Companhia Hispano-Brasileira de Pelotização - Hispanobras Financial Statements for the Years Ended December 31, 2007 and 2006 and Report of

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 Hispano-Brasileira Vitória - Brazil 1 We have audited the accompanying balance sheets of Companhia Hispano-Brasileira de Pelotização - Hispanobras as of December 31, 2007 and 2006, and the related 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 financial statements referred to above present fairly, in all material respects, the financial position of Companhia Hispano-Brasileira de Pelotização - Hispanobras 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 Balance Sheets as of December 31 Expressed in thousands of U.S. dollars Assets Current assets Cash and cash equivalents Accounts receivable Related parties 55,045 49,448 Other 11,929 20,682 Inventories 16,898 24,437 Recoverable taxes 10,185 11,801 Other 7,302 2,133 Total current assets 101, ,650 Property, plant and equipment, net 75,738 41,504 Other non-current assets Recoverable taxes 12,440 Legal deposits 23,960 19,563 Deferred income tax 3,002 2,414 Other Total non-current assets 39,826 22,328 Total assets 217, ,482 3

4 Balance Sheets as of December 31 Expressed in thousands of U.S. dollars (continued) Liabilities and stockholders' equity Current liabilities Suppliers Related parties - CVRD 48,791 57,369 Others 4,890 6,093 Advances on export contracts 45,423 Short-term debt - related parties and others 7,418 1,098 Dividends payable 7,443 Income taxes 5,311 Other 1, Total current liabilities 107,965 78,257 Non-current liabilities Accrual for contingencies 25,049 19,851 Stockholders' equity Preferred stocks, class A, B and C - no par value - 276,479,292 shares authorized, issued and outstanding 3,881 3,881 Common share - no par value - 2,211,834,353 shares authorized, issued and outstanding 31,047 31,047 34,928 34,928 Appropriated retained earnings 52,641 40,680 Unappropriated retained earnings 11,024 28,262 Accumulated other comprehensive losses (14,061) (29,496) Total stockholders' equity 84,532 74,374 Total liabilities and stockholders' equity 217, ,482 The accompanying notes are an integral part of these financial statements. 4

5 Statements of Income and Comprehensive Income for the Years Ended December 31 Expressed in thousands of US dollars Operating revenues, net of discounts, returns and allowances Sales of pellets 334, ,310 Cost of pellets sold (294,933) (248,208) Net operating revenues 39,103 61,102 Operating expenses Selling, general and administrative expenses (2,977) (2,383) Provision (reversal) of the reserve for value-added tax credit, net (2,865) (3,131) Accrual for contingencies (4,566) (5,842) (10,080) Income from operations 33,261 51,022 Non-operating income (expenses) Financial income Financial expenses (3,629) (2,561) Foreign exchange and monetary losses (1,799) (374) Other 806 (213) (4,233) (2,721) Income before income tax and social contribution 29,028 48,301 Income tax and social contribution Current (10,878) (19,299) Deferred (10,798) (19,145) Net income 18,230 29,156 Earnings per share (basic and diluted) Other comprehensive income Translation adjustment 15,435 6,336 Comprehensive income 33,665 35,492 The accompanying notes are an integral part of these financial statements. 5

6 Statements of Changes in Stockholders' Equity for the Years Ended December 31 Expressed in thousands of U.S. dollars Preferred shares, classes A, B and C 3,881 3,881 Common stock 31,047 31,047 34,928 34,928 Appropriated retained earnings Legal reserve Balance as of January 1 5,159 4,712 Transfer from unappropriated retained earnings 1, Balance as of December 31 6,227 5,159 Reserve for future capital expenditures Balance as of January 1 35,521 18,847 Transfer from (to) unappropriated retained earnings ,674 Balance as of December 31 35,660 35,521 Especial reserver for dividend Balance as of January 1 Transfer from (to) unappropriated retained earnings 10,754 Balance as of December 31 10,754 Total appropriated retained earnings 52,641 40,680 Unappropriated retained earnings Balance as of January 1 28,262 50,078 Net income 18,230 29,156 Dividends payable (7,443) Cash dividends (23,507) (26,408) Transfer to appropriated retained earnings (11,961) (17,121) Balance as of December 31 11,024 28,262 Accumulated other comprehensive loss Balance as of January 1 (29,496) (35,832) Translation adjustment 15,435 6,336 Balance as of December 31 (14,061) (29,496) Total stockholders' equity 84,532 74,374 The accompanying notes are an integral part of these financial statements. 6

7 Statements of Cash Flows for the Years Ended December 31 Expressed in thousands of U.S. dollars Cash flows from operating activities Net income 18,230 29,156 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 4,121 2,792 Deferred income tax (80) (154) Accrual for contingencies 991 4,566 Provision for value-added tax credits 5,597 6,592 Reversal of the reserve for value-added tax credits (2,732) (3,461) Other (17) 26,127 39,474 Decrease (increase) in operating assets Accounts receivable 16,076 (17,874) Inventories 11,459 (6,558) Recoverable taxes (7,623) 3,259 Value-added tax credits (2,817) (3,131) Legal deposits (315) (403) Other (4,327) ,453 (24,180) Increase (decrease) in operating liabilities Suppliers (20,847) 25,229 Payroll and related charges 27 (19) Other (40) (14,794) (20,860) 10,416 Net cash provided by operating activities 17,720 25,710 Cash flows from investing activities Property, plant and equipment (27,444) (10,121) Net cash used in investing activities (27,444) (10,121) Cash flows from financing activities Advances on export contracts 41,316 Dividends paid (31,342) (26,408) Net cash provided by (used in) financing activities 9,974 (26,408) Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents 474 (10,596) Cash and cash equivalents at beginning of year ,745 Cash and cash equivalents at end of year Supplementary cash flows information Income tax and social contribution offset against recoverable taxes 17,961 13,916 The accompanying notes are an integral part of these financial statements. 7

8 1 General Information Companhia Hispano-Brasileira ("The company") is a Brazilian corporation located at Ponta do Tubarão in the state of Espírito Santo, is jointly owned by Companhia Vale do Rio Doce (CVRD) ("VALE") and ArcelorMittal España, S.A., a Spanish company, controlled by the ArcelorMittal Group. It was founded in 1974 and its activities comprise the production and sale of iron ore pellets destined mainly to its stockholders and related parties. 2 Basis of Presentation of 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 accounting principles generally accepted in the United States of America 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. 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 periods 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 52), "Foreign Currency Translation". 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$ 1,00 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) 8

9 have been translated is 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 for the period. 3 Significant Accounting Policies The significant accounting policies followed in the preparation and presentation of the financial statements are summarized as follows: (a) Cash and cash equivalents are defined as cash in bank and short-term. Short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity (original maturity of three months or less) that they present negligible risk of changes in value due to changes in interest rates. These are carried at cost plus accrued interest. (b) Inventories are stated at the lower of average cost of acquisition or production or market. A provision is made, when necessary, to reduce inventories to market value. (c) Property, plant and equipment are stated at cost of purchase or construction. Depreciation is computed by the straight-line method, using global account balances as a basis for calculation, at the annual rates disclosed in Note 8, which are compatible with the useful lives of the assets. The Company evaluates recoverability of its long-lived assets for purposes of identifying and measuring impairments, whenever events and circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. Recoverability is determined by comparing the carrying amount of the asset (or asset group) on the date it is being evaluated for recoverability to the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset (or asset group) exceeds the gross, undiscounted cash flows from use and disposition, an impairment loss is recognized. The impairment loss is measured as the excess of the carrying amount over the asset s (or asset group s) fair value. Fair value 9

10 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) 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 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 for liabilities for future compensation to employees for vacations vested during the period. The Company reports comprehensive income (loss) in accordance with SFAS 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. 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 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. 10

11 In September 2006, 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. According 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 Inventories Finished products Pellets 153,860 MT in 2007 (327,127 MT in 2006) 10,402 18,552 Spare parts and supplies 6,496 5,885 MT = Metric ton 16,898 24,437 6 Recoverable Taxes This balance refers to the credits from PIS and COFINS obtained mainly from the purchase of iron ore, which can be offset against any other federal taxes payable. 11

12 7 Legal Deposits and Accrual for Contingencies Legal Accrual for Legal Accrual for deposits contingencies deposits contingencies Deductibility of complementary monetary restatement relative to year 1990 and use of reduced taxation on export profits 6,410 4,415 5,234 3,605 Deductibility of additional depreciation due to complementary monetary restatement relative to year ,398 9,263 7,675 7,564 Other 8,152 11,371 6,654 8,682 23,960 25,049 19,563 19,851 The Company is defendant in numerous legal actions in the normal course of business. Based on the advice of it legal counsel, management believes that the reserve made for contingent losses is sufficient to cover probable losses in connection with such actions. These represent amounts relating to lawsuits labor and tax nature, provided for at amounts considered sufficient to cover eventual losses. Furthermore, the Company has US$ 6,265 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. 8 Property, Plant and Equipment, Net Annual depreciation rate (%) In operation Industrial installations ,973 86,695 Buildings Furniture and fixtures Other ,292 86,951 Accumulated depreciation (82,538) (65,701) Construction in progress 47,984 20,254 75,738 41,504 12

13 Depreciation of US$ 4,121 and US$ 2,792 provided for the years ended December, 2007 and 2006, respectively, was charged mainly to cost of production. The construction in progress, refers basically to the construction of equipments to be used in production. 9 Advance on Export Contracts During 2007, the Company contracted advances on export contracts which amount corresponds to US$ 45,423 at December 31, 2007, and matures within 180 days. 10 Stockholder s Equity Capital, fully paid in, is represented, by 2,488,313,645 shares, with no-par value, as follows: Number of shares Common stocks Brazilian stockholder 1,128,035,520 Foreign stockholder 1,083,798,833 2,211,834,353 Preferred stocks Brazilian stockholder (class A) 138,239,646 Foreign stockholder: Class B 94,002,959 Class C 44,236, ,479,292 2,488,313,645 13

14 Preferred stock, Classes A and B, together with the common stock, have the right to vote on the appointment and dismissal of certain members of management. Class C preferred stock, together with the common stocks, have the right to vote exclusively on any changes in the Company s bylaws, on the approval of the financial statements and on all resolutions related to the appropriation of profits, including the distribution of dividends. All preferred stock have priority in the redemption of capital and the right to the same dividend as the common stock. In accordance with the Brazilian Central Bank foreign capital regulations, companies have to comply with certain requirements in order to have earnings generated in local currency registered as foreign investment. Profits which are reinvested in the Company are registered as foreign currency investment based on specific translation procedures established by the Brazilian authorities. At December 31, 2007 and 2006, the stockholder's capital domiciled was recorded with the Central Bank of Brazil at the amount of US$ 12,769 (US dollars) and $ 6,256 (euros). Brazilian law and the Company's bylaws require that certain appropriations be made from retained earnings to equity reserve accounts on an annual basis. The purpose and basis of appropriation to such reserves are described below: Legal reserve This reserve is a requirement for all Brazilian corporations and represents the appropriation of 5% of annual net income based on statutory accounts up to a limit of 20% of capital stock. 11 Dividends and Interest Attributed to Stockholders Brazilian law permits the payment of cash dividends only from retained earnings as stated in the official accounting records. 14

15 The stockholders are entitled to minimum dividend of 25% of net income for the year, calculated in accordance with Brazilian corporate law. The remittance of dividends is based on the retained earnings in local currency at the rate in effect at the remittance date. Therefore, a portion of the translated retained earnings is restricted for distribution. During the period ended December 31, 2007 the company paid dividends in the amount of US$ 31,342, which are related to the income for the year ended December 31, Considering the company's cash flow, the board of directors destinated 50% of total earnings relating to the year ending December 31, 2007, as special reserve for dividends, as per article 202, paragraph 3ro to 5th of Law number /1976, and the remaining 50% as reserve for future capital expenditures. 12 Income Taxes Income taxes in Brazil consist of federal income tax and social contribution, at a composite rate of 34%. 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 29,028 48,301 Federal income and social contribution taxes at statutory rates (9,870) (16,422) Adjustments to reflect effective income tax and social contribution rates Provision for value-added tax credits, net (974) (1,065) Other 46 (1,658) Income tax and social contribution shown in the statement of operations (10,798) (19,145) 15

16 In 2001, the Company reviewed its projected operations, and concluded that the expenses related to the provision for value-added tax credits would not be deductible in future years under Brazilian tax law. As a consequence, since 2001 the Company has recognized a valuation allowance on the related deferred income tax benefit. The Company recognized deferred tax assets in accordance with SFAS 109 on its deductible temporary differences and basis differences, as follows: Accrual for contingencies 2,475 1,901 Provision for market value of Eletrobras credits Effect of change in the functional currency Other - Basis difference due to US GAAP adjustments ,002 2, Recoverable Value Added Tax Credits - (ICMS) On June 2003, the Company transferred through a sales contract value-added tax credits (ICMS) from its own operations in the amount of US$ 13,240 to its stockholder CVRD. On December 2007, the remaining balance of the referred transfer is US$ 3,238. Considering the recovery possibility of such credits by its stockholder, the Company decided to set up a reserve for the full amount of the credits transferred, without tax effects. Subsequently, further value-added tax credits were generated, after this transfer. The Company has value-added tax (ICMS) credits from its operations in the amount of US$ 33,713 on December 31, 2007 (US$ 22,867 on December 31, 2006). Considering the uncertainty involving the recovery of such credits, the Company set up an allowance of US$ 32,954 on December 31, 2007 (US$ 22,214 on December 2006). The provisions above mentioned are being reversed at the moment that such credits are recovered. 16

17 14 Related Parties Balances Arcelor Arcelor CVRD España CVRD España Accounts receivable 42,316 12,729 43,271 6,177 Suppliers - related parties 48,791 57,369 Other liabilities 6, Transactions Arcelor Arcelor CVRD España CVRD España Sales of pellets 188,957 62, ,658 45,954 Purchase of iron ore 207, ,832 Other revenues (basically foreign exchange) 7,745 2,535 Other expenses (basically foreign exchange) 6,473 1,397 3, 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 Hispanobras 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. 17

18 15 Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments such as cash and cash equivalents, accounts receivables 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 Aceralia, which are disclosed in Note 14. * * * 18