Companhia Coreano-Brasileira de Pelotização - KOBRASCO Financial Statements for the Years Ended December 31, 2007 and 2006 and Report of Independent

Transcription

1 Financial Statements for the Years Ended December 31, 2007 and 2006 and Report of Independent Auditors

2 Report of Independent Auditors To the Board of Directors and Stockholders of Companhia Coreano-Brasileira de Pelotização - Kobrasco Vitória - Brazil 1 We have audited the accompanying consolidated balance sheets of Companhia Coreano- Brasileira de Pelotização - Kobrasco as of December 31, 2007 and 2006, and the related consolidated statements of income and other comprehensive income, of changes in stockholders equity and of cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. 2 We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 3 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Companhia Coreano-Brasileira de Pelotização - Kobrasco as of December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Rio de Janeiro, February 14, 2008 PricewaterhouseCoopers Auditores Independentes 2

3 Consolidated Balance Sheets as of December 31 Expressed in thousands of U.S. dollars Assets Current assets Cash and cash equivalents 9,982 7,194 Accounts receivable - related parties 14,288 13,563 Inventories 13,272 25,744 Taxes recoverable 12,634 15,969 Other 1,052 1,008 51,228 63,478 Property, plant and equipment, net 141, ,640 Non-current assets Taxes recoverable 14,920 Deferred income taxes 3,038 3,339 Judicial deposits 9,179 7,072 27,137 10, , ,529 3

4 Consolidated Balance Sheets as of December 31 Expressed in thousands of U.S. dollars (continued) Liabilities and stockholders' equity Current liabilities Loans 30, Loans - related parties 25, Suppliers - related parties 24,257 39,090 Related parties - dividends payable 8,832 Accounts payable 5,635 7,533 Payroll and related charges Provision for income taxes 1, Other liabilities ,469 58,148 Non-current liabilities Loans 30,000 30,000 Loans - related parties 24,000 Accrual for contingencies 12,009 9,444 42,009 63,444 Stockholders' equity Common stock, no par value - shares authorized, issued and outstanding, 2007 and ,021,438 thousand 77,000 77,000 Appropriated retained earnings 22,324 3,927 Unappropriated retained earnings 7,786 Cumulative translation adjustment (8,915) (17,776) 90,409 70,937 Total liabilities and stockholders' equity 219, ,529 The accompanying notes are an integral part of these consolidated financial statements. 4

5 Consolidated Statements of Income and Other Comprehensive Income for the Years Ended December 31 Expressed in thousands of U.S. dollars Operating revenues, net of discounts and returns Iron ore and pellets - related parties 317, ,760 Services rendered to stockholder 25,091 Value added tax, discounts and other (4,200) 338, ,760 Cost of sales (284,620) (281,231) 53,969 63,529 Operating costs and expenses Selling, general and administrative expense (1,594) (3,458) Accrual for losses on realization of value-added Tax(ICMS) credits, net (4,023) (5,573) Income from operations 48,352 54,498 Non-operating income (expenses) Financial income (expenses), net 9,712 2,265 Other income (expenses) (454) (1,626) 9, Income before income taxes and social contribution 57,610 55,137 Income tax and social contribution Current (18,551) (15,209) Deferred (869) (7,027) (19,420) (22,236) Net income 38,190 32,901 Earnings per share (basic and diluted) Other comprehensive income Translation adjustment (17,776) 8,454 Comprehensive income 20,414 41,355 The accompanying notes are an integral part of these consolidated financial statements. 5

6 Statements of Changes in Stockholders' Equity for the Years Ended December 31 Expressed in thousands of U.S. dollars Thousands of shares 2007 and 2006 Common stock 4,021,438 77,000 77,000 Appropriated retained earnings Balance as of January 1 3,927 2,176 Transfer from restricted retained earnings 18,397 1,751 Balance as of December 31 22,324 3,927 Unappropriated retained earnings Balance as of January 1 7,786 28,843 Net income 38,190 32,901 Dividends payable (52,207) Dividends paid (27,579) Transfer to restricted retained earnings (18,397) (1,751) Balance as of December 31 7,786 Cumulative translation adjustment Balance as of January 1 (17,776) (26,230) Translation adjustment 8,861 8,454 Balance as of December 31 (8,915) (17,776) Total stockholders equity 4,021,438 90,409 70,937 The accompanying notes are an integral part of these consolidated financial statements. 6

7 Consolidated Statements of Cash Flows for the Years Ended December 31 Expressed in thousands of U.S. dollars Cash flows from operating activities Net income 38,190 32,901 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 5,752 4,124 Accrual for contingencies 609 3,086 Allowance for losses on realization of ICMS 6,805 9,029 Deferred income tax 869 7,027 Interest accrued and exchange loss on loans and debt (8,688 ) (638 ) Other (5,030 ) 1,495 38,507 57,024 Decrease (increase) in operating assets Accounts receivable - related parties 3,579 (7,850 ) Inventories 16,294 (1,435 ) Recoverable value added tax (ICMS) (6,805 ) (9,029 ) Income taxes (5,712 ) 2,100 Increase in legal deposits (804 ) (736 ) Other ,748 (16,716 ) Increase (decrease) in operating liabilities Suppliers and contractors (17,360 ) 4,093 Accounts payable (2,777 ) 740 Payroll and related charges 6 (60 ) Income taxes (1,317 ) (14,588 ) Dividends 8,832 Other (6,822 ) (3,921 ) (28,270 ) (4,904 ) Net cash from operating activities 16,985 35,404 Cash flows from investing activities Additions to property, plant and equipment (4,597 ) (18,100 ) Net cash used in investing activities (4,597 ) (18,100 ) Cash flows provided (used in) financing activities Debt repayment (2,000 ) Long-term debt 30,000 30,000 Dividends (41,873 ) (52,207 ) Net cash used in financing activities (11,873 ) (24,207 ) Increase (decrease) in cash and cash equivalents 515 (6,903 ) Effect of exchange rate changes on cash equivalents 2,273 1,086 Cash and cash equivalents at beginning of year 7,194 13,011 Cash and cash equivalents at end of the year 9,982 7,194 Supplementary cash flows information Income tax and social contribution offset against taxes recoverable 18,551 15,210 The accompanying notes are an integral part of these consolidated financial statements. 7

8 1 General Information Companhia Coreano-Brasileira ("The Company") is a Brazilian corporation 50% owned by Companhia Vale do Rio Doce - CVRD ("VALE") and 50% owned by POSCO. The Company was established in March 1996 and its production started in October, The activities consist of the production and sale of iron ore pellets. Iron ore, the main raw material used in the production process, is supplied by VALE through a long term contract and sales of total pellets production to VALE and POSCO are assured by a stockholders agreement. 2 Basis of Presentation of Consolidated Financial Statements The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), which differ in certain respects from the Brazilian accounting principles applied by the Company in its statutory financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company s financial statements therefore, include various estimates concerning the selection of useful lives of property, plant and equipment, provisions necessary for contingent liabilities, income tax valuation allowances and other similar evaluations. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Consequently, actual results may be affected by revision to these prior accounting estimates. The Company maintains its accounting records in Brazilian currency and in the Portuguese language. The U.S. dollar amounts for the years presented have been translated from the Brazilian reais amount in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 52 (SFAS No.52) "Foreign Currency Translation". 8

9 The Company has translated all assets and liabilities from its functional currency, the Brazilian real into U.S. dollars, the Company s reporting currency at the current exchange rate (R$ and R$ to US$ 1 at December 31, 2007 and 2006, respectively). All amounts in the statements of operations and cash flows (including amounts related to local currency indexation and exchange variations on assets and liabilities denominated in foreign currency) have been translated to U.S. dollars at the monthly average rates prevailing during the years ended December 31, 2007 and The equity accounts are translated based on the historical rates. The translation gain or loss resulting from this process is included in stockholders equity as cumulative translation adjustment. Transactions denominated in currencies other than the Brazilian real are initially recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing at each balance sheet date and related foreign currency exchange gains and losses are included in results of operations. 3 Significant Accounting Policies The significant accounting policies followed in the preparation and presentation of the financial statements are summarized as follows: (a) (b) (c) Cash and cash equivalents are defined as cash in bank and short-term investments with original maturities of three months or less at the time of purchase. These are carried at cost plus accrued interest. Inventories are stated at the lower of cost of purchase or production, as compared to replacement cost or net realizable value. Property, plant and equipment are stated at cost of purchase or construction, plus interest cost of borrowings incurred during the period of construction when applicable. Depreciation is computed by the straight-line method, using global account balances as a basis for calculation, at the following annual rates, which are compatible with the useful lives of the assets: industrial installations - mill 10%, buildings 4%, vehicles 20%, furniture and fixtures, 10%. The Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future undiscounted net operating cash flows expected to result from the asset, including eventual 9

10 disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset s carrying value and fair value. Fair value is determined using quoted market prices in active markets, when available. Otherwise, the Company estimates fair value based on the best information available such as market prices for similar assets (group of assets), or using valuation techniques such as the expected present value of future cash flows. The Company has not recognized any impairment write downs on its long-lived assets for any of the years presented. (d) (e) (f) (g) (h) (i) Assets and liabilities to be realized or paid within 12 months following the balance sheet dates are classified as current assets and current liabilities, respectively. Deferred income taxes have been calculated in accordance with "SFAS No Accounting for Income Taxes", with appropriate valuation allowance, when necessary. Revenues are recognized when products are shipped or services are rendered and benefits of ownership are transferred. Expenses, costs and all other transactions are recognized on the accrual basis. The Company accrues the liability for future compensation to employees for vacation vested during the period. The Company reports comprehensive income (loss) in accordance with SFAS No.130, "Reporting Comprehensive Income". Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments, and is presented in the statement of income. The accounts of the wholly-owned subsidiary Kobrasco International Trading Co. - KOBIN have been consolidated, and all significant intercompany accounts and transactions have been eliminated. 4 Recently-issued Accounting Pronouncements In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, "the fair value option for financial assets and Financial Liabilities". SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently 10

11 without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board s long-term measurement objectives for accounting for financial instruments. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. This standard is effective for fiscal years ending on or after November 15, The company is currently studying the impact of this standard. In September 2007, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. Accordingly to the Board, a single definition of fair value, together with a framework for measuring fair value, should result in increased consistency and comparability in fair value measurements. This standard is effective for fiscal years ending on or after November 15, The company is currently studying the impact of this standard. 5 Cash and Cash Equivalents Cash and bank 209 2,577 Short-term investments - VALE 4,617 Short-term investments - Others 9,773 9,982 7,194 Short term investments relate basically to investments in investment funds managed by Citibank. 11

12 6 Inventories Pellets MT ( in 2007 and MT in ,452 17,948 Spare parts and maintenance supplies 8,135 7,154 Importation in transit Total 13,272 25,744 MT = Metric ton 7 Taxes Recoverable (short and long-term) This balance refers to credits from PIS and COFINS obtained mainly from the purchase of iron ore, which can be offset against any other federal taxes payable. 8 Property, Plant and Equipment Accumulated Cost depreciation Net Net Industrial installations - Mill 183,623 (43,397) 140,226 97,147 Buildings, furniture and fixtures and other 340 (232) Vehicles 38 (38) 2 Total 184,001 (43,667) 140,334 97,266 Construction in progress 1,188 1,188 21, ,189 (43,667) 141, ,640 All property, plant and equipment is located in Brazil and is employed in the pellets business. Management believes that such balances will be recoverable through future operations. Depreciation of US$ 5,752 and US$ 4,124 provide for the years ended December, 2007 and 2006, respectively, was charged mainly to cost of production. 12

13 9 Recoverable Value-added Tax (ICMS) Since the Company s production is exported, the Company has not been taxed by ICMS on its sales, as well as any other sales taxes on exportation. The allowance for losses on realization of ICMS tax credits raised from purchases of raw material and supplies in the amount of US$ 22,345 as of December 31, 2002 was reverted in October 2003, due to the sale of these credits to its shareholder VALE, along with the credits generated in the period from January to September 2003 in the amount of approximately US$ 3,400. The sale of ICMS credits to VALE is supported by Decree n os 1172-R/2003, Article E 136-B from the Government of the state Espírito Santo of and on the agreement signed by both companies. Subsequently, further value-added tax credits were generated after this sale. The Company had value-added tax (ICMS) credits from its operations in the amount of US$ 32,604 on December 31, 2007 (US$ 20,717 on Dec 31, 2006). Considering the uncertainty involving the recovery of such tax credits, the company decided to set up a reserve for the full amount of the credits generated, including those previously sold to VALE, without tax effects. The credits are recorded in the income statement only when realized. 10 Loans 13 Current Long-term Current Long-term Related Parties Posco Investments Co. (a) Loan maturing in ,000 24,000 Accrued interest Vale - ASSFIN 522 Others Banco do Brasil (b) Loan maturing in ,000 30,000 Accrued interest Bradesco (c) Loan maturing in ,000 Accrued interest 50 55,667 30,000 1,146 54,000 (a) Subject to US$ dollar exchange variation adjustment and interest (LIBOR % p.a.).

14 (b) Subject to US$ dollar exchange variation adjustment and interest (LIBOR % p.a.). (c) Subject to US$ dollar exchange variation adjustment and interest 5.46% p.a. The Company is in the process of negotiation with its stockholders to postpone the payment of the loans with related parties. 11 Judicial Deposits and Accrual for Contingencies Judicial Accrual for Judicial Accrual for deposits contingencies deposits contingencies Income tax 3,255 2,037 2,509 1,691 Social contribution PIS and COFINS 3,840 2,964 ICMS on demand of energy/ece 5,737 5,112 4,424 4,243 Labor claims ,179 12,009 7,072 9,444 The Company is defendant in numerous legal actions of labor an tax nature in the normal course of business. Based on the advice of its legal counsel, management believes that the reserve made for contingent losses is sufficient to cover probable losses in connection with such actions. Furthermore, the Company has US$61,144 (US$ 31,147 on December 31, 2006 ) relating to the lawsuits of the aforementioned natures, which, according to the Company s legal advisors were classified as a possible loss and therefore did not require a provision for contingency. 14

15 12 Stockholders' Equity Capital stock, fully paid, is represented by 4,021,438 common nominative share, with no par value, as follows: 2007 and 2006 Thousands of shares $ VALE 2,010,719 38,500 Pohang Iron and Steel Co., Ltd. 2,010,719 38,500 4,021,438 77,000 Foreign capital amounting to US$ 38,500 is registered with the Brazilian Central Bank. The Company s by-laws assure a minimum dividend equal to 25% of net income for the year, as determined by Brazilian corporate legislation. The company s board of directors proposed to the shareholders to distribute the dividends referring to the result of the year ending December 31, 2006, amounting to R$ 75,398, equivalent to US$ 35,329. Considering the company s cash flow, the board of directors destinated the total earnings relating to the year ending December 31, 2007, as special reserve for dividends, amounting to R$ 61,524, equivalent to US$ 34,734, as per article 202, paragraph 3 to 5 Law No / Income Taxes Taxes in Brazil consist of federal income tax and social contribution, at a composite rate of 34%. 15

16 The amounts reported as income tax expense in the accompanying financial statements are reconciled to the statutory rates as follows: Income before income taxes and social contribution 57,610 55,137 Tax charge at statutory rate (19,587) (18,747) Allowance for losses on ICMS credits (1,555) (2,585) Other differences 1,722 (904) Income tax and social contribution shown in the statement of operations (19,420) (22,236) The components of deferred income tax assets in the balance sheet are as follows: Temporary differences arising from: Basis differences mainly related to the write-off, for US GAAP purposes, of pre-operating expenses 3,038 2,927 Recognition of tax credits on tax loss carry-forwards 412 3,038 3, Related Party Transactions Assets Liabilities Assets Liabilities VALE (Brazil) 9,947 24,149 3,719 38,860 POSCO (Korea) 4, ,844 Posco Investments Co. Ltd. (Hong Kong) 24,688 24,707 Cia. Nipo-Brasileira de Pelotização - NIBRASCO Terminal de Vila Velha - TVV 9 Ferrovia Centro Atlântica S.A. - FCA ,288 49,467 13,563 63,797 16

17 These balances are included in the following balance sheet classifications: Assets Liabilities Assets Liabilities Current assets Accounts receivable - related parties 14,288 13,563 Current liabilities Suppliers and contractors - related parties 24,057 39,090 Loans and financing 25, Long-term liabilities - loans and financing 24,000 14,288 49,267 13,563 63,797 The principal amounts of business and financial operations carried out with related parties are as follows: Income Expense Income Expense VALE (Brazil) 276, , , ,854 POSCO (Korea) 68, ,422 1,263 Posco Investments Co. Ltd. (Hong Kong) 4,709 1,711 2,444 1,620 Vale Engergia 6,795 Ferrovia Centro Atlântica S.A. - FCA 4,634 1,234 Fundação Vale do Rio Doce Seg. Social - VALIA Cia Nipo-Brasileira de Pelotização - NIBRASCO 2,774 2, , , , ,092 These amounts are included in the following statements of operations classifications: Gross sales 342, ,760 Cost of sales (222,751) (203,893) Selling, general and administrative expenses (129) (255) Financial result 5,171 2, , ,597 17

18 All transactions with related parties are formalized through agreements entered into between the parties, establishing the conditions for the purchase of ores and sale of iron ore pellets, compatible with the market. In April 2007 Kobrasco signed a new pellets supply contract with its stockholders, in which the sales price, due to market prices, was increased in 5.28% in relation to the contract previously in force. Furthermore, the iron ore purchase price has been increased in approximately 9.5%, resulting in a gross profit decrease when compared with the prior year. 15 Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments such as cash and cash equivalents, accounts receivable and accounts payables generally approximate fair value, because of their short maturities. 16 Business and Geographical Information For management purposes, the Company is organized in only one segment - the pellets segment. The Company's assets, liabilities revenues and costs are mainly located in Brazil, except for the amounts related to transactions with the Company's stockholder Posco, which are disclosed in Note 14. * * * 18