,226 | 1,643,236 | 1,612,783 | ||||
Long-term receivables (*) | (71,817) | (47,669) | (75,783) | (50,369) | ||||
Current assets | 1,250,072 | 1,259,557 | 1,567,453 | 1,562,414 | ||||
(*) Based on its turnover, part of the maintenance materials inventory was reclassified to long-term. |
Advances to suppliers and expenditures for imports in transit mainly relate to the acquisition of petrochemical naphtha, which is the main raw material of the Company.
32
Braskem S.A. and Subsidiaries
Notes to the Financial Statements
8 Related Parties
(a) Parent company
Balances | ||||||||||||||||
Current | Long-term | Current | Long-term | |||||||||||||
assets | receivables | liabilities | liabilities | |||||||||||||
Trade | ||||||||||||||||
accounts | Related | Related | Related | |||||||||||||
receivable | parties | Suppliers | parties | Suppliers | Debentures | parties | ||||||||||
Subsidiaries | ||||||||||||||||
Braskem Importação | 1,207 | |||||||||||||||
Braskem Inc. | 14,513 | |||||||||||||||
Braskem Participações | 1,137 | |||||||||||||||
Cayman | 9,421 | 53 | ||||||||||||||
CINAL | 5,384 | |||||||||||||||
CPP (i) | 8 | |||||||||||||||
IPL | 12 | |||||||||||||||
Lantana | 29,359 | |||||||||||||||
Poliaden America | 9 | |||||||||||||||
Polialden | 14,490 | 3,594 | ||||||||||||||
Tegal (i) | 2,420 | 401 | 1,016 | |||||||||||||
Jointly-controlled entities | ||||||||||||||||
CETREL (i) | 138 | 39 | 1,820 | |||||||||||||
Copesul | 549 | 500,697 | ||||||||||||||
Petroflex | 51,843 | |||||||||||||||
Petroquímica Paulínia (i) | 17,740 | |||||||||||||||
Politeno | 27,987 | |||||||||||||||
Associated company | ||||||||||||||||
Borealis | 8,678 | |||||||||||||||
Related parties | ||||||||||||||||
ODBPAR Investimentos S.A. ("ODBPAR") (ii) | 999,347 | |||||||||||||||
Construtora Norberto Odebrecht ("CNO") | 12,307 | |||||||||||||||
Petróleo Brasileiro S.A. ("Petrobras") | 35,279 | 59,046 | 21,521 | |||||||||||||
Petrobras Distribuidora S.A. | 20,927 | 1,589 | ||||||||||||||
Other | 1,642 | |||||||||||||||
At December 31, 2005 | 156,987 | 57,181 | 604,176 | 23,110 | 999,347 | 3,372 | ||||||||||
At December 31, 2004 | 246,950 | 745,765 | 1,171,094 | 1,147,804 | 65,727 | 867,870 | 671,381 | |||||||||
(i) | Amounts stated under Related parties, in long-term receivables, refer to advances for future capital increase. | |||||||||||||||
(ii) | Debentures issued by Braskem (Note 15(b)) |
33
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsParent company (continued)
Transactions | ||||||||
Raw materials, | ||||||||
Product | service & utilities | Financial | Financial | |||||
sales | purchases | income(iii) | expenses | |||||
Braskem Importação | 193 | |||||||
Braskem Inc. | 756,163 | 40,479 | 15,901 | |||||
Braskem Participações | 202 | |||||||
Cayman | 95,277 | 2,393 | ||||||
CINAL | 47,634 | |||||||
CPN Distribuidora | 5,548 | |||||||
CPP | ||||||||
IPL | ||||||||
Lantana | 53,294 | 1,957 | ||||||
Poliaden America | 13 | |||||||
Polialden | 422,907 | 31,597 | 38,118 | |||||
Tegal | 14,409 | 77 | 17 | |||||
Jointly-controlled entities | ||||||||
CETREL | 1,446 | 28,891 | ||||||
Copesul | 6,377 | 2,572,031 | 29,224 | 2,396 | ||||
Petroflex | 442,151 | 4,022 | ||||||
Politeno | 1,053,935 | |||||||
Associated company | ||||||||
Borealis | 128,476 | |||||||
Related parties | ||||||||
ODBPAR | 131,478 | |||||||
CNO | 109,469 | |||||||
Petrobras | 4,337,278 | 3,814 | ||||||
Petrobras Distribuidora | 189,545 | |||||||
Other | 220 | |||||||
At December 31, 2005 | 2,960,039 | 7,371,333 | 63,156 | 172,404 | ||||
At December 31, 2004 | 2,987,604 | 7,159,110 | 56,023 | 68,227 | ||||
(iii) Includes interest on capital. |
34
Braskem S.A. and Subsidiaries
Notes to the Financial Statements(b) Consolidated
Balances | ||||||||||||||||
Long-term | ||||||||||||||||
Current assets | receivables | Current liabilities | Long-term liabilities |
|||||||||||||
Trade | ||||||||||||||||
accounts | Accounts | Related | Related | Related | ||||||||||||
receivable | receivable | parties | Suppliers | Debentures | parties | Suppliers | Parties | |||||||||
Jointly-controlled entities | ||||||||||||||||
CETREL | 65 | 856 | 3,072 | |||||||||||||
Copesul | 387 | 353,188 | ||||||||||||||
Petroflex | 41,412 | |||||||||||||||
Politeno | 18,483 | |||||||||||||||
Associated company | ||||||||||||||||
Borealis | 8,678 | |||||||||||||||
Related parties | ||||||||||||||||
Alberto Pasqualini - REFAP S.A (related party to Copesul) | 7,920 | 300 | ||||||||||||||
Ipiranga Petroquímica S.A. (related party to Copesul) | 12,492 | 528 | ||||||||||||||
CNO | 620 | 12,307 | ||||||||||||||
Monsanto Nordeste S.A. (related party to CETREL) | 3,018 | |||||||||||||||
ODBPAR | 999,347 | |||||||||||||||
Petrobras | 98 | 35,279 | 59,053 | 21,521 | ||||||||||||
Petrobras Distribuidora S.A. | 38 | 20,955 | 1,589 | |||||||||||||
Other | 5,281 | 9 | 519 | |||||||||||||
At December 31, 2005 | 89,573 | 620 | 40,560 | 447,187 | 999,347 | 3,081 | 23,110 | 3,444 | ||||||||
At December 31, 2004 | 34,855 | 599 | 35,181 | 351,834 | 867,870 | 8 | 65,727 | 115,734 | ||||||||
35
Braskem S.A. and Subsidiaries
Notes to the Financial StatementsConsolidated (continued)
Transactions | ||||||||
Raw materials, | ||||||||
Product | services & utilities | Financial | Financial | |||||
sales | purchases | income | expenses | |||||
Jointly-controlled entities | ||||||||
CETREL | 680 | 13,593 | ||||||
Copesul | 4,498 | 1,814,293 | 1,690 | |||||
Petroflex | 353,190 | |||||||
Politeno | 696,019 | |||||||
Associated company | ||||||||
Borealis | 128,476 | |||||||
Related parties | ||||||||
Alberto Pasqualini - REFAP S.A (related party to Copesul) | 35,763 | 636,543 | ||||||
Ipiranga Petroquímica S.A. (related party to Copesul) | 1,207,188 | 25,564 | 1,198 | 17 | ||||
CNO | 109,469 | |||||||
Monsanto Nordeste S.A. (related party to CETREL) | ||||||||
ODBPAR | 131,478 | |||||||
Petrobras | 5,115,973 | 3,814 | ||||||
Petrobras Distribuidora S.A. | 195,415 | |||||||
At December 31, 2005 | 2,425,814 | 7,910,850 | 5,012 | 133,185 | ||||
At December 31, 2004 | 1,280,377 | 6,169,437 | 3,863 | 42,545 | ||||
36
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsTrade accounts receivable and Suppliers include the balances resulting from transactions with related parties, arising mainly from the following sales and purchases of goods and services:
Sales of Braskem:
Company | Products/inputs | |
Borealis / Cayman / Lantana | Thermoplastic resins | |
Braskem Inc. | Basic petrochemicals and thermoplastic resins | |
Polialden / Politeno | Ethylene and utilities | |
Petroflex | Butadiene | |
Purchases of Braskem: | ||
Company | Products/inputs/services | |
CINAL | Utilities, treatment and incineration of waste | |
Copesul | Ethylene, propane and utilities | |
Petrobras | Naphtha | |
Petrobras Distribuidora | Fuel | |
Polialden | Thermoplastic resins | |
CNO | Construction and maintenance services | |
Tegal | Gas storage services |
Transactions with related parties are carried out at normal market prices and conditions, considering the following:
.. The price of ethylene results from a process that shares the margin with the second generation companies of the petrochemical sector. This process consists of allocating the gross margin in proportion to the return on investments. The prices charged for the other products are established based on several market factors, including international ones.
.. The price of naphtha supplied by Petrobras is negotiated with the Company and the petrochemical companies using as a benchmark the European market prices. During the twelve-month period ended December 31, 2005, the Company also imported naphtha at a volume equal to 31% of its consumption (twelve-month period ended December 31, 2004 - 38% - unaudited).
37
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsThe related parties balance includes current account balances, as follows:
Participating companies | Annual financial charges | 2005 | 2004 | |||
Subsidiaries | ||||||
Long-term receivables | ||||||
Braskem Inc. | US$ exchange variation + 8.30% | 556,386 | ||||
Cayman | US$ exchange variation + 10.05% | 53 | 48,926 | |||
Lantana | US$ exchange variation + 3.80% | 97,150 | ||||
Long-term liabilities | ||||||
Braskem Importação | 100% of CDI | 1,207 | ||||
Braskem Participações | 100% of CDI | 1,137 | ||||
Braskem Distribuidora | None | 981 | ||||
Odequi | None | 342,289 | ||||
Polialden | 100% of CDI | 327,131 | ||||
Tegal | 100% of CDI | 1,017 | 980 |
The current accounts are used by the Company and its direct and indirect subsidiaries to centralize available cash in a central pool for settlement of their obligations. Financial charges on remittances and balances of the pool of funds are agreed upon by the account holders, considering the costs of funds charged to the individual participants by financial institutions, so that such charges are paid/transferred to the Company.
9 Taxes Recoverable
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Excise tax (IPI) (standard operations) | 65,102 | 45,742 | 69,221 | 47,836 | ||||
Zero rate IPI (i) | 39 | 39 | ||||||
Value-added Tax on Sales and Services (ICMS) (ii) | 412,865 | 340,154 | 556,917 | 440,912 | ||||
Social Integration Program (PIS) Decree Laws | ||||||||
2,445 and 2,449/88 | 52,215 | 51,673 | 60,186 | 53,740 | ||||
Income tax and social contribution | 38,666 | 26,037 | 62,306 | 63,687 | ||||
Income Tax on Net Income - ILL (iii) | 12,675 | 53,725 | 27,814 | 67,971 | ||||
PIS and Cofins (standard operations) | 25,983 | 2,198 | 40,772 | 11,662 | ||||
Import Duty | 17,962 | 5,172 | 18,183 | 5,172 | ||||
Finsocial | 14,221 | 14,221 | 14,478 | 14,478 | ||||
Other | 19,963 | 18,707 | 34,414 | 21,774 | ||||
659,652 | 557,668 | 884,291 | 727,271 | |||||
Current assets | (263,677) | (381,774) | (324,868) | (476,011) | ||||
Long-term receivables | 395,975 | 175,894 | 559,423 | 251,260 | ||||
38
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(i) Zero-rate IPI
In the 1st trimester of 2005, the Company concluded the offset operation of the amount of IPI tax credit from acquisition of raw materials and inputs that are exempt from IPI, not subject to IPI taxation or taxed at a zero rate, when related to transactions involving the establishments of absorbed company OPP Química S.A. (OPP Química), located in the State of Rio Grande do Sul. This credit was granted on a claim lodged in July 2000, when OPP Química filed a lawsuit for full applicability of the non-cumulative principle for this tax to the establishments mentioned.
On December 19, 2002, the Federal Supreme Court (STF), based on past determinations of its Full Bench, entertained an extraordinary appeal lodged by the National Treasury and affirmed the decision of the Regional Federal Court (TRF), 4th Circuit, recognizing the entitlement to an IPI tax credit from said acquisitions during a 10-year period prior to the filing date, plus monetary restatement and accrual of interest at the SELIC benchmark rate until actual use of these credits.
The STF determination was challenged by the National Treasury via special appeal known as agravo regimental, which is pending judgment by the Second Panel of the STF. In this special appeal, the National Treasury is no longer challenging the companys entitlement to the IPI tax credit itself, but rather alleging some inaccuracies in the court determination as to non-taxed inputs and raw materials, the restatement of tax credits, and the respective calculation rate.
According to the opinion of the Companys legal advisors, however, all these aspects have already been settled in the STF and TRF decisions favorably to OPP Química, or even in the STF full-bench precedents. For this reason, the special appeal referred to above poses no risk of changes in OPP Químicas entitlement to the tax credit, even though the STF itself is revisiting this matter in a similar lawsuit involving another taxpayer (this judgment is currently on hold).
In December 2002, OPP Química posted this undue tax at R$ 1,030,125, which was offset by the Company with IPI itself and other federal tax debts. Similar lawsuits have also been filed by the Companys branches located in the States of São Paulo, Bahia and Alagoas (Note 16(ii)).
39
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(ii) Recoverable Taxes ICMS
The Company has accrued ICMS tax credits, basically on account of its high level of exports and outgoing products subject to deferred taxation. The Companys Management is giving priority to a number of actions aimed at optimal use of such credits and, currently, no losses are expected from realization of those credits. Based on the Companys Management projection over the realization of those credits, the amount of R$ 221,819 (consolidated R$ 349,203) was posted as long-term assets.
(iii) Tax on Net Income (ILL)
The Company brought suit for recovery of unduly paid ILL tax in the 1989 and 1990 tax years. The courts eventually held this case valid in a final and conclusive manner, and the Company asked the Federal Revenue Office (SRF) to acknowledge the corresponding credit for further offsetting with other subsequent tax debts. Entitlement to a R$ 45,395 credit was acknowledged in November 2005, which was fully offset with PIS and COFINS debts.
10 Judicial Deposits and Compulsory Loan Long-term Receivables
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Judicial deposits | ||||||||
Labor claims | 13,325 | 2,405 | 12,697 | 1,678 | ||||
Other | 9,476 | 10,943 | 11,571 | 11,431 | ||||
Compulsory loan | ||||||||
Eletrobrás | 12,098 | 15,825 | 12,254 | 15,825 | ||||
34,899 | 29,173 | 36,522 | 28,934 | |||||
As required to CVM Deliberation 489/05, the Company presently states contingent liabilities net of the corresponding judicial deposits (Notes 2 and 16).
40
Braskem S.A. and its subsidiaries
Notes to the Financial Statements11 Investments
(a) Information on investments
Number of shares or quotas held (thousand) |
||||||||||||||||||||||
Interest in total | ||||||||||||||||||||||
2005 | 2004 | capital (%) |
||||||||||||||||||||
Common | Preference | Common | Preference | |||||||||||||||||||
shares | Shares | Quotas | Total | shares | shares | Quotas | Total | 2005 | 2004 | |||||||||||||
Subsidiaries | ||||||||||||||||||||||
Braskem Inc. | (i) | 40,095 | 40,095 | 95 | 95 | 100.00 | 100.00 | |||||||||||||||
Braskem International | 5 | 5 | 5 | 5 | 100.00 | 100.00 | ||||||||||||||||
Braskem Participações | (ii) | 6,500,000 | 6,500,000 | 6,500,000 | 2,000,000 | 8,500,000 | 100.00 | 100.00 | ||||||||||||||
Braskem Distribuidora | (iii) | 31,649 | 31,649 | 354 | 354 | 100.00 | 100.00 | |||||||||||||||
Braskem Importação | (iv) | 153,602 | 153,602 | 100,00 | ||||||||||||||||||
Cayman | (iv) | 900 | 900 | 100,00 | ||||||||||||||||||
CINAL | (iv) | 77,589 | 52,857 | 130,446 | 62,199 | 45,440 | 107,639 | 86.82 | 63.03 | |||||||||||||
CPP | (iv) | 8,465 | 8,465 | 4,666 | 4,666 | 79.70 | 90.71 | |||||||||||||||
Overseas | (iv) | 1 | 1 | 100.00 | ||||||||||||||||||
IPL | (iv) | 974 | 974 | 100.00 | ||||||||||||||||||
Lantana | (iv) | 5 | 5 | 100.00 | ||||||||||||||||||
Odequi | 12,528 | 514 | 13,042 | 100,00 | ||||||||||||||||||
Polialden | 263,690 | 147,214 | 410,904 | 263,690 | 147,214 | 410,904 | 63.68 | 63.68 | ||||||||||||||
Tegal | 21,938 | 21,938 | 21,938 | 21,938 | 90.79 | 90.79 | ||||||||||||||||
Jointly-controlled entities | ||||||||||||||||||||||
CETREL | (iv) | 715 | 715 | 456 | 456 | 48.02 | 40.56 | |||||||||||||||
CODEVERDE | (v) | 9,639 | 9,639 | 9,533 | 9,533 | 35.52 | 35.49 | |||||||||||||||
Copesul | (iv) | 44,255 | 44,255 | 3,555,182 | 3,555,182 | 29.46 | 23.67 | |||||||||||||||
Politeno | (iv) | 21,847,901 | 618,266 | 22,466,167 | 20,174,177 | 583,545 | 20,757,722 | 33.96 | 33.88 | |||||||||||||
Petroflex | (iv) | 4,759 | 2,321 | 7,080 | 95,185 | 46,412 | 141,597 | 20.12 | 20.12 | |||||||||||||
Petroquímica Paulínia | (iv) | 45,000 | 45,000 | 93.75 | ||||||||||||||||||
Associated companies | ||||||||||||||||||||||
Borealis | 18,949 | 18,949 | 18,949 | 18,949 | 20.00 | 20.00 | ||||||||||||||||
Rionil | 3,061 | 3,061 | 3,061 | 3,061 | 33.33 | 33.33 | ||||||||||||||||
Sansuy | 271 | 271 | 271 | 271 | 20.00 | 20.00 |
41
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsInformation on investments (continued)
Number of shares or quotas held (thousand) |
||||||||||||||||||||||
Interest in | ||||||||||||||||||||||
2005 | 2004 | total capital (%) | ||||||||||||||||||||
Common | Preference | Common | Preference | |||||||||||||||||||
shares | shares | Quotas | Total | shares | shares | Quotas |
Total | 2005 | 2004 | |||||||||||||
Information on investments of subsidiaries | ||||||||||||||||||||||
Braskem Distribuidora | ||||||||||||||||||||||
Cayman | (iv) | 900 | 900 | 100.00 | ||||||||||||||||||
Braskem Participações | ||||||||||||||||||||||
IPL | (iv) | 295 | 295 | 100.00 | ||||||||||||||||||
IPL | ||||||||||||||||||||||
Braskem Importação | (iv) | 252,818 | 252,818 | 100.00 | ||||||||||||||||||
Cayman | ||||||||||||||||||||||
Overseas | (iv) | 1 | 1 | 100.00 | ||||||||||||||||||
Lantana | (iv) | 5 | 5 | 100.00 | ||||||||||||||||||
Polialden | ||||||||||||||||||||||
Polialden America | 40 | 40 | 40 | 40 | 100.00 | 100.00 | ||||||||||||||||
(i) Capital increase on April 25, through issue of quotas. | ||||||||||||||||||||||
(ii) Cancellation of preference shares, pursuant to Extraordinary Shareholders Meeting of July 28, 2005. | ||||||||||||||||||||||
(iii) On November 30, 2005, the Company increased the capital of Braskem Distribuidora through credits held by the Company. | ||||||||||||||||||||||
(iv) Changes in the number of shares/quotas held and interest in total capital are detailed in Note 3 (g). | ||||||||||||||||||||||
(v) Increase in interest as a result of the capitalization of AFAC. |
42
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsInformation on investments (continued)
Adjusted shareholders | ||||||||
Adjusted net income (loss) | equity (unsecured | |||||||
for theyear | liabilities) | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Subsidiaries | ||||||||
Braskem Inc. | 23,951 | (60,018) | 122,509 | 5,591 | ||||
Braskem International | 84,419 | 27,915 | (190,517) | (311,783) | ||||
Braskem Participações | (17) | (646) | 20,560 | 22,312 | ||||
Braskem Distribuidora | (239,102) | 77,388 | 3,542 | |||||
Braskem Importação | (46,169) | 218 | ||||||
Cayman | 1,460 | 208,548 | ||||||
CINAL | (3,697) | 3,739 | 80,784 | 94,395 | ||||
CPP | 10,621 | 5,144 | ||||||
Overseas | (982) | (223,821) | ||||||
IPL | 12 | |||||||
Lantana | (139,070) | 58,712 | ||||||
Odequi | 63,090 | 1,340,750 | ||||||
Polialden | 13,206 | 55,668 | 294,608 | 456,939 | ||||
Tegal | (3,413) | (5,518) | 15,705 | 19,118 | ||||
Jointly-controlled entities | ||||||||
CETREL | 7,073 | (8,663) | 97,991 | 56,600 | ||||
CODEVERDE | 42,814 | 41,810 | ||||||
Copesul | 565,963 | 558,417 | 1,240,509 | 1,154,801 | ||||
Petroflex | 88,322 | 98,599 | 278,891 | 255,746 | ||||
Petroquímica Paulínia | 48,000 | |||||||
Politeno | 63,371 | 96,493 | 489,603 | 450,495 | ||||
Associated companies | ||||||||
Borealis | 13,423 | 114,115 | ||||||
Rionil | 72 | 1 | 5,838 | 5,882 | ||||
Sansuy | (12,701) | 1,696 | 4,962 | 14,453 | ||||
Information on investments of subsidiaries | ||||||||
Braskem Distribuidora | ||||||||
Cayman | (250,621) | (21,990) | ||||||
Braskem Participações | ||||||||
IPL | 85 | 391 | ||||||
IPL | ||||||||
Braskem Importação | 161 | 379 | ||||||
Cayman | ||||||||
Lantana | (2,952) | (17,730) | ||||||
Overseas | (826) | (87,186) | ||||||
Polialden | ||||||||
Polialden America | 1,424 | 818 | 5,238 | 2,069 |
43
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(b) Investment activity of subsidiaries, jointly-controlled entities and associated companies
Subsidiaries and jointly-controlled entities |
||||||||||||||||||||
2005 | ||||||||||||||||||||
Braskem | Braskem | Braskem | ||||||||||||||||||
Distribuidora | Importação | Braskem Inc. | Participações | Cayman | CETREL | CINAL | COPESUL | Lantana | ||||||||||||
At January 1 | 3,542 | 218 | 5,591 | 22,312 | 208,548 | 29,639 | 50,781 | 468,119 | 58,712 | |||||||||||
Addition through exchange/purchase of shares/mergers (i) | 15,841 | 103,065 | ||||||||||||||||||
Addition through capital increase | 312,948 | 101,400 | 277 | 23,501 | ||||||||||||||||
Write-off by transfer/ disposal/ merger | (266) | (174,696) | ||||||||||||||||||
Redemption of shares | (2,288) | |||||||||||||||||||
Dividends | (136,713) | |||||||||||||||||||
Equity in the results | (15,635) | 48 | 30,530 | (17) | 104 | 3,506 | (1,958) | 153,285 | (58,057) | |||||||||||
Reversal of (provision) for loss on investments | ||||||||||||||||||||
Increase (decrease) of interest in investments | 4,695 | |||||||||||||||||||
Amortization of (goodwill)/negative goodwill | (223,467) | (6,579) | (865) | (433) | (31,244) | |||||||||||||||
Exchange variation on foreign investment | (8,433) | (33,956) | (655) | |||||||||||||||||
Transfers of (goodwill)/negative goodwill on merger (ii) | ||||||||||||||||||||
Other | (2,012) | (515) | ||||||||||||||||||
At December 31 | 77,388 | 122,509 | 20,560 | 60,476 | 61,428 | 556,512 | ||||||||||||||
(i) | Additions through merger arise from the corporate restructuring described in Note 1(b). | |||||||||||||||||||
(j) | Goodwill and negative goodwill on the mergers of investments were transferred to Property, plant and equipment and Deferred charges, pursuant to CVM Instruction 319/99. |
44
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsInvestment activity of investments of subsidiaries, jointly-controlled entities and associated companies (continued)
Subsidiaries and jointly-controlled entities | ||||||||||||||||
2005 | 2004 | |||||||||||||||
Petroquímica | ||||||||||||||||
Odequi | Paulínia | Petroflex | Polialden (iii) | Politeno (iii) | Outros | Total | Total | |||||||||
At January 1 | 1,340,056 | 50,840 | 654,144 | 553,770 | 27,872 | 3,474,144 | 4,478,823 | |||||||||
Addition through share exchange/purchase / mergers (i) | 45,000 | 163,906 | 556,074 | |||||||||||||
Addition through spun-off asset of subsidiary | 269,074 | |||||||||||||||
Addition through capital increase | 4,181 | 442.307 | 119,387 | |||||||||||||
Recording of goodwill (negative goodwill) | 784,038 | |||||||||||||||
Write-off by transfer / disposal/ merger | (1,340,906) | (12) | (1,515,880) | (1,559,208) | ||||||||||||
Redemption of shares | (2,288) | |||||||||||||||
Dividends | (11,603) | (170,297) | (16,068) | (334,681) | (192,295) | |||||||||||
Equity in the results | 156 | 16,260 | 66,923 | 29,300 | (3,088) | 221,357 | 169,288 | |||||||||
Reversal of (provision) for loss on investments | (7,500) | |||||||||||||||
Increase (decrease) in interest in investments | 416 | 13 | 5,124 | |||||||||||||
Amortization of (goodwill)/negative goodwill | 694 | (63,035) | (60,751) | (37) | (385,717) | (283,988) | ||||||||||
Exchange variation on foreign investment | (43,044) | (57,883) | ||||||||||||||
Transfer of (goodwill)/negative goodwill on merger (ii) | (801,195) | |||||||||||||||
Other | 2,012 | (515) | (471) | |||||||||||||
At December 31 | 45,000 | 55,497 | 487,735 | 508,679 | 28,929 | 2,024,713 | 3,474,144 | |||||||||
(i) Additions through merger arise from the corporate restructuring described in Note 1 (b). | ||||||||||||||||
(ii) Goodwill and negative goodwill on the mergers of investments were transferred to Property, plant and equipment and Deferred charges, pursuant to CVm Instruction 319/99. | ||||||||||||||||
(iii) Equity pick-up includes the effect of the distributions of dividends relating to preference shares with incentives. |
45
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsAssociated | ||||||||||
companies | ||||||||||
2005 | 2004 | |||||||||
Borealis | Rionil | Sansuy | Total | Total | ||||||
At the beginning of the year | 1,960 | 2,891 | 4,851 | |||||||
Addition through merger (i) | 4,187 | |||||||||
Transfer of investment (Note 5)) | 22,138 | 22,138 | ||||||||
Equity in the results | 2,685 | (14) | (1,899) | 772 | 664 | |||||
Dividends | (2,000) | (2,000) | ||||||||
At the end of the year | 22,823 | 1,946 | 992 | 25,761 | 4,851 | |||||
Goodwill and negative goodwill underlying the investments
Parent company | ||||||||||||||||
2005 | 2004 | |||||||||||||||
Cetrel | Cinal |
Copesul |
Polialden |
Politeno |
Other |
Total |
Total | |||||||||
(i) | (ii) | (ii) | (ii) | |||||||||||||
Goodwill cost | 15,559 |
309,121 | 510,674 | 492,270 | 1,327,624 | 1,320,080 | ||||||||||
(-) Accumulated amortization | (2,136) |
(118,073) | (157,587) | (151,877) | (429,673) | (301,323) | ||||||||||
Negative goodwill cost | (8,711) |
(52,962) | (2,114) | (63,787) | (64,481) | |||||||||||
Goodwill (negative goodwill), net | 13,423 |
(8,711) |
191,048 | 300,125 | 340,393 | (2,114) | 834,164 | 954,276 | ||||||||
(i) Goodwill is based on the appreciation of property, plant and equipment and amortized over up to 2015 | ||||||||||||||||
(ii) Goodwill is based on future profitability and amortized over up to 2011 |
In the consolidated financial statements, goodwill is stated in property, plant and equipment or deferred charges, while negative goodwill is stated in deferred income, in accordance with CVM Instruction 247/96.
46
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsProvision for loss on investments
Parent company | ||||||||||||
Provision for loss on investments Long-term liabilities |
||||||||||||
2005 | 2004 | |||||||||||
Braskem | ||||||||||||
International | Lantana | Overseas | Other | Total | Total | |||||||
At the beginning of the year | 311,783 | 223,821 | 535,604 | 698,691 | ||||||||
Addition through merger (i) | 17,963 | |||||||||||
Provision increase /(reversal) | ||||||||||||
Capital increase | (18,663) | |||||||||||
Winding-up | (34,211) | |||||||||||
Operating result | (84,419) | (8,905) | (187,378) | (280,702) | (79,060) | |||||||
Non-operating result | 4,154 | 4,154 | ||||||||||
Exchange variation on shareholders equity | (36,847) | 8,905 | (36,443) | (64,385) | (49,116) | |||||||
Other | 5,126 | 5,126 | ||||||||||
At the end of the year | 190,517 | 9,280 | 199,797 | 535,604 | ||||||||
(i) Additions through merger arise from the corporate restructuring described in Note 1 (b). |
(c) Information on the main investees with operating activities
Copesul
COPESUL is engaged in the manufacture, sale, import and export of chemical, petrochemical and fuel products and the production and supply of utilities, as well as providing various services used by the companies in the Triunfo Petrochemical Complex in the State of Rio Grande do Sul and management of logistic services related to its waterway and terrestrial terminals.
Polialden
Polialden is engaged in the manufacture, processing, sale, import and export and any other activities related to the production or sale of high-density polyethylene and other chemical and petrochemical products. The main raw material for all of its products is ethylene, which is supplied by Braskem. Polialden operates an industrial plant in Camaçari Bahia.
The independent auditors opinion on Polialdens financial statements as of December 31, 2005, included an emphasis paragraph with respect to the uncertainties surrounding the recovery of the ICMS balance recoverable, in the amount of R$ 78,495. As stated in the opinion, management is seeking action by the Finance Secretariat of the State of Bahia in order to recover such credit.
47
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsPoliteno
Politeno is engaged in the manufacture, processing, direct or indirect sale, consignment, export, import and transportation of polyethylene and by-products, as well as the participation in other companies. The main raw material for all of its products is ethylene, which is supplied by Braskem. Politeno operates an industrial plant in Camaçari - Bahia.
The independent auditors opinion on Politenos financial statements as of December 31, 2004 included an emphasis paragraph with respect to the uncertainties surrounding the recovery of the ICMS balance recoverable, in the amount of R$ 133,509. According to the opinion, management is discussing with the Finance Secretariat of the State of Bahia potential alternatives to recover such credit.
CETREL
The activities of CETREL are to supervise, coordinate, operate and monitor environmental protection systems; carry out research in the environmental control area and in the recycling of waste and other materials recoverable from industrial and urban emissions; monitor the levels of environmental pollution of air quality, water resources and other vital elements; perform environmental diagnostics; prepare and implement projects of environmental engineering solutions; develop and install environmental management systems and those relating to quality, laboratory analyses, training, environmental education and also specification, monitoring and intermediation in the acquisition of materials of environmental protection systems.
CINAL
CINAL is engaged in the implementation of the Basic Industrial Nucleus of the Alagoas Chlorinechemical Complex and the production and sale of goods and several services, such as steam, industrial water, industrial waste treatment and incineration of organochlorine waste for the companies located in the mentioned Industrial Nucleus.
The CINAL Special Shareholders Meeting held in April 2005 resolved to fully and definitely redeem the companys preferred Class B shares for their book value, with no capital reduction. As a result, the Company received a reimbursement of R$ 2,288, corresponding to 4,139 thousand shares, while its percentage holding in CINALs total capital increased by 8.02% .
48
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsPetroquímica Paulínia
On September 16, 2005, Braskem and Petroquisa formed Petroquímica Paulínia, which will be responsible for the implementation and operation of a new polypropylene unit to be built at Paulínia São Paulo, using as raw material polymer-grade propylene supplied by Petrobras. Operations are scheduled to start by the end of 2007, using last-generation Braskem technology. The assignment of the right to use this technology gave rise to a gain of R$ 58,240 for the Company.
In September and December 2005, the Company made capital contributions to Petroquímica Paulínia of R$ 4,500 in cash and R$ 40,500 as part of the assignment of the right to use the technology. The difference between the assignment value, R$ 58,240, and the capitalized portion is recorded as an advance for future capital increase.
Investments in the new plant are estimated at US$ 240 million. The capital structure will comprise approximately 30% of own funds and 70% of third-party funds, represented by long-term loans and financing.
49
Braskem S.A. and its subsidiaries
Notes to the Financial Statements12 Property, Plant and Equipment
Parent company | Consolidated | |||||||||||||||||
2005 | 2004 | 2005 | 2004 | Annual | ||||||||||||||
depreciation | ||||||||||||||||||
Accumulated | Accumulated | rates | ||||||||||||||||
Cost | depreciation | Net | Net | Cost | depreciation | Net | Net | (%) | ||||||||||
Land | 21,264 | 21,264 | 21,264 | 43,379 | 43,379 | 43,422 | ||||||||||||
Buildings and improvements | 832,577 | (361,323) | 471,254 | 474,768 | 981,923 | (427,302) | 554,621 | 553,607 | 2 to 10 | |||||||||
Machinery, equipment and facilities | 6,236,113 | (2,441,061) | 3,795,052 | 3,798,010 | 7,836,294 | (3,585,983) | 4,250,311 | 4,248,596 | 3.33 to 20 | |||||||||
Mines and wells | 26,016 | (22,216) | 3,800 | 4,640 | 26,777 | (22,860) | 3,917 | 4,640 | 4 to 10 | |||||||||
Furniture and fixtures | 37,094 | (31,550) | 5,544 | 4,729 | 45,374 | (38,438) | 6,936 | 5,552 | 10 | |||||||||
Information technology equipment | 50,481 | (43,298) | 7,183 | 9,173 | 68,981 | (56,170) | 12,811 | 11,325 | 20 | |||||||||
Construction in progress | 955,467 | 955,467 | 499,895 | 1,063,142 | 1,063,142 | 575,246 | ||||||||||||
Other | 31,029 | (11,259) | 19,770 | 11,056 | 52,526 | (23,487) | 29,039 | 15,170 | Up to 20 | |||||||||
8,190,041 | (2,910,707) | 5,279,334 | 4,823,535 | 10,118,396 | (4,154,240) | 5,964,156 | 5,457,558 | |||||||||||
Construction in progress relates principally to projects for operating improvements to increase the useful life of the industrial units, machinery and equipment, as well as programs in the areas of health, technology and security.
At December 31, 2005, property, plant and equipment includes the appreciation, in the form of goodwill, of the assets arising from merged companies Trikem and OPP Química, transferred in conformity with CVM Instruction 319/99, in the amount of R$ 878,857 (2004 - R$ 937,236), net of accumulated depreciation.
50
Braskem S.A. and its subsidiaries
Notes to the Financial Statements13 Deferred Charges
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Costs | ||||||||
Pre-operating expenses | 61,018 | 216,417 | 87,080 | 242,428 | ||||
Rights to manufacturing processes | 27,421 | 53,313 | 27,949 | 56,995 | ||||
Organization and system implementation expenses | 238,966 | 227,163 | 303,716 | 317,436 | ||||
Expenditures for structured operations | 314,442 | 314,748 | 388,923 | 436,045 | ||||
Goodwill on merged/ consolidated investments (i) | 1,698,572 | 1,709,297 | 2,269,432 | 2,409,506 | ||||
Expenditures for programmed stoppages (ii) | 621,676 | 494,038 | 628,903 | 500,472 | ||||
Research and development | 59,386 | 64,596 | 91,208 | 90,921 | ||||
Others | 99,112 | 103,382 | 100,033 | 104,334 | ||||
3,120,593 | 3,182,954 | 3,897,244 | 4,158,137 | |||||
Accumulated amortization | (1,209,591) | (973,425) | (1,236,859) | (1,055,450) | ||||
1,911,002 | 2,209,529 | 2,660,385 | 3,102,687 | |||||
(i) The goodwill on merged investments is based on future profitability and is being amortized in up to ten years, according to the appraisal reports issued by independent experts. The recording of this goodwill in deferred charges is in conformity with CVM Instruction 319/99.
(ii) At programmed dates, which vary from one to six years, the Company stops production, totally or partially, to carry out inspection and maintenance. The costs associated with each stoppage are deferred and amortized to cost of production up to the beginning of the next corresponding stoppage.
51
Braskem S.A. and its subsidiaries
Notes to the Financial Statements14 Loans and Financing
Parent company | Consolidated | |||||||||||
Annual financial charges | 2005 | 2004 | 2005 | 2004 | ||||||||
Foreign currency | ||||||||||||
Eurobonds | Note 14 (a) | 1,294,005 | 1,057,657 | 743,217 | 700,525 | |||||||
Advance on foreign exch. contract | 2005 | US$ exchange variation + interest of 2.75% to10.99% | 36,251 | |||||||||
2004 | US$ exchange variation + interest of 2.30% to 6.00% | 300,434 | 351,902 | |||||||||
Export prepayment | Note 14(b) | 592,044 | 1,129,647 | 595,934 | 918,968 | |||||||
Medium-term Notes | Note 14 (c) | 1,277,405 | 1,581,448 | 1,277,405 | 1,581,448 | |||||||
Raw material financing | 2005/2004 | YEN exchange variation + fixed interest of 6.90% | 2,399 | 4,392 | ||||||||
2005 | US$ exchange variation + interest of 0.45% to 2.50% above LIBOR (ii) | 28,682 | 47,810 | |||||||||
2004 | US$ exchange variation + interest of 0.53% to 7.65% above LIBOR | 219,825 | 467,129 | |||||||||
Permanent asset financing | 2005 | US$ exchange variation + fixed interest of 1.22% to 7.14% | 30,211 | 33,282 | ||||||||
2004 | US$ exchange variation + interest of 1.22% to 3.88% above LIBOR | 29,868 | 30,829 | |||||||||
2004 | US$ exchange variation + fixed interest of 4.75% to 13.64% | 27,932 | 28,913 | |||||||||
Working capital | 2005/2004 | US$ exchange variation + interest of 2.77% to 7.50% | 10,348 | 102,776 |
52
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsLoans and Financing (continued)
Parent company |
Consolidated |
|||||||||||
Annual financial charges | 2005 | 2004 | 2005 | 2004 | ||||||||
Local currency |
||||||||||||
Working capital | 2005 | Interest of 102.5% to 105.5% of CDI | 73,752 | |||||||||
2004 | Interest of 0.30% to 11.0% + fixed restatement (IGPM, TJLP and CDI) | 17,189 | 34,089 | |||||||||
2004 | US$ exchange variation + interest of 4.50% | 10,944 | 10,944 | |||||||||
FINAME | 2005/2004 | Fixed interest of 3,00% to 11.00%+ fixed restatement (TJLP) | 929 | 30,175 | 17,146 | |||||||
BNDES | 2005 | Fixed interest of 6.50% to 12.60% + fixed restatement (TJLP and UMBNDES) (i) | 178,877 | 189,076 | ||||||||
2004 | Fixed interest of 2.50% to 12.60% + fixed restatement (TJLP and UMBNDES) (i) | 166,492 | 180,928 | |||||||||
BNB | 2005 | Fixed interest of 11.81% to 14% p.a. | 60,270 | 62,887 | ||||||||
2004 | Fixed interest of 11.81% | 31,538 | 31,538 | |||||||||
FINEP/FINIMP | 2005 | US$ exchange variation + interest of 4.50% p.a. or interest of 0.4% to 5.00% p.a. + fixed | ||||||||||
restatement (TJLP and UMBNDES) | 22,191 | 31,513 | ||||||||||
Acquisition of shares | Note 14 (e) | 176,339 | 176,277 | 176,339 | 176,277 | |||||||
Project financing (NEXI) | Note 14 (f) | 283,618 | 283,618 | |||||||||
Vendor | 141,656 | 168,636 | ||||||||||
Other | Fixed interest of 14.00% to 21.00% + bonus for timely repayment of 15.00% or 112% | |||||||||||
do CDI | 16,814 | 39,076 | ||||||||||
3,943,642 | 4,750,180 | 3,752,476 | 4,845,516 | |||||||||
Less: Current liabilities | (612,227) | (1,435,094) | (895,004) | (1,785,945) | ||||||||
Long-term liabilities | 3,331,415 | 3,315,086 | 2,857,472 | 3,059,571 | ||||||||
(i) UMBNDES = BNDES monetary unit | ||||||||||||
(ii) LIBOR = London Interbank Offered Rate |
53
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(a) Eurobonds
In October 1996, OPP Petroquímica (merged into OPP Química in December 2002) issued Eurobonds amounting to US$ 100,000 thousand, falling due in October 2004 and with annual interest of 11%, paid semiannually. This transaction was settled upon maturity.
In June 1997, the Company issued Eurobonds amounting to US$ 150,000 thousand falling due in June 2007, and with annual interest of 9%, paid semiannually in June and December of each year. The Eurobonds balance at December 31, 2005 is US$ 150,225 thousand - R$ 351,632 (2004 - US$ 150,225 thousand - R$ 398,757).
In July 1997, the merged company Trikem issued Eurobonds in the amount of US$ 250,000 thousand, falling due in July 2007 and with annual interest of 10.625%, paid semiannually in January and July of each year. The Eurobonds balance at December 31, 2005 is US$ 251,953 thousand - R$ 589,747 (2004 - US$ 248,229 thousand - R$ 658,900). In July 2005, the Company renegotiated the transaction interest rate to 9.375% p.a., and the maturity date to 2015, with no early settlement covenant.
In June 2005, the Company issued Eurobonds in the amount of US$ 150,000 thousand, with no stated maturity (Perpetual Eurobonds), bearing annual interest of 9.75%, payable on a quarterly basis from September 2005 onwards. The securities can be fully repurchased, at the option of the Company, as from June 17, 2010, provided that investors are given a minimum 30-day notice. At December 31, 2005, the balance amounts to US$ 150,650 thousand - R$ 352,626.
(b) Prepayment of exports
The merged company Trikem received an advance of US$ 100,000 thousand made by a foreign customer in August 1997. This advance bears annual interest of 12% and the balance was settled in October 2004.
On December 28, 2001, the Company obtained funds in the amount of US$ 250,000 thousand as prepayment of exports. This loan was placed in two tranches. The first tranche, in the amount of US$ 80,000 thousand, has a settlement term up to December 2004 and was subject to interest of 4.25% p.a. plus 3-month LIBOR, payable on a quarterly basis and was fully amortized upon maturity. The second tranche, in the amount of US$ 170,000 thousand, has a settlement term up to December 2006, was also fully amortized in December 2004, and was subject to interest of 5.25% p.a. plus 3-month LIBOR, payable on a quarterly basis.
54
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsIn December 2002, the merged company OPP Química received an advance from a foreign customer, in the amount of US$ 97,200 thousand, with annual interest of 3.75%, plus semiannual LIBOR, in addition to the exchange variation. In November 2004, the Company renegotiated the charges, reducing the spread to 1.25% per annum. This contract will be settled through shipments made up to June 2006. The balance due at December 31, 2005 is US$ 15,931 thousand - R$ 37,289 (2004 - US$ 47,018 thousand - R$ 124,805).
In June 2004, the Company obtained funds in the amount of US$ 200,000 thousand as prepayment of exports divided in two tranches. The first tranche, in the amount of US$ 145,000 thousand, has a settlement term up to December 2007 and is subject to interest of 3.5% per annum plus 6-month LIBOR, payable semiannually. The second tranche, in the amount of US$ 55,000 thousand, has a settlement term up to June 2009 and is subject to interest of 4.5% per annum plus 6 month LIBOR, payable semiannually. In June 2005, the two tranches were consolidated, falling due in June 2009 and bearing interest at 1.45% p.a. above LIBOR, payable semiannually. The balance of this transaction at December 31, 2005 is US$ 175,442 thousand - R$ 410,656 (2004 - US$ 200,643 thousand - R$ 532,588).
In August 2004, the Company obtained funds in the amount of US$ 50,000 thousand as prepayment of exports. In addition to the foreign exchange variation, these funds bear annual interest of 3% plus 6-month LIBOR up to January 2005 and 3-month LIBOR as from that date up to the final maturity, in October 2006. The balance of this operation, at December 31, 2005, is US$ 20,283 thousand - R$ 47,477 (2004 - US$ 51,009 thousand - R$ 135,397).
The Company has also other prepayments of export operations, the outstanding balance of which amounts to US$ 41,279 thousand - R$ 96,622 at December 31, 2005 (2004 - US$ 126,905 thousand - R$ 336,857). These transactions will be settled at various dates through January 2008. In addition to the exchange variation, the amounts bear annual interest of 1.55% to 3.00% above LIBOR.
(c) Medium-term Notes ("MTN") program
In July 2003, Braskem implemented a MTN Program of US$ 500,000 thousand. On December 16, 2003, the Companys Board of Directors authorized an increase in the total of the program to US$ 1 billion and an extension in term from five to ten years.
55
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsMTN issues and balance at December 31 are as follows:
US$ thousand | R$ | |||||||||||
Issues |
Interest | Maturity |
2005 | 2004 | 2005 | 2004 | ||||||
2nd Tranche |
9.25% | 10/23/2005 |
65,000 | 172,536 | ||||||||
3rd Tranche |
12.50% | 11/05/2008 |
275,000 | 275,000 | 643,693 | 729,960 | ||||||
4th Tranche |
11.75% | 01/22/2014 |
250,000 | 250,000 | 585,175 | 663,600 | ||||||
525,000 | 590,000 | 1,228,868 | 1,566,096 | |||||||||
Interest accrued |
48,537 | 15,352 | ||||||||||
Balance at December 31 |
1,277,405 | 1,581,448 | ||||||||||
(d) FINAME, BNDES and BNB
These loans relate to various transactions aiming at increasing production capacity, as well as environmental programs, operating control centers, laboratory and waste treatment stations. Principal and charges are payable monthly up to June 2016.
In June 2005 a further BNDES credit line was approved, in the amount of R$ 384,600, and the first tranche of R$ 100,789 was released on July 27, 2005 and the second tranche of R$ 30,015 was released on December 21, 2005.
(e) Acquisition of shares
This loan refers to the acquisition from BNDESPAR of one billion shares of Braskem Participações, made in September 2001, by the merged company Nova Camaçari Participações S.A. (Nova Camaçari). The loan principal is payable in full in August 2006. The principal bears interest of 4% p.a. and TJLP, due annually as from August 2002.
56
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(f) Project finance
In March and September 2005, the Company obtained loans in Japanese currency from Nippon Export and Investment Insurance ("NEXI"), in the amount of YEN 5,256,500 thousand R$ 136,496 and YEN 6,628,200 thousand R$ 141,529, respectively, to finance several investment projects, including the Program Braskem +. These loans bear annual interest of 0.95% above the Tokyo Interbank Rate (Tibor) plus exchange variation, payable semiannually.
Principal will be paid in 11 installments as from March 2007, and final maturity will occur in March 2012. The financing contracts comprise an insurance that guarantees 95% of commercial risks and 97.5% of political risks.
As part of its risk management policy (Note 21), the Company signed swap contracts in the total amount of these debts, changing the annual financial charges to 101.59% of CDI, 103.98% of CDI and 104.29% of CDI for the two tranches released in March and for the tranche released in September 2005, respectively. The swap contract was signed with a prime foreign bank and its maturity, currencies, rates and amounts are perfectly matched to the debt contracts. The result of this contract is recorded in monetary variation of financing (Note 22).
(g) Repayment and guarantee schedule
Long-term loans mature as follows:
Parent company | Consolidated | |||||||||
2005 | 2004 | 2005 | 2004 | |||||||
2006 | 563,929 | 622,228 | ||||||||
2007 | 596,949 | 1,269,314 | 348,515 | 948,559 | ||||||
2008 | 857,428 | 770,436 | 880,015 | 774,430 | ||||||
2009 | 147,555 | 22,190 | 157,263 | 24,462 | ||||||
2010 and thereafter | 1,729,483 | 689,217 | 1,471,679 | 689,892 | ||||||
3,331,415 | 3,315,086 | 2,857,472 | 3,059,571 | |||||||
57
Braskem S.A. and its subsidiaries
Notes to the Financial Statements atIn the case of short-term loans, the Company has given security such as trade bills receivable and promissory notes.
Long-term loans are secured by liens on fixed assets, shares, shareholders endorsements, bank guarantees and promissory notes. Certain long-term operations are guaranteed by Surety Bonds and mortgages of the Company's industrial plants.
15 Debentures
(a) 10th public issue
On October 1, 2001, the Company carried out the issue and sale of two series of the 10th issue of non-convertible debentures, being 4,108 of the 1st series and 2,142 of the 2nd series, totaling R$ 625,000.
In January 2004, the Company redeemed 2,289 debentures of the 1st series and 945 debentures of the 2nd series, while the rest of both series was redeemed on September 30, 2004. All such debentures were cancelled.
(b) 1st private issue
On May 31, 2002, the merged company OPP Produtos Petroquímicos S.A. ("OPP PP") issued 59,185 convertible debentures. These debentures were fully purchased by Odebrecht S.A., which subsequently transferred their title to ODBPAR. These debentures have the following characteristics:
Single series | ||
Unit face value: | R$ 10 | |
Final maturity date: | July 31, 2007 | |
Remuneration: | TJLP variation plus interest of 5% p.a. |
ODBPAR has the option to convert these debentures into Class "A" preferred shares at any time. The payment of the principal and interest will only occur on their final maturity date. There is no partial or total redemption clause allowing payments before this date. At December 31, 2005, the transaction balance amounts to R$ 999,347 (2004 - R$ 867,870).
58
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(c) 11th public issue
The Company's Extraordinary Shareholders Meeting held on November 19, 2003 approved the 11th public issue of debentures, not convertible into shares. On December 1, 2003, a single series of 12,000 thousand debentures was issued in the total amount of R$ 1,200,000, with subscriptions on January 16 and February 2, 2004. Their characteristics are as follows:
Single series | ||
Unit face value: | R$ 100 | |
Final maturity date: | December 1, 2007 | |
Repayment of face value: | 36 monthly, equal, successive installments, as from January 1, 2005 | |
Remuneration: | CDI + interest of 4.5% p.a. | |
Payment of remuneration: | 1st day of each month, as from January 2004 |
On November 3, 2004, the Company carried out the early redemption of all debentures of this issue, as permitted by Clause 5.19 of the Deed of Issue. After redemption the debentures were cancelled.
(d) 12th public issue
The Extraordinary Shareholders Meeting held on June 15, 2004 approved the issue of 3,000 debentures, non-convertible into shares, totaling R$ 300,000. The debentures were subscribed and paid up on September 29, 2004, and have the following characteristics:
Single series | ||
Unit face value: | R$ 100 | |
Final maturity date: | June 1, 2009 | |
Repayment of face value: | Single installment upon maturity | |
Remuneration: | 117% of CDI | |
Payment of remuneration: | Semiannually as from December 1, 2004 |
To guarantee the compliance with the obligations of these debentures, the Company set up a pledge on pre-indexed credit rights. At December 31, 2005, the transaction balance is R$ 304,920 (2004 - R$ 304,969).
59
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(e) 13th public issue
The Board of Directors, at a meeting held on April 13, 2005, approved the issue of 30,000 simple, non-convertible, unsecured debentures, in a single series, for a total of R$ 300,000. These debentures were subscribed and paid up on June 30, 2005 and have the following characteristics:
Single series | ||
Unit face value: | R$ 10 | |
Final maturity date: | June 1, 2010 | |
Repayment of face value: | Single installment upon maturity | |
Remuneration: | 104.10% of CDI | |
Payment of remuneration: | Semiannually, as from December 1, 2005 |
The transaction balance at December 31, 2005 amounts to R$ 304,374.
The debenture activity can be summarized as follows:
Parent company / | ||||
Consolidated | ||||
2005 | 2004 | |||
Balance at January 1 | 1,172,839 | 1,492,000 | ||
Financial charges | 229,448 | 444,132 | ||
Issue | 300,000 | 1,500,000 | ||
Amortization | (93,645) | (2,263,293) | ||
Balance at the end of the period | 1,608,642 | 1,172,839 | ||
Less: Current liabilities | (9,295) | (4,969) | ||
Long-term liabilities | 1,599,347 | 1,167,870 | ||
60
Braskem S.A. and its subsidiaries
Notes to the Financial Statements16 Taxes and Contributions Payable Long-term Liabilities
Parent company | Consolidated | |||||||||
2005 | 2004 | 2005 | 2004 | |||||||
IPI credits offset | ||||||||||
IPI export credit | (i) | 550,263 | 462,832 | 550,263 | 462,832 | |||||
IPI zero rate | (ii) | 308,728 | 272,143 | 466,301 | 406,880 | |||||
IPI consumption materials and property, plant | ||||||||||
and equipment | 37,673 | 34,418 | 37,673 | 85,034 | ||||||
Other taxes and contributions payable | ||||||||||
PIS /COFINS - Law 9,718/98 | (iii) | 285,521 | 290,533 | 316,081 | 320,620 | |||||
Education contribution, SAT and INSS | 33,360 | 28,816 | 40,784 | 33,152 | ||||||
PAES-Law 10,684 | (iv) | 43,151 | 49,706 | 43,151 | 49,706 | |||||
Other | 2,746 | 4,799 | 9,802 | 28,187 | ||||||
(-) Judicial deposits | (102,971) | (131,416) | (139,697) | (170,263) | ||||||
1,158,471 | 1,011,831 | 1,324,358 | 1,216,148 | |||||||
The Company has brought suit against some changes in Brazilian tax law, defending among other claims its entitlement to Manufactured Products Tax (IPI) credits originating from the purchase of goods and from product exports. As for contingent IPI credits, which had been offset against several federal tax debts, the Company posted them as liabilities to avoid contingent gains, and provisioned for interest on these liabilities at the SELIC benchmark rate. The Company has not recorded tax credits that may be viewed as realizable contingent assets.
(i) IPI Tax Credit on Exports (Crédito-prêmio)
This refers to lawsuits for court recognition of the IPI credit (crédito-prêmio) introduced by Decree-law 491/69 as an incentive to manufactured product exports.
The Company and absorbed company Nitrocarbono filed a motion for writ of mandamus in September 2003, and the resulting court decision granted an entitlement to these credits for a five-year period preceding the filing date, which may be offset against all taxes administered by the Federal Revenue Office. The Federal Government lodged an appeal, which is pending judgment by the TRF, 1st Circuit.
OPP Química obtained a court decision holding the case partially valid, authorizing this absorbed company to offset such tax credit against federal tax debts for the units located in Rio Grande do Sul. This decision was overturned by the TRF, 4th Circuit. Special and extraordinary appeals were then lodged by the Company, and are pending judgment by the Superior Court of Justice (STJ) and the Federal Supreme Court (STF), respectively.
61
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsAbsorbed company Trikem, in its São Paulo unit, filed a motion for writ of mandamus on these same grounds. This case is pending judgment by first-instance courts.
Absorbed companies OPP Química and Trikem, in their Bahia industrial units, filed a lawsuit on these same grounds. The case was held invalid, and the Company appealed this unfavorable decision. This appeal is pending judgment by the TRF, 1st Circuit.
Absorbed company Trikem, in its Alagoas units, filed a motion for writ of mandamus over this same matter. A mandamus was granted and entitlement to this tax credit on exports was granted for a 10-year period prior to the filing date. The TRF, 5th Circuit upheld this favorable decision, but reduced this time span to five years. Special and extraordinary appeals lodged against this ruling are pending judgment by the STJ and STF, respectively.
The outside legal counsel of the Company believe that the chances of success with respect to the IPI tax credit (crédito-prêmio) itself and the effects of monetary restatement (recovery of understated inflation indexes, monetary restatement and accrual of the SELIC benchmark rate) are good, despite the unfavorable rulings recently rendered by the STJ, in the aftermath of Senate Resolution No. 71 of December 2005. The Company is still analyzing the potential developments of this Resolution.
(ii) IPI Zero rate
Absorbed companies OPP Química and Trikem have filed similar lawsuits in the States of São Paulo, Bahia and Alagoas, claiming IPI tax credits from the purchase of raw materials and inputs that are exempt, non-taxed or taxed at a zero rate.
An injunctive relief was denied to the lawsuit underway in São Paulo, but the TRF, 3rd Circuit granted staying effects and recognized the Companys entitlement to said tax credit. A first-instance decision is pending.
The TRF, 1st Circuit found for the lawsuit lodged in Bahia, and the Federal Government filed special and extraordinary appeals against such decision. The special appeal was not cognized by both the TRF and the STJ, and the extraordinary appeal is pending judgment by the STF.
Finally, the Alagoas case was held valid by the TRF, 5th Circuit, but a formal defect in this judgment caused the STJ to remand the case to the TRF for curing this defect. The case is at the STJ pending judgment on the Companys motion to clarify.
In August 1999, Polialden filed a motion for writ of mandamus and was authorized to use the IPI credits originated from the preceding five years acquisition of raw materials and inputs that are exempt from IPI, not subject to IPI taxation or taxed at a zero rate. The TRF, 1st Circuit affirmed this decision, and special and extraordinary appeals lodged by the Federal Government then followed. The case was distributed to the Superior Court of
62
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsJustice (STJ). From March 2000 through December 2005, Polialden used R$ 98,011 credits to offset with the IPI tax owed in its ordinary course of business. This is a contingent IPI credit and, as such, was posted as a long-term liability.
The Companys legal advisors are of the opinion that the case is likely to prevail in the Brazilian courts, given the existence of past STF decisions favorably to taxpayers. However, the STF itself is revisiting this matter in a similar lawsuit involving another taxpayer (this judgment is currently on hold).
(iii) PIS/COFINS - Law 9,718 of 1998
The Company and controlled company Polialden has brought a number of lawsuits to challenge the constitutionality of the changes deriving from Law 9718/98, which, in practice, increased the value of PIS and COFINS contributions as from February 1999, as described below:
.. COFINS Its rate escalated from 2% to 3%, and the tax base was expanded to reach nearly every corporate income beyond the sale of goods and services;
.. PIS expansion of the tax base as in COFINS.
As for the period after December 2002 (when Law 10637/02 came into effect), all discussions over the constitutionality of the PIS tax base (Law 9718/98) became void, due to the new non-cumulative system adopted for this tax. Similarly, after February 2004, when Law 10833/03 came into force, the discussions over the COFINS tax base became void as well. As from such dates, the Company started paying these contributions as prescribed by proper legislation, without prejudice to claims related to past periods.
As court disputes still hold valid for the period while Law 9718/98 was in effect, and once the STF Full Bench determined in November 2005 that the increase in PIS and COFINS tax bases under said law is unconstitutional, the status of each case is as follows:
.. The Company brought a lawsuit alleging that the COFINS tax base expansion in March 1999 was unconstitutional. An injunctive relief only authorized a judicial deposit of the amount under dispute. A writ of mandamus was eventually granted, but the TRF, 1st Circuit overturned the first-instance decision. The Company lodged an extraordinary appeal, which is pending judgment by the STF. The disputed amounts came to R$ 39,056 as of January 2004, and judicial deposits relating to all of these sums have been made.
.. The Company filed a motion for writ of mandamus challenging the constitutionality of the PIS tax base expansion in March 1999. A writ of mandamus was issued, but the TRF, 1st Circuit overturned this decision. The Company lodged an extraordinary appeal at the STF, which rendered a favorable decision (published in December 2005).
63
Braskem S.A. and its subsidiaries
Notes to the Financial Statements.. The Company filed a lawsuit for non-payment of COFINS at a rate of 3%, in October 2001. A writ of mandamus was rejected, and the Company appealed this decision, which is pending judgment by the TRF, 1st Circuit.
.. In other cases pending judgment on the merits, the Company is challenging the PIS and COFINS tax base expansions as well as the COFINS rate increase for controlled companies Proppet S.A. (Proppet), Nitrocarbono and CEMAN - Central de Manutenção Ltda. (CEMAN), all of them already absorbed.
.. Absorbed companies OPP Química and Trikem brought a lawsuit together with other companies, challenging the lawfulness and constitutionality of the COFINS tax base expansion. This case was held valid, and the Federal Government appealed this decision. The case is pending judgment by the TRF, 1st Circuit. In August 2003, absorbed company Trikem opted for voluntary dismissal of the case as regards the tax rate increase, and qualified to PAES (Note 16(iv)) for payment of its tax liabilities in installments.
.. Absorbed companies OPP Química and Trikem, along with other companies, filed a motion for writ of mandamus challenging the lawfulness and constitutionality of PIS tax base expansion in July 1999. A writ of mandamus was entered, but the TRF, 1st Circuit overturned this decision. An extraordinary appeal lodged against this ruling is pending judgment by the STF. After distribution of the extraordinary appeal, an incidental motion for writ of prevention was lodged at the STF to stay payment of PIS at the expanded tax base. The writ of prevention was granted, and the extraordinary appeal is pending judgment.
Based on those court orders, OPP Química was released from paying or depositing any amounts relating to the tax increases introduced by Law 9718/98 up to its merger into the Company. Besides the increase in the COFINS rate, in which there was a motion for partial voluntary dismissal of the action, absorbed company Trikem is in the same situation as OPP Química.
.. Polialden filed a motion for writ of mandamus in 1999 to challenge the COFINS tax rate increase. The case was held partially valid, suspending the payment of COFINS at the higher rate while the court order releasing the company from CSL tax remained in force. Both litigants presented appeals, which are pending judgment by the TRF, 1st Circuit. The unpaid COFINS tax came to R$ 1,672 in FY 1999, and Polialden applied for installment payment of this tax liability.
.. Effective 2000, Polialden paid COFINS at 3%. In September 2000, Polialden lodged another motion for writ of mandamus, this time to keep on paying COFINS at 2% and to offset the increased COFINS tax with CSL payments. Polialden made judicial deposits at R$ 11,826 to secure such claims. The motion was eventually held invalid, and Polialden appealed at the TRF, 1st Circuit. Polialdens appeal was rejected, which prompted the filing of an extraordinary appeal at STF.
64
Braskem S.A. and its subsidiaries
Notes to the Financial Statements.. Until January 2004, Polialden paid COFINS at 2% and made judicial deposits for the 1% difference. In February 2004, Polialden started paying COFINS as per Law 10833/03, which provided for new assessment criteria.
.. Polialden filed a motion for injunctive relief in June 2005, challenging the constitutionality of the PIS and COFINS tax base expansion and applying for offset of overpaid taxes during the effectiveness of said law. The writ of mandamus was granted, and the Federal Governments appeal is pending judgment
(iv) Special Installment Program (PAES) - Law 10,684/03
Federal Law No. 10684 was published on May 30, 2003, instituting the PAES program which offers taxpayers that are delinquent to the Federal Revenue Office or the National Treasury Attorneys Office (whether past-due tax liabilities have already been acknowledged or are being challenged in court) the possibility of paying their debts overdue as at February 28, 2003 in up to 180 monthly successive installments.
Among other benefits, this legislation provides for a 50% reduction in the default fine as well as the adoption of the Long-Term Interest Rate (TJLP) for restatement of installments (replacing the SELIC rate, which is usually higher).
In August 2003, absorbed company Trikem opted to file for voluntary dismissal of its lawsuit against the COFINS rate increase, thus qualifying for the more favorable payment conditions under the PAES program. The amount due is being paid in 120 monthly installments, and this option was confirmed upon payment of the first installment on August 31, 2003. The outstanding debt is R$ 49,706 as of December 31, 2005, being R$ 6,555 in current liabilities and R$ 43,151 in long-term liabilities (2004 R$ 56,261, being R$ 6,555 in current liabilities and R$ 49,706 in long-term liabilities).
65
Braskem S.A. and its subsidiaries
Notes to the Financial Statements
17 Income Tax and Social Contribution on Net Income
(a) Current income tax parent company
2005 | 2004 | |||
Income before income tax | 764,331 | 648,523 | ||
Adjustments to net income for the year | ||||
Permanent additions | 67,519 | 23,690 | ||
Temporary additions | 477,375 | 380,537 | ||
Permanent exclusions | (252,889) | (208,334) | ||
Temporary exclusions | (459,479) | (208,918) | ||
Interest on capital | (270,000) | (170,000) | ||
Taxable income before tax loss carryforward | 326,857 | 465,498 | ||
Utilization of tax losses (30%) | (98,057) | (139,649) | ||
Taxable income for the year | 228,800 | 325,849 | ||
Income tax (15%) and surcharge (10%) | 57,176 | 81,438 | ||
Income tax expenses from changes in net assets | ||||
arising from the merger of : | ||||
Trikem and other companies | (2,307) | 10,903 | ||
Income tax expense for the year | 54,869 | 92,341 | ||
Of the income tax expense, R$ 44,244 is entitled to exemption/abatement benefit (Note 18(a)) (2004 - R$ 53,887).
66
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(b) Deferred income tax
(i) Composition of deferred income tax parent company
In accordance with the provisions of CVM Deliberation 273/98, which approved the Institute of Independent Auditors of Brazil (IBRACON) standards on the accounting of income tax, supplemented by CVM Instruction 371/02, the Company has the following accounting balances of deferred income tax:
Composition of calculated deferred income tax: | 2005 | 2004 | ||
Tax loss carryforwards | 441,068 | 539,754 | ||
Amortized goodwill on investments in | ||||
merged companies | 151,163 | 168,757 | ||
Amortized goodwill on permanent investments | 923,070 | 629,572 | ||
Temporarily non-deductible expenses | 1,009,240 | 1,261,018 | ||
Potential calculation basis of deferred income tax | 2,524,541 | 2,599,101 | ||
Potential deferred income tax (25%) | 631,135 | 649,775 | ||
Unrecorded portion of deferred income tax | (353,885) | (348,248) | ||
Deferred income tax assets | 277,250 | 301,527 | ||
Activity: | ||||
Opening balance for the year | 301,527 | 165,620 | ||
Addition (write-off) of deferred income tax on tax losses | (24,672) | (30,682) | ||
Deferred income tax on amortized goodwill of merged companies | (3,374) | 37,040 | ||
Deferred income tax on temporary provisions | 3,769 | 129,549 | ||
Closing balance | 277,250 | 301,527 | ||
Deferred income tax (liabilities) on accelerated depreciation | ||||
Opening balance for the year | (9,115) | (9,705) | ||
Realization of deferred income tax | 590 | 590 | ||
Closing balance for the year | (8,525) | (9,115) | ||
Deferred income tax in income statement | (23,687) | 136,497 | ||
67
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsDeferred income tax assets arising from tax losses and timing differences are recorded taking into account analyses of future tax profits, supported by studies prepared based on internal and external assumptions and current macroeconomic and business scenarios approved by the Company's management.
(ii) Estimated timing of the realization of deferred income tax assets
In addition to the positive impacts from the corporate restructuring (Note 1 (b)), the Company's business plan at December 31, 2005 anticipates the generation of future taxable income based on projections and feasibility studies primarily influenced by price, foreign exchange, interest rate and market growth assumptions and other variables relevant to the performance of Braskem. The studies show that the credit from tax losses, in the amount of R$ 110,267, will be fully utilized between 2006 and 2010.
Deferred income tax credits on timing differences, mainly comprised of goodwill in the amount of R$ 33,366, and temporarily deductible expenses in the amount of R$ 133,617, are justified by their full utilization due to the tax realization of goodwill and provisions.
The realization of corporate income tax credits on goodwill is anticipated as follows:
2006 | 4,398 | |
2007 | 4,398 | |
2008 | 4,398 | |
2009 | 4,951 | |
2010 | 4,951 | |
2011 | 4,901 | |
2012 | 2,294 | |
2013 | 1,025 | |
2014 | 1,025 | |
2015 | 1,025 | |
33,366 | ||
68
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsThe accounting for deferred income tax assets does not consider the portion of amortized goodwill on investments in merged companies, the realization term of which exceeds 10 years (R$ 17,698), as well as amortized goodwill on permanent investments ( R$ 923,070), the realization of which is uncertain over the next 10 years.
Concerning temporarily non-deductible expenses, deferred income tax was calculated on tax expenses which are currently being challenged in court and other operating expenses, as is the case of the provision for doubtful accounts. Provisions for
losses on permanent investments (R$ 474,772) were not considered, as their realization is uncertain over the next 10 years.
It should be pointed out that assets recorded refer only to those amounts the realization of which is supported by projects of taxable income, brought to present value, utilized by the Company over up to 10 years, considering also that tax losses
available for offset are limited to 30% of net income for the year before income tax and tax exemption and abatement benefits.
As the income tax taxable basis is determined not only by the potential future profits, but also the existence of non-taxable revenues, non-deductible expenses, fiscal incentives and other variables, there is no immediate correlation between the Company's net income and the income tax results. Accordingly, the expectation of using fiscal credits should not be construed as an indication of the Company's future results.
(c) Social Contribution on Net Income (CSL)
In view of the discussions over the constitutionality of Law 7689/88, the Company and its absorbed companies OPP Química and Trikem filed a lawsuit against payment of CSLL.
The TRF, 1st Circuit had expressly recognized the unconstitutionality of this tax, and the decisions favorable to the Company and its absorbed companies and Polialden became final and conclusive. However, the Federal Government filed a rescission action against the decisions on the lawsuits filed by the Company, Trikem and Polialden, on the argument that after the final decision favorable to those companies the Full Bench of STF declared the constitutionality of this tax except for 1988. As the Federal Government did not file a rescission action in the case of OPP Química, the first final and conclusive decision remained in force.
The rescission action filed by the Federal Government was held valid in the first and second instances, but tax payments are still on hold. Currently, appeals to the rescission action are pending judgment by the STF and STJ.
69
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsBased on the referred STF decision, the Federal Revenue Office has issued tax infraction notices against the Company and its absorbed companies, and administrative defenses have been filed against such notices.
Based on the opinion of its outside legal counsel, the Company and Polialden believes that the following is likely to occur: (i) the courts will eventually release the Company and Polialden from paying this tax; and (ii) even if the rescission action is held valid, it cannot be applied retrospectively to enactment of the law, the reason why the Company has created no provisions for this tax.
If retrospective collection is required (contrary to the opinion of the Companys outside legal counsel), the Company and Polialden believes that the possibility of imposing a fine is remote. Accordingly, the amount payable, restated based on Brazils SELIC benchmark rate, would be R$ 582,261 for the Company and R$ 651,663 for a consolidated status (2004 R$ 507,000 for the Company and R$ 562,000 for a consolidated status), net of fine.
18 Tax Incentives
(a) Corporate income tax
From calendar years 2002 to 2011, the Company has the right to reduce by 75% the income tax on the profit arising from the sale of basic petrochemical products and utilities. The Camaçari polyethylene plant has the same right for the same period. The PVC plant at Camaçari has the same right from 2005 to 2014. The PVC plant in Alagoas and the PET plant at Camaçari are exempt from corporate income tax calculated on the results of their industrial operations until 2008.
Productions of caustic soda, chloride, ethylene dichloride and caprolactama enjoy the benefit of the 75% decrease in the income tax rate up to 2012.
At the end of each fiscal year, in the case of taxable profit resulting from the benefited operations, the income tax amount is recorded as expense for the year and credited to a capital reserve account, which can only be used to increase the capital or absorb losses.
On December 14, 2004, the Board of Directors of Braskem approved the use of R$ 463,281 from the tax incentive reserve for absorption of the balance of accumulated losses.
70
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(b) Value-added tax - ICMS
The Company has ICMS tax incentives granted by the States of Rio Grande do Sul and Alagoas, through the Company Operation Fund - FUNDOPEM and State of Alagoas Integrated Development Program - PRODESIN, respectively. Such incentives are designed to foster the installation and expansion of industrial facilities in those States. The incentive determined for the year ended December 31, 2005 amounted to R$ 7,795 (2004 - R$ 9,681). The accounting treatment of such incentives is the same applied to the income tax incentive.
19 Stockholders Equity
(a) Capital
At December 31, 2005, the Company's subscribed and paid-up capital is R$ 3,402,968, divided into 120,860,099 Common, 240,860,356 class A preference, and 803,066 Class B preference shares, all of them registered shares with no par value. At the same date, the Company's authorized capital comprises 488,000,000 shares, of which 175,680,000 are Common, 307,440,000 are Class A preference, and 4,880,000 are Class B preference shares.
In January 2004, as a result of the merger of Trikem (Note 1(b)), the Company'scapital was increased by R$ 304,596, through the issue of 8,136,165,484 class A preference shares, to reach R$ 2,192,018.
In September 2004, in accordance with the Global Offer (Note 1(c)), the Company increased its capital in the amount of R$ 1,210,950, through the issue of 13,455,000,000 Class A preference shares, at the price of R$ 90.00 per thousand shares in Brazil and US$ 31.38 overseas. Accordingly, capital totaled R$ 3,402,968.
On January 15, 2004, in order to maintain the minimum limit related to the proportion between common and preference shares, in accordance with Brazilian Corporate Law, before the merger of Trikem, the conversion of 121,948,261 Class A preference shares into common shares was approved at the Extraordinary General Meeting. Similarly, on September 17, 2004, before the completion of the Global Offer, the conversion of 4,484,963,007 Class A preference shares into common shares was approved at the Extraordinary General Meeting.
71
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsFrom September 2004 to March 2005, in accordance with Article 6 of the by-laws, the conversion of 28,313,178 Class B preference shares into 14,156,589 Class A preference shares was carried out. As a result, at March 31, 2005, before the approval of the reverse split (Note 1(d)), capital comprised 30,215,024,848 Common shares, 60,215,051,485 Class A preference shares and 200,841,622 Class B preference shares.
For the year ended December 31, 2004, earnings per share was determined based on the total number of shares then issued. Taking into consideration the share reverse split approved on March 31, 2005, earnings per share would be R$ 1.913.
(b) Share rights
Preferred shares are non-voting but ensure priority to the receipt of a non-cumulative dividend of 6% p.a. on their unit value, in accordance with the net income available for distribution. Only Class A preference shareholders share equally with the common shares in the remaining net income, and common shares are entitled to dividends only after priority dividends have been paid to the holders of preference shares. Only Class A preference shareholders share equally with common shares in the distribution of shares resulting from the incorporation of other reserves. Class B preference shares are not convertible into common shares. However, at the end of the non-transfer period provided for in the applicable law, they can be converted into Class A preference shares at any time, at the ratio of 2 Class B preference shares for each Class A preference share.
Class A and Class B preference shares have priority to the return of capital in the case of liquidation.
Shareholders are ensured a mandatory dividend of 25% of net income for the year, adjusted in accordance of the Brazilian Corporate Law.
Pursuant to the Understanding Memoranda for the Execution of Shareholders Agreement, the Company must distribute dividends corresponding to not less than 50% of the net income for the year, as long as the required reserve amounts are sufficient to allow for the efficient operation and development of the Company's businesses.
Under the terms of Eurobond and MTN agreements (Notes 14(a) and (c)), the payment of dividends, interest on capital or any other profit sharing is limited to the higher of 50% of net income for the year, or 6% of the nominal value of class A and B preference shares.
72
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(c) Treasury stock
At December 31, 2005, the Company's treasury stock comprised 467,347 Class A preference shares (2004 116,836,839 shares).
(d) Appropriation of net income
In accordance with the Companys by-laws, net income for the year, adjusted as provided by Law 6.404/76, will be appropriated as follows: (i) 5% for constitution of the legal reserve, not exceeding 20% of capital; (ii) 25% for payment of non-cumulative mandatory dividends, observing the legal and statutory advantages of the preference shares. When the priority dividend amount paid to the preference shares is equal to or higher than 25% of the net income for the year, calculated in accordance with Article 202 of Brazilian Corporate Law, the full payment of the mandatory dividend is carried out. If there is a remaining mandatory dividend after the payment of the priority dividend, it will be used as follows: i) in the payment to common shares of a dividend up to the limit of the priority dividend of preference shares; ii) if there is a remaining balance in the distribution of an additional dividend to common shares and Class A preference shares, under the same conditions, so as each common share or preference share of this class receives the same dividend.
73
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsDividends proposed by management, subject to approval by the shareholders meeting, are as follows:
2005 | 2004 | |||
Net income for the year | 685,775 | 692,679 | ||
Portion appropriated to legal reserve | (34,289) | (34,634) | ||
Adjusted net income for the calculation of dividends | 651,486 | 658,045 | ||
Distribution of profits: | ||||
Interest on capital (Note 19(e)) | ||||
Common shares R$ 0.746 per thousand shares (2004 - R$ 1.125) | 90,179 | 33,976 | ||
Class A preference shares R$ 0.746 per thousand shares (2004 - R$ 2.256) | 179,368 | 135,652 | ||
Class B preference shares R$ 0.563 per thousand shares (2004 - R$ 2.256) | 453 | 372 | ||
270,000 | 170,000 | |||
Dividends proposed |
||||
Common shares R$ 0.156 per thousand shares (2004 - R$ 1.131) | 18,649 | 34,178 | ||
Class A preference shares R$ 0.156 per thousand shares | 37,094 | |||
Total dividends proposed | 55,743 | 34,178 | ||
Total interest on capital and dividends | 325,743 | 204,178 | ||
Amount appropriated to revenue reserve | 325,743 | 453,867 | ||
Minimum mandatory dividends - 25% | 162,872 | 164,511 | ||
Retained earnings are linked to a capital budget included in the Business Plan, approved by the Board of Directors at a meeting held on December 13, 2005, to be submitted to the appreciation of the 2006 Annual Shareholders Meeting.
(e) Interest on capital
On December 29, 2005, the Management Board approved the payment of interest on capital in the amount of R$ 270,0000, of which (i) R$ 179,368 to holders of Class A preference shares and holders of American Depositary Receipts (ADR), corresponding to the gross amount of R$ 0.746145 per share and R$ 1.492290 per ADR; (ii) R$ 452 to the holders of Class B preference shares, corresponding to the gross amount of R$ 0.563940 pier share, equal to 6% of the share unit value, as provided in Article 9 of the Company's by-laws and (iii) R$ 90,179 to the holders of common shares, corresponding to the gross amount of R$ 0.746145 per share. Payment will be made until 60 days after the date of the 2006 Annual Shareholders Meeting.
74
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsInterest on capital was determined based on the shareholding position at December 31, 2005, applying such amount to priority and mandatory dividends for 2005, as prescribed by Law 9,249/95 and paragraph 6, Article 44 of the by-laws. Withholding income tax on interest credited was R$ 35,515 and the benefit for the Company regarding income tax was R$ 67,500.
For disclosure purposes, the interest on capital expense was reversed in the statement of income for the year, in the group Operating expenses (income), and also reflected in the statement of changes in stockholders equity, pursuant to CVM Deliberation CVM 207/96.
20 Contingencies
(a) Collective Bargaining Agreement Section 4
The Petrochemical, Plastics, Chemicals and Related Companies Employees Union in the State of Bahia (SINDIQU¥MICA) and the Employers Association of the Petrochemical and Synthetic Resins Industries in the State of Bahia (SINPEQ) are disputing in court the validity of a wage and salary indexation clause contained in the collective bargaining agreement (convenção coletiva de trabalho), given the matter of public policy involved, namely, the adoption of an economic plan in 1990 that put a limit on wage adjustments. The Company ran plants in the region in 1990, and is a member of SINPEQ. The employees labor union seeks retrospective adjustment of wages and salaries. In December 2002, the STF entertained an appeal from SINPEQ and affirmed an erstwhile decision from the Superior Labor Court (TST), determining that an economic policy legislation should prevail over collective bargaining agreements and, as such, no adjustment was due. SINDIQUIMICA appealed this decision. In June 2003, after two STF justices had rendered an unfavorable opinion, judgment was suspended. It was reinstated in May 31, 2005, when the appeal was rejected by unanimous opinion. This decision is pending publication.
Based on the opinion of the Companys outside legal counsel, Management believes in a favorable outcome for the companies, and no amount was thus provisioned for in connection with this case. On October 24, 2005, SINDIQU¥MICA filed a motion to review (embargos de divergência), which is pending judgment.
75
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(b) Holders of Preferred Shares
Some holders of Class B preferred shares issued by the Company under a tax incentive program claim that they are entitled to profit distribution on a par with the holders of common and Class A preferred shares. One of these lawsuits was found against the Company, which prompted Braskem to file a rescission action to vacate such unfavorable ruling; as a result, the courts entered an injunctive relief staying the enforcement of this award until a final and conclusive decision were eventually rendered in the rescission action. On December 11, 2003, the Bahia State Court of Justice held Braskems rescission action fully valid, vacating the erstwhile judgment handed down by this same court and rejecting the pleadings of shareholders on account of an express breach of special laws. In June 2004, the shareholders filed a special appeal (recurso especial) at the Superior Court of Justice (STJ), but it was not cognized by resolution of the Chief Justice of the Bahia State Court of Justice in November 2004; as a result, the shareholders appealed this decision once again at the STJ. In September 2005, after discussions over the timeliness of the shareholders special appeal, it was seized of by STJ. The Companys legal counsel believes that the chances of success in this case are high, notably because the Companys stance is backed by legal opinions from renowned jurists and by court rulings on this specific issue.
The dispute surrounding the rule set out in the bylaws of controlled company Polialden about the distribution of dividends to preferred shares under incentive (article 5, paragraph 3, coupled with article 37, paragraph 4), dating back to the issuance of Official Notice CVM/GEA-3 No. 100 of April 14, 2000, was resolved in a decision rendered by the CVM Board on August 10, 2000, which granted Polialdens appeal and concluded that "the minimum dividends payable to preferred shares are 6% ..., capped at 8% of this same value or the equivalent to 25% of net profits at yearend, whichever is higher, as the company has done over the last 10 years; such shares are not entitled to remaining profits, as the bylaws have clearly set the maximum dividends attaching to such shares."
Backed by such decision and in reliance on legal opinions prepared by renowned legal advisors and jurists, Polialdens Management has abided by the rule set out in its bylaws for payment of dividends to common shares and to preferred shares under incentive, capping the payments to those preferred shares at 8% of the nominal value of Polialdens capital stock, and considering the maximum 25% compulsory dividend distribution as provided for in the bylaws and in the CVM decision.
Despite the existence of legal opinions, past court rulings and the CVM decision favorably to Polialdens stance that preferred shares under incentive do not qualify for the remaining profits, some holders of preferred shares under incentive have looked to the courts for recognition of their purported entitlement to dividends on an equal footing with common shares.
76
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsMost court decisions already rendered in this regard have been favorable to Polialden. However, in August 2001, contrary to the consolidated stance of the CVM Board over this issue, and despite the legal opinions issued by renowned jurists about this matter, the 4th Panel of STJ held a special appeal valid, acknowledging the appellant shareholders entitlement to dividends on equal conditions vis-à-vis the holders of common shares, based on resolutions adopted in some past shareholders meetings. This decision is still being appealed by Polialden.
As a consequence of preliminary injunctions entered favorably to some shareholders, Polialden has posted judicial bonds in an amount corresponding to the shortfall asserted by those shareholders in connection with the dividends approved at the Annual General Meetings of 2002 and 2004. Since then, Polialden has successfully managed to cancel those injunctions, releasing the respective judicial bonds; on this date, judicial deposits come to R$ 5,698. It should be stressed that the grounds for one of the STJ decisions favorable to Polialden, leading to cancellation of an existing injunction, were that the case was yet to be heard in a final and conclusive manner, and the decision on a special appeal cannot extend to resolutions adopted in subsequent meetings, but only to general meetings dealt with in the main suit underway at the STJ.
In September 2003, another lawsuit filed against Polialden was held fully groundless, recognizing the differentiated treatment accorded to preferred shares under incentive as prescribed by the Companys bylaws, considering that said shares were issued under a special tax incentive program. On December 28, 2004, the Bahia State Court of Justice affirmed this decision by unanimous opinion, rejecting an appeal lodged by the appellant shareholder, who lodged a special appeal at the STJ (the admissibility of which is pending review).
It should be stressed that the merits of such disputes are yet to be entertained; for this reason, and in reliance on the CVM Board decision, on opinions from legal counsel and on recent court rulings on this issue, each of the Managements of Braskem and of Polialden believes that no additional dividends are payable to preferred shares under incentive, and that those companies are acting in strict abidance by their respective bylaws under prevailing laws.
77
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(c) Offsetting of tax credits
From May through October 2000, absorbed companies OPP Química and Trikem offset their own federal tax debts with IPI tax credits (créditos-prêmio) assigned by an export trading company (Assignor). These offsetting procedures were recognized by the São Paulo tax officials (DERAT/SP) through offset supporting certificates (DCCs) issued in response to an injunctive relief entered in a motion for writ of mandamus (MS SP). Assignor also filed a motion for writ of mandamus against the Rio de Janeiro tax officials (DERAT/RJ) (MS RJ) for recovery of IPI tax credits and their use for offsetting with third-party tax debts, among others. The MS SP was dismissed without prejudice, confirming the Rio de Janeiro administrative and jurisdictional authority to rule on Assignors tax credits.
In June 2005, DERAT/SP issued ordinances (portarias) canceling the DCCs. Based on said ordinances, the Federal Revenue Office unit in Camaçari/BA sent collection letters to the Company. Notices of dispute were presented by the Company, but the administrative authorities declined to process them. As a result, past-due federal tax liabilities (dívida ativa) at R$ 276,620 were posted in December 2005 concerning the Companys tax debts originating from purportedly undue offsetting procedures.
Both Assignor and the Company commenced a number of judicial and administrative proceedings to defend the lawfulness and validity of those offsetting procedures, and the legal counsels to both companies labeled the chances of success in those cases as probable, mostly in light of the indisputable validity and liquidity of those credits as confirmed in a specific audit conducted by DERAT/RJ.
On October 3, 2005, the Federal Supreme Court held the MS RJ favorably to Assignor in a final and conclusive manner, confirming Assignors definite right to use the IPI tax credits from all its exports and their availability for offsetting with third-party debts. As a result, the legal counsels to Assignor and to the Company believe that the offsetting procedures carried out by the absorbed companies and duly recognized by DERAT/SP are confirmed, and for this reason they also hold that the tax liabilities being imputed to the Company are not due. Irrespective of the final and conclusive decision in MS RJ, the legal counsels to Assignor and to the Company, in addition to a jurist when inquired of his opinion on this specific issue, feel that the tax liabilities purportedly related to offsetting procedures carried out by the absorbed companies have become time-barred and, as such, can no longer be claimed by the tax authorities.
Finally, in January 2006, the Company was ordered to post bond in aid of execution of the tax claim referred to above; this bond will be tendered in the form of an insurance policy (seguro garantia) currently under negotiation between the Company, Assignor and insurance companies.
78
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsThe Companys legal counsel has labeled the chances of success in all claims listed above as probable; nevertheless, if the Company is eventually defeated in all those cases, it will be entitled to full recourse against Assignor concerning all amounts paid to the National Treasury, as per the assignment agreement executed in 2000.
(d) National Social Security Institute - INSS
The Company is a party to several social security disputes in the administrative and judicial spheres, totaling R$ 169,854 as of December 31, 2005. Out of these sums, the Company has made judicial deposits at R$ 15,100, and R$ 18,200 are secured by a portion of the Companys inventory. The Company has provisioned for social security contingencies at R$ 8,500. Further, the Company has credits with INSS under court dispute, totaling R$ 54,600. These credits are off the balance sheet.
In October 2000, INSS fined Polialden for non-submission of evidence as to collection of social security contributions owed by contractors from May 1995 through December 1998, as well as for non-payment of the employers social security contribution on payroll from May 1998 through January 1999, which amounted to R$ 8,811 on December 31, 2005.
In reliance on the outside legal counsels opinion that the Companys stance is likely to prevail in these disputes, the Companys Management believes that no amount is owed in this regard and, as such, the corresponding sums have not been provisioned for.
79
Braskem S.A. and its subsidiaries
Notes to the Financial Statements(e) Other court disputes involving the Company
The Company figures as defendant in civil lawsuits filed by a former caustic soda distributor, totaling R$ 131,000 on December 31, 2005 (2004 R$ 170,199). This former distributor seeks redress of damages caused by the Companys alleged non-fulfillment of the distributor agreement. In reliance on the opinion of outside legal counsel sponsoring the Company in these lawsuits, the Management believes that the cases are likely to be rejected, and for this reason the respective sums have not been provisioned for.
In the 2nd trimester of 2005, the Petrochemical and Chemicals Companies Employees Union in Triunfo (RS) and Camaçari (BA) lodged labor actions claiming overtime payment. On those lawsuits it has been filed the proper defense and the Management does not expect any loss by the end of its judgment.
As of 2005, the Company figures as respondent in approximately 1,100 labor claims, including those mentioned above, totaling circa R$ 223,400 (2004 R$ 53,460). Based on the opinion of outside legal counsel, most of these labor claims are likely to be held favorably to the Company and, for this reason, no amounts were provisioned for in this respect. The cases labeled as a probable loss have been provisioned for at R$ 7,930 by the Company (consolidated R$ 12,262).
21 Financial Instruments
(a) Risk management
Since the Company operates in the domestic and international markets, obtaining funds for its operations and investments, it is exposed to market risks mainly arising from changes in the foreign exchange and interest rates. The bank accounts, financial investments and other accounts receivable are subject to credit risk. The Company has developed policies and procedures for risk evaluation, report preparation and mathematical models for the monitoring of these risks and possible use of derivatives to decrease these risks.
To cover the exposure to market risk, the Company utilizes various types of currency hedges, some involving the use of cash and others not. The most common types which use cash, as adopted by the Company, are financial applications abroad (Certificates of deposit, securities in U.S. dollars, foreign mutual funds, time deposits and overnight deposits) and put and call options. The types of currency hedge which do not involve the use of cash are swaps of foreign currency for CDI and forwards.
80
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsTo hedge its exposure to exchange and interest risks arising from loan and financing agreements, the Company adopted, at December 31, 2001, the following methodology: hedging of the principal and interest (on a consolidated basis), falling due in the next 12 months in, at least, (i) 60% of the debt linked to exports (trade finance), except for Advances on Exchange Contracts ("ACCs") of up to six months and Advances on Export Contracts ("ACEs"); and (ii) 75% of the debt not linked to exports (non-trade finance).
(b) Exposure to foreign exchange risks
The Company has long-term loans and financing to finance its operations, including cash flows and project financing. Part of the long-term loans is linked to the U.S. dollar (Note 14).
(c) Exposure to interest rate risks
The Company is exposed to interest rate risks on its debt. The debt in foreign currency, bearing floating interest rates, is mainly subject to LIBOR variation, while the domestic debt, bearing floating interest rates, is mainly subject to fluctuations in the Long-term Interest Rate (TJLP) and the Interbank Deposit Certificate (CDI) rate and IGPM inflation index.
(d) Exposure to commodities risks
The Company is exposed to fluctuations in the price of several petrochemical commodities, especially its main raw material, naphtha. Since the Company seeks to transfer to its own selling prices the effect of price changes in its raw material, arising from changes in the naphtha international quotation, part of its sales may be carried out under fixed-price contracts or contracts stating maximum and/or minimum fluctuation ranges. Such contracts are commercial agreements or derivative contracts relating to future sales.
(e) Exposure to credit risk
The operations that subject the Company to concentration of credit risk are mainly bank accounts, financial investments and other accounts receivable, exposing the Company to the risk of the financial institution involved. In order to manage the credit risk, the Company keeps its bank accounts and financial investments with large financial institutions.
81
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsIn relation to customer credit risk, the Company protects itself by performing detailed analyses before granting credit and by obtaining real and personal guarantees, when necessary.
(f) Market value of derivative instruments
To determine the estimated market value of financial instruments, the Company uses reserve transaction quotations or public information available in the financial market, as well as valuation methodologies generally accepted and utilized by counterparties. These estimates do not necessarily guarantee that such operations could be realized in the market at the indicated amounts. The use of different market information and/or valuation methodologies could have a significant effect on the estimated market value.
22 Financial Income (Expenses)
Parent company | Consolidated |
|||||||
2005 | 2004 | 2005 | 2004 | |||||
Financial income (expenses): | ||||||||
Interest income | 128,260 | 181,555 | 140,131 | 160,780 | ||||
Monetary variation of financial investments, related parties and | ||||||||
accounts receivable | 14,768 | 18,585 | 17,705 | 12,825 | ||||
Monetary variation of taxes recoverable | 4,984 | 26,875 | 7,616 | 31,803 | ||||
Gains on derivative transactions | 11,454 | 4,117 | 45,695 | 125,769 | ||||
Exchange variation on foreign currency assets | (281,349) | (326,044) | (288,846) | (335,261) | ||||
Other | 59,774 | 68,840 | 44,080 | 72,716 | ||||
(62,109) | (26,072) | (33,619) | 68,632 | |||||
Financial expenses: | ||||||||
Interest on financing and related parties | (355,568) | (568,478) | (346,999) | (595,297) | ||||
Monetary variation of financing and related parties | (236,088) | (431,970) | (203,080) | (380,887) | ||||
Monetary variation and interest on taxes, contributions and | ||||||||
suppliers | (140,728) | (121,792) | (169,669) | (137,079) | ||||
Losses on derivative transactions | (36,420) | (9,498) | (61,485) | (131,355) | ||||
Expenses with vendor transactions | (108,144) | (73,287) | (108,242) | (73,636) | ||||
Discounts granted | (35,631) | (44,675) | (88,375) | (80,720) | ||||
Exchange variation on foreign currency liabilities | 560,705 | 405,860 | 556,884 | 425,368 | ||||
Taxes and charges on financial transactions | (101,731) | (126,460) | (110,621) | (148,425) | ||||
Interest on capital | (270,000) | (170,000) | (270,000) | (170,000) | ||||
Reversal of interest on capital | 270,000 | 170,000 | 270,000 | 170,000 | ||||
Other | (99,199) | (104,496) | (144,170) | (185,218) | ||||
(552,804) | (1,074,796) | (675,757) | (1,307,249) | |||||
Financial results, net | (614,913) | (1,100,868) | (709,376) | (1,238,617) | ||||
82
Braskem S.A. and its subsidiaries
Notes to the Financial Statements23 Other Operating Income and Expenses
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Income (expenses) | ||||||||
Rental of facilities and assignment of right to use | 58,458 | 20,838 | 3,914 | 20,886 | ||||
Recovery of taxes | 655 | 1,402 | 3,364 | 16,445 | ||||
Reimbursement of claims | 20 | 1,612 | (36) | 1,612 | ||||
Sale of sundry materials | 14,180 | 11,444 | 13,094 | 11,128 | ||||
Recovery of costs and expenses | 3,664 | 83 | 4,583 | 1,240 | ||||
Other operating income (expenses), net | (7,086) | (1,096) | (2,166) | (8,317) | ||||
69,891 | 34,283 | 22,753 | 42,994 | |||||
24 Non-operating Income (Expenses)
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Income (expenses) | ||||||||
Increase in interest on investments | 5,172 | 3,037 | 5,443 | 3,468 | ||||
Sale of permanent assets | 720 | (2,381) | 753 | (4,961) | ||||
Reversal (provision) of loss on investments | (4,203) | (2,355) | (4,265) | (2,386) | ||||
Provision for loss/retirement of assets | (22,449) | (18,199) | (22,449) | (18,199) | ||||
Other non-operating expenses, net | (4,105) | (6,646) | (4,638) | (7,742) | ||||
(24,865) | (26,544) | (25,156) | (29,820) | |||||
25 Insurance Coverage
The Company has a broadly-based risk management program designed to provide cover and protection for all assets, as well as possible losses caused by production stoppages, through an "all risks" insurance policy. This policy establishes the amount for maximum probable damage, considered sufficient to cover possible losses, taking into account the nature of the Companys activities and the advice of insurance consultants. At December 31, 2005, insurance coverage for inventories, property, plant and equipment, and loss of profits of the Company and its subsidiary Polialden amounts to R$ 4,439,376 per claim, while the total of all insured assets amounts to R$ 9,885,314.
83
Braskem S.A. and its subsidiaries
Notes to the Financial Statements
26 Shares Traded Abroad - NYSE and LATIBEX
(a) American Depositary Shares (ADSs) Program
The Company's ADSs are traded on the NYSE with the following characteristics:
.. Type of shares: Class A preference.
.. Each ADS represents 2 shares, traded under the symbol BAK.
.. Foreign Depositary Bank: The Bank of New York (BONY) - New York branch.
.. Brazilian Custodian Bank: Banco Itaú S.A.
(b) LATIBEX
The Company's Class A preference shares are traded on LATIBEX, the market for Latin American Companies quoted in Euros at the Madrid Stock Exchange. The shares are traded under the symbol "XBRK" and the Brazilian Custodian Bank is Banco Itaú S.A. LATIBEX has adjusted and altered the process for quotation and trading to comply with the new standards adopted by Bovespa. Accordingly, as from May 16, 2005, the shares are traded in units.
27 Private Pension Plans
The actuarial obligations relating to the pension and retirement plans are accrued in conformity with the procedures established by CVM Deliberation 371 of December 13, 2000.
The formation of Braskem (Note 1 (b)) involved the integration of six sponsoring companies and three different pension plans managed by Fundação PETROBRAS de Seguridade Social - PETROS ("PETROS"), PREVINOR - Associação de Previdência Privada ("PREVINOR") and ODEPREV - Odebrecht Previdência ("ODEPREV"). In addition to sponsoring different private pension plans, the Company has approximately 800 employees who do not participate in company-sponsored pension plans, as no new benefits were granted to employees since the inception of the Company. Management ceased to provide benefits to new employees in order to devise a single, legitimate solution for all participants, with a view to protecting the plan participants financial assets.
84
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsExperts engaged by the Company recommended that ODEPREV be the only supplementary pension plan entity sponsored by the Company. Furthermore, employees who do not participate in the PETROS and PREVINOR plans were offered the opportunity of joining the ODEPREV plan, retroactively to August 16, 2002.
In early June 2005, the Company communicated to PETROS and PREVINOR its intended withdrawal as a sponsor effective June 30, 2005. With regard to Petros, the Company is completing the calculation of mathematical reserves of participants, that define potential requirements of contribution by the Company to settle previous commitments. Following the completion of actuarial calculations, the proposed withdrawal as a sponsor will be submitted for the approval of the National Superintendency for Supplementary Pension Plans, a Social Security Ministry department in charge of regulating and inspecting private pension plans. To support the potential contribution mentioned above, the Company recorded a provision of R$ 58,554 in long-term liabilities.
During 2005, the Company's contributions totaled R$ 2,841 (2004 - R$ 6,203), while employees' contributions amounted to R$ 1,791 (2004 - R$ 3,482).
As to PREVINOR, the reserve computations have been completed and the entity has a surplus, so that no contributions by the Company are required. The process is being reviewed by the Supplementary Pension Plan Secretariat. Following the approval, active participants and beneficiaries rights will be settled.
During 2005, the Company's contributions totaled R$ 628 (2004 - R$ 1,220), while participants contributions amounted to R$ 354 (2004 - R$ 686).
Benefits to retired employees and pensioners will continue to be paid on a regular basis up to completion of the process.
(a) ODEPREV
The Company has a defined-contribution plan for its employees. The plan is managed by ODEPREV - Odebrecht Previdência which was set up by Odebrecht S.A. as a closed private pension entity. ODEPREV offers its participants, employees of the sponsoring companies, the Optional Plan, a defined-contribution plan, under which monthly and sporadic participant contributions and annual and monthly sponsor contributions are accumulated and managed in individual retirement savings accounts.
85
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsThe Board of Trustees of ODEPREV defines each year, in advance, the parameters for contributions to be made by the participants and the sponsoring companies. With regard to the payment of benefits under the Optional Plan, the obligation of ODEPREV is limited to the total value of the quotas held by its participants and, to comply with the regulations for a defined-contribution plan, it will not be able to require any obligation or responsibility on the part of the sponsoring company to assure minimum levels of benefits to the participants who retire.
Currently, the active participants in ODEPREV total 2,131 (2004 1,133).
Up to December 31, 2005, sponsors and employees contributions amounted to R$ 4,631 (2004 - R$ 2,441) and R$ 9,348 (2004 - R$ 5,783), respectively.
(b) PETROS
At December 31, 2005, jointly-controlled subsidiaries Copesul and Petroflex take part in the defined benefit plan for employees, managed by PETROS. The main objectives of the plan are to: (i) supplement retirement benefits provided by the Government, and (ii) implement social assistance programs with the support of the sponsoring companies. The sponsoring companies and their employees pay monthly contributions to PETROS based on the employees' compensation.
In accordance with CVM Deliberation 371/2000, which approved NPC 26 of IBRACON - "Accounting for Employee Benefits", the subsidiaries carried out the actuarial valuation of the plans and, accordingly, recorded actuarial liabilities in long-term liabilities.
The amounts of the jointly-controlled plans are as follows:
2005 | 2004 | |||
Present value of actuarial liabilities | 197,423 | 175,509 | ||
Fair value of asset plans | 198,028 | 164,760 | ||
(605) | 10,749 | |||
Actuarial liabilities | (605) | 10,749 | ||
Actuarial liabilities provided for | 6,562 | 6,174 | ||
Unrecognized actuarial gains (losses) | (7,167) | 4,575 | ||
86
Braskem S.A. and its subsidiaries
Notes to the Financial StatementsActuarial assumptions at the balance sheet date (expressed as weighted average) are:
Type of plan | Defined benefits | |||
Discount rate | 6% p.a. | |||
Expected return rate on assets | 6% p.a. | |||
Future salary raises | 2% p.a. |
Contributions by Copesul and Petroflex at December 31, 2005, amounted to R$ 1,089 and R$ 2,236 (2004 R$ 321 and R$ 2,011), respectively.
28 Raw Material Purchase Commitments
The Company has contracts for consumption of electric energy for its industrial plants located in the States of Alagoas, Bahia and Rio Grande do Sul. The minimum commitment for consumption under these four-year contracts amounts to approximately R$ 102,340.
The Company acquires from Copesul ethylene and propylene for its units at the Southern Petrochemical Complex, under a contract in force until 2014. The minimum annual purchase commitment corresponds to 268,200 metric tons of ethylene and 262,200 metric tons of propylene. Considering the prices ruling at December 31, 2005, this commitment corresponds to R$ 1,171,567 (unaudited). If the Company does not acquire the minimum volume, it must pay 40% of the current price of the amount not purchased. Based on 40% of prices charged as of December 31, 2005, the amount would be equal to R$ 468,627 (unaudited).
Braskem purchases naphtha under contracts establishing a minimum annual purchase volume equal to R$ 4,559,514 (unaudited), based on market prices as of December 31, 2005.
87
Attachment I
Braskem S.A. and Subsidiaries
Supplementary InformationParent company | Consolidated | |||||||
(Reclassified) | ||||||||
2005 | 2004 | 2005 | 2004 | |||||
Net income for the year | 685,775 | 692,679 | 625,837 | 687,027 | ||||
Adjustment to reconcile net income: | ||||||||
Depreciation, amortization and depletion | 766,340 | 720,432 | 841,493 | 798,033 | ||||
Amortization of goodwill (negative goodwill), net | 385,717 | 283,988 | 152,539 | 152,729 | ||||
Equity in the results | (222,129) | (169,952) | (1,287) | (663) | ||||
Reversal (provision) of loss on investments | (280,702) | (124,434) | 7,500 | |||||
Tax incentives | (39,225) | (44,979) | ||||||
Exchange variation on investments | (21,341) | 8,767 | (3,629) | 9,645 | ||||
Increase (decrease) in interest in investments and other | 2,293 | (2,576) | 2,188 | (16,030) | ||||
Gains (losses) on permanent assets written-off | (720) | 2,381 | 2,224 | 5,499 | ||||
Provision for losses on permanent assets | 18,199 | 18,199 | ||||||
Interest and monetary and exchange variations, net | 374,670 | 704,201 | 411,678 | 693,270 | ||||
Minority interests | (54,068) | 24,565 | ||||||
Deferred income tax | 23,687 | (136,497) | 29,641 | (141,375) | ||||
Assignment of right to use | (58,240) | (3,640) | ||||||
Other | (31,828) | 4,950 | (27,136) | 18,499 | ||||
1,623,522 | 2,002,138 | 1,96,615 | 2,211,919 | |||||
Effect of mergers and disposals of investments | 24,993 | 36,762 | ||||||
Effect of merger on cash | 2 | 4 | ||||||
Finnacial cash effects | 198,867 | 276,795 | 156,199 | 293,136 | ||||
Cash generation before changes in operating | ||||||||
working capital | 1,822,391 | 2,303,926 | 2,092,818 | 2,541,817 | ||||
Changes in operating working capital | ||||||||
Marketable securities | (611,203) | 20,900 | (82,127) | 47,893 | ||||
Trade accounts receivable | 273,356 | (186,823) | 161,709 | (451,737) | ||||
Financial instruments | (4,056) | (4,056) | ||||||
Inventories | (28,980) | (300,941) | (51,533) | (389,477) | ||||
Taxes recoverable | (88,431) | 349,947 | (130,282) | 289,398 | ||||
Prepaid expenses | 15,857 | 22,984 | 15,998 | 29,572 | ||||
Dividends received | 385,984 | 128,416 | 2,000 | 828 | ||||
Other accounts receivable | (23,957) | 11,465 | (30,113) | 28,117 | ||||
Suppliers | 248,711 | 1,052,222 | 485,080 | 1,152,076 | ||||
Taxes, charges and contributions | (22,071) | 129,375 | (79,328) | 174,315 | ||||
Tax incentives | 52,039 | 63,748 | 91,178 | 112,507 | ||||
Advances from customers | 18,343 | (79,266) | (559) | (212,311) | ||||
Credit rights | (113,400) | 363,205 | (113,400) | |||||
Other accounts payable | (32,130) | (1,772) | (52,482) | (43,099) | ||||
Generation of cash from operations before financial effects | 2,009,909 | 3,396,725 | 2,785,564 | 3,162,443 | ||||
Exclusion of financial cash effects | (198,867) | (276,795) | (156,199) | (293,136) | ||||
Generation of accounting cash from operations | 1,811,042 | 3,119,930 | 2,629,365 | 2,869,307 | ||||
88
Attachment I
Braskem S.A. and Subsidiaries
Supplementary Information
Statements of Cash Flows
Years Ended December 31
In thousands of reais
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Proceeds from the sale of investments | 1,787 | 95 | 1,787 | 119 | ||||
Additions to investments | (155,577) | (23,020) | (33,981) | (23,648) | ||||
Additions to property, plant and equipment | (671,684) | (368,349) | (780,673) | (442,286) | ||||
Additions to deferred charges | (231,099) | (509,823) | (237,071) | (549,395) | ||||
Cash used for investments | (1,056,573) | (901,097) | (1,049,938) | (1,015,210) | ||||
Short-term debt | ||||||||
Funds obtained | 346,820 | 1,313,986 | 948,349 | 2,059,900 | ||||
Repayment | (2,193,003) | (5,128,951) | (2.846,826) | (5.632,274) | ||||
Long-term debt | ||||||||
Funds obtained | 1,206,300 | 2,375,758 | 1,624,739 | 2,662,201 | ||||
Repayment | (900,000) | (617,228) | (990,461) | |||||
Related parties | ||||||||
Funds obtained | 841,883 | 871,313 | 201 | 39,860 | ||||
Repayment | (848,310) | (837,045) | (124,654) | (109,241) | ||||
Dividends paid to shareholders and | ||||||||
minority interests | (203,938) | (208,742) | (4,790) | |||||
Capital payment | 1,210,951 | 2,531 | 1,210,950 | |||||
Treasury stock | 8,233 | 8,233 | ||||||
Other | (16,012) | 5,883 | ||||||
Generation (use) of cash in financing | (850,248) | (1,085,755) | (1,237,642) | (749,739) | ||||
Generation (use) of cash and cash equivalents | (95,779) | 1,133,078 | 341,785 | 1,104,358 | ||||
Represented by | ||||||||
Cash and cash equivalents, beginning of period | 1,556,869 | 423,791 | 1,793,955 | 689,597 | ||||
Cash and cash equivalents, end of period | 1,461,090 | 1,556,869 | 2,135,740 | 1,793,955 | ||||
Generation (use) of cash and cash equivalents | (95,779) | 1,133,078 | 341,785 | 1,104,358 | ||||
This statement was prepared in accordance with the criteria described in Accounting Standards and Procedures - NPC 20 Statement of Cash Flow, issued by IBRACON - Instituto dos Auditores Independentes do Brasil (Brazilian Institute of Independent Accountants).
89
Attachment I
Braskem S.A. and Subsidiaries
Supplementary
Information
Statements of Cash Flows
Years Ended December 31
In thousands of reais
Main transactions not impacting cash
The following transactions with no impact on cash were excluded from the Statements of cash flows:
.. Issue of Company shares and use of treasury stock to acquire minority interests in its subsidiaries (Note 1(b));
.. Exchange of a portion of financing and debentures of the 10th issue and debentures of the 11th issue (Note 15(a) and (c));
.. Exchange of a portion of financing for debentures of 12th issue (Note 15(d)).
.. Capitalization of investment with assignment of right to use (Note 11(c)).
90
Attachment II
Braskem S.A.
Supplementary InformationParent company |
Consolidated |
|||||||||
2005 | 2004 | 2005 | 2004 | |||||||
1- Revenues | 15,051,272 | 13,963,883 | 16,936,958 | 16,055,380 | ||||||
1.1 | Sale of goods, products and services | 14,994,236 | 13,996,779 | 16,922,683 | 16,082,761 | |||||
1.2 | Allowance for possible loan losses | (26,744) | (46,997) | (32,276) | (51,675) | |||||
1.3 | Other operating income, net | 108,645 | 40,645 | 71,707 | 54,114 | |||||
1.4 | Other non-operating income, net | (24,865) | (26,544) | (25,156) | (29,820) | |||||
2- Inputs acquired from third parties | (11,143,728) | (10,255,309) | (12,112,328) | (11,386,914) | ||||||
2.1 | Raw materials used | (10,028,518) | (9,286,858) | (10,779,920) | (9,751,679) | |||||
2.2 | Cost of products resold | (69,808) | (62,042) | (21,075) | (518,184) | |||||
2.3 | Materials, energy, third-party service and other | (1,045,402) | (906,409) | (1,311,333) | (1,117,051) | |||||
- Production | (396,755) | (354,172) | (533,238) | (461,102) | ||||||
- Selling | (152,822) | (137,737) | (187,401) | (164,151) | ||||||
- Administrative | (181,132) | (150,443) | (217,224) | (174,195) | ||||||
- Freight expenses | (314,693) | (264,057) | (373,470) | (317,603) | ||||||
3- Gross value added | 3,907,544 | 3,708,574 | 4,824,630 | 4,668,466 | ||||||
4- Retentions | ||||||||||
4.1 | Depreciation, amortization and depletion | (766,340) | (720,432) | (841,493) | (798,033) | |||||
5-Value added generated by the Company | 3,141,204 | 2,988,143 | 3,983,137 | 3,870,433 | ||||||
6- Value added received on transfer | 74,502 | (21,382) | (139,575) | (152,188) | ||||||
6.1 | Equity in the results | 115,270 | 13,457 | (113,450) | (97,972) | |||||
6.2 | Financial income | (40,768) | (34,839) | (26,125) | (54,216) | |||||
7- Total value added to be distributed | 3,215,706 | 2,966,760 | 3,843,562 | 3,718,245 |
91
Attachment II
Braskem S.A.
Supplementary Information
Statements of Value Added
Years Ended December 31
In thousands of reais
Parent company | Consolidated | |||||||
2005 | 2004 | 2005 | 2004 | |||||
Distribution of value added | 3,215,706 | 2,966,760 | 3,843,562 | 3,718,245 | ||||
Personnel and charges | 481,914 | 366,778 | 586,592 | 472,690 | ||||
Salaries and charges | 335,122 | 285,248 | 419,469 | 365,045 | ||||
Sales commissions | 39,818 | 34,257 | 42,051 | 45,673 | ||||
Directors fees | 10,469 | 10,111 | 13,911 | 11,932 | ||||
Other benefits | 96,505 | 37,162 | 111,161 | 50,040 | ||||
Taxes and contributions | 1,521,669 | 861,240 | 2,006,106 | 1,341,400 | ||||
Federal | 1,260,685 | 917,865 | 1,612,866 | 1,286,742 | ||||
State | 305,611 | 2,976 | 472,200 | 156,862 | ||||
Local | 7,412 | 4,147 | 10,853 | 6,810 | ||||
(-) Tax incentives | (52,039) | (63,748) | (89,813) | (109,014) | ||||
Interest and rental | 474,309 | 982,315 | 591,397 | 1,084,003 | ||||
Interest | 465,945 | 967,898 | 581,165 | 1,068,549 | ||||
Rental | 8,364 | 14,417 | 10,232 | 15,454 | ||||
Minority interests in retained earnings | (54,068) | 24,565 | ||||||
Retained earnings for the year | 737,814 | 756,427 | 713,535 | 795,587 | ||||
Legal reserve | 34,289 | 34,634 | 34,289 | 34,634 | ||||
Retention of profits | 325,743 | 454,551 | 265,805 | 448,899 | ||||
Tax incentives | 52,039 | 63,748 | 87,698 | 108,560 | ||||
Dividends proposed and interest on capital | 325,743 | 203,494 | 325,743 | 203,494 |
* * *
92
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 17, 2006
BRASKEM S.A. | |||
By: | /s/ Paul Elie Altit | ||
Name: | Paul Elie Altit | ||
Title: | Chief Financial Officer |