6-K 1 arauco-6k_0829.htm


 

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of September 2008

Commission File Number 33-99720

 

ARAUCO AND CONSTITUTION PULP INC.


(Translation of registrant’s name into English)

El Golf 150

Fourteenth Floor

Santiago, Chile

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  þ  Form 40-F o

Indicate   by  check  mark  if  the  registrant  is  submitting  the  Form  6-K  in  paper  as  permitted  by  Regulation  S-T  Rule
101(b)(1):  o

Indicate   by  check  mark  if  the  registrant  is  submitting  the  Form  6-K  in  paper  as  permitted  by  Regulation  S-T  Rule
101(b)(7): o

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 þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- _________



ARAUCO AND CONSTITUTION PULP INC

TABLE OF CONTENTS

 

 

 

 

 

Item

 

 

 

Page

 

 

 

 

 

1.

 

Ratio Analysis of the Consolidated Financial Statements

 

1

2.

 

Unaudited Consolidated Balance Sheets

 

7

3.

 

Unaudited Consolidated Statements of Income

 

9

4.

 

Unaudited Statements of Consolidated Cash Flows

 

10

5.

 

Unaudited Notes to the Consolidated Financial Statements

 

12

6.

 

Annex: Press Release

 

 




 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

1.

VALUATION OF ASSETS AND LIABILITIES

 

 

 

The financial statements of Celulosa Arauco y Constitución S.A., a Chilean corporation (the “Company”) and its subsidiaries (the Company, together with its subsidiaries, “Arauco”) have been prepared on the basis of accounting principles generally accepted in Chile and specific guidelines issued by Superintendencia de Valores y Seguros of Chile (the “Chilean Securities Commission”). In management’s opinion there is no material difference between the Company’s economic value and the valuation reflected in the Company’s financial statements.

 

 

2.

ANALYSIS OF FINANCIAL POSITION

 

 

a)

Analysis of the Balance Sheet

 

 

 

On January 1, 2002, the Company and its subsidiaries Aserraderos Arauco S.A. and Paneles Arauco S.A. began maintaining their accounting records and preparing their financial statements in U.S. dollars.

 

 

 

On January 1, 2003, the Company’s subsidiaries Forestal Arauco S.A., Forestal Celco S.A., Bosques Arauco S.A., Forestal Valdivia S.A., Forestal Cholguán S.A. and Arauco Internacional S.A. also began maintaining their accounting records and preparing their financial statements in U.S. dollars.

 

 

 

The principal components of assets and liabilities as of June 30, 2007 and 2008 are as follows:


 

 

 

 

 

 

 

 









Assets

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Current assets

 

 

1,729,990

 

 

2,173,729

 

Property, plant and equipment

 

 

6,139,491

 

 

6,561,605

 

Other assets

 

 

92,720

 

 

121,580

 









Total assets

 

 

7,962,201

 

 

8,856,914

 









 

 

 

 

 

 

 

 









Liabilities and Shareholders’ Equity

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Current liabilities

 

 

695,249

 

 

861,773

 

Long-term liabilities

 

 

2,356,615

 

 

2,459,933

 

Minority interest

 

 

11,947

 

 

68,693

 

Shareholders’ equity

 

 

4,898,390

 

 

5,466,515

 









Total liabilities and shareholders’ equity

 

 

7,962,201

 

 

8,856,914

 










 

 

 

Total assets increased by 11.2%, or U.S.$895 million, from June 30, 2007 to June 30, 2008. This increase is mainly attributable to an increase in property, plant and equipment, inventories, trade accounts receivable, marketable securities and investments in related companies.

 

 

 

Total liabilities increased by U.S.$270 million from June 30, 2007 to June 30, 2008. This increase is mainly attributable to a net increase in bank liabilities of U.S.$350 million and an increase in deferred tax of U.S.$59 million, which was partially offset by a decrease in income tax of U.S.$24 million and bonds of U.S.$131 million.

1


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

2.

ANALYSIS OF FINANCIAL POSITION, continued

 

 

a)

Analysis of the Balance Sheet, continued

 

 

 

The main financial and operating ratios are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 









 

Liquidity ratios

 

06/30/2007

 

12/31/2007

 

06/30/2008

 

 












 

Current ratio

 

 

2.49

 

 

3.07

 

 

2.52

 

 

Acid ratio

 

 

1.40

 

 

1.77

 

 

1.44

 

 













 

 

 

The liquidity ratio in the current period represents an increase in current assets, due to a decrease in the short-term public debt and an increase in inventory, and accounts receivables partially offset by an increase in bank liabilities.

 

 

 

The increase in the current acid ratio from 2007 to 2008 is attributable to an increase in current assets due to higher trade accounts receivables, marketable securities and lower balance of bonds, offset by an increase in bank liabilities.


 

 

 

 

 

 

 

 

 

 

 

 

 









 

Debt indicators

 

06/30/2007

 

12/31/2007

 

06/30/2008

 

 












 

Debt to equity ratio

 

 

0.62

 

 

0.58

 

 

0.61

 

 

Short-term debt to total debt

 

 

0.23

 

 

0.20

 

 

0.26

 

 

Long-term debt to total debt

 

 

0.77

 

 

0.80

 

 

0.74

 

 

Financial expenses covered

 

 

5.72

 

 

5.83

 

 

6.20

 

 













 

 

 

The debt ratio was 0.62 and 0.61 at June 30, 2007 and June 30, 2008, respectively.

 

 

 

Current liabilities increased modestly from 23% of total liabilities at June 30, 2007 to 26% of total liabilities at June 30, 2008. The increase is attributable to a higher proportional increase in current liabilities.

 

 

 

The ratio of financial expenses covered increased from 5.72 points in 2007 to 6.20 points in 2008. The increase is attributable to a higher increase in profits related to financial expenses.


 

 

 

 

 

 

 

 

 

 

 

 

 









 

Operational ratios

 

06/30/2007

 

12/31/2007

 

06/30/2008

 

 












 

Inventory turnover

 

 

1.35

 

 

2.79

 

 

1.36

 

 

Inventory turnover (excluding forests)

 

 

2.07

 

 

4.51

 

 

2.16

 

 

Inventory permanence (days)

 

 

132.96

 

 

129.01

 

 

132.02

 

 

Inventory permanence (excluding forests)

 

 

87.15

 

 

79.87

 

 

83.25

 

 













 

 

 

The ratio of inventory turnover increased from 1.35% at June 30, 2007 to 1.36% points at June 30, 2008. For this reason, the inventory permanence ratio decreased during the period ended June 30, 2008.

2



 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

2.

ANALYSIS OF FINANCIAL POSITION, continued

 

 

b)

Analysis of the Income Statement

 

 

 

The breakdown of operating income and costs is as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 












 

 

Operating income

 

06/30/2007
ThU.S.$

 

 

12/31/2007
ThU.S.$

 

 

06/30/2008
ThU.S.$

 

 

 

 









 

 

Pulp

 

 

825,522

 

 

 

1,729,860

 

 

 

969,188

 

 

 

 

Sawn timber, cut wood, plywood and fiber panels

 

 

758,477

 

 

 

1,647,846

 

 

 

871,632

 

 

 

 

Forestry products

 

 

36,218

 

 

 

81,778

 

 

 

48,265

 

 

 

 

Other

 

 

68,510

 

 

 

116,248

 

 

 

75,817

 

 

 

 















 

 

Total operating income

 

 

1,688,727

 

 

 

3,575,732

 

 

 

1,964,902

 

 

 

 












 

 

 










 

 

Operating costs

 

 

06/30/2007
ThU.S.$

 

 

12/31/2007
ThU.S.$

 

 

06/30/2008
ThU.S.$

 

 

 

 











 

 

Timber

 

 

231,112

 

 

 

529,324

 

 

 

284,755

 

 

 

 

Forestry work

 

 

145,145

 

 

 

311,896

 

 

 

192,659

 

 

 

 

Depreciation

 

 

112,705

 

 

 

238,851

 

 

 

111,887

 

 

 

 

Other costs

 

 

400,815

 

 

 

857,969

 

 

 

501,829

 

 

 

 















 

 

Total operating costs

 

 

889,777

 

 

 

1,938,040

 

 

 

1,091,130

 

 

 

 















 


 

 

 

Analysis of Operating Income

 

 

 

Operating income includes net income of U.S.$507 million in 2008 compared to U.S.$510 million in 2007, a decrease of U.S.$4 million, primarily due to an increase in sales revenue consisting of higher volume and prices, which was partially offset by an increase in costs of sales and administration and sales expenses, principally for freight expenses.

 

 

 

Analysis of Non-Operating Loss

 

 

 

There was a non-operating loss of U.S.$78 million in 2007, compared to U.S.$56 million in 2008. The change was primarily caused by an increase in non-operating loss as described in the following table:


 

 

 

 

 

 

 

 





 

 

Item

 

Million U.S.$

 

 

 






 

 

Other non-operating income

 

 

1

 

 

 

Financial expenses

 

 

5

 

 

 

Other non-operating expenses

 

 

(3

)

 

 

Exchange difference

 

 

13

 

 

 

Others net

 

 

6

 

 

 






 

 

Decrease non-operating loss

 

 

22

 

 

 






 


 

 

 

The increase in the exchange difference is principally due to a strong depreciation of the dollar against the Chilean peso and the Euro, currency in which the Company owns financial investments.

3



 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

2.

ANALYSIS OF FINANCIAL POSITION, continued


 

 

 

 

 

 

 

 

 

 

 

 

 

 












 

 

Profitability ratios

 

 

06/30/2007

 

 

12/31/2007

 

 

06/30/2008

 

 

 












 

 

Equity yield

 

 

7.51

 

 

13.58

 

 

6.84

 

 

 

Asset performance ratio

 

 

4.57

 

 

8.46

 

 

4.21

 

 

 

Operating asset ratio

 

 

6.82

 

 

12.42

 

 

6.11

 

 

 

Income per share (U.S.$)

 

 

3.06

 

 

6.15

 

 

3.13

 

 

 

EBITDA *

 

 

646,070

 

 

1,303,310

 

 

654,790

 

 

 

Income after tax (ThU.S.$)

 

 

343,989

 

 

692,691

 

 

353,794

 

 

 












 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Earnings before income tax, interest, depreciation, amortization and extraordinary items.


 

 

 

 

 

 

 

 

 

 

 

 

 

 












 

 

Operational income ThU.S.$

 

 

510,419

 

 

1,008,562

 

 

507,306

 

 

 

Financial expenses ThU.S.$

 

 

(92,059

)

 

(180,771

)

 

(86,994

)

 

 

Non-operating expenses ThU.S.$

 

 

(77,757

)

 

(139,134

)

 

(55,419

)

 

 












 


 

 

3.

MARKET SITUATION

 

 

 

Pulp

 

 

 

During the first half of 2008 the sales objectives for long and short pulp fiber were fulfilled.

 

 

 

It should be noted that the supply problems of raw materials that many of our competitors in the short pulp fiber industry faced contributed to moderate and succesive price increases throughout the period.

 

 

 

During this period the long pulp fiber material market showed itself comparatively weaker due to the increase in the supply of the product, a situation derived from different producers intensifying their production of long pulp fiber at the expense of short pulp fiber due to the supply shortage of raw materials mentioned above.

 

 

 

We expect that the outlook for the pulp market for the second half of 2008 will depend on the performance of the global economy and the impact it will have in the pulp market and other commodities.

 

 

 

It is foreseeable that the second half of 2008 will present a more negative scenario, as the close of the first half of 2008 saw an increase in the pulp inventory levels of paper companies, which we expect will have a bearing on demand in the months ahead. Another element that could negatively affect the market is the eventual closure of paper companies as a result of the continued increase in production costs and the excess supply of paper in some markets.

4



 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

3.

MARKET SITUATION, continued

 

 

 

Wood

 

 

 

The situation of the furniture and construction market in the Unites States has not changed in the second quarter of this year. The construction of new homes is still low, hovering around levels of one million homes per year, compared to two million home starts two years ago. There is still a signficiant amount of new, unsold homes, which we expect will hinder the recovery of this sector for the remaining portion of this year.

 

 

 

This situation is affecting negatively the sales volume of molding and wood compared to the previous year. Nevertheless, significant reduction in the supply of molding from Chile and Brazil has allowed for the recovery of prices.

 

 

 

During the second quarter of this year a greater availability of wood has been reported, especially in Europe. This has resulted in a drop in the price of wood in Europe, the Middle East and North Africa. Also, the charter fees of wood break bulk to the Middle East have increased sharply, resulting in a decrease in the profitability of the destination.

 

 

 

In Asia, the demand and supply situation is more balanced and has resulted in an improvement in prices.

 

 

 

Panels

 

 

 

During the second quarter of 2008, sales from Paneles de Arauco grew 29% (measured in dollars) compared to the second quarter of 2007. These results present a growth in the first half of 2008 of 25% in turnover compared to the same period in 2007, without taking into account the sale of energy to other businesses of the company, as well as the Interconnected Central System.

 

 

 

The demand for AraucoPLY (plywood) remains high in the markets we operate in, which as regards prices, has made possible improving our returns 13% compared to June 2007.

 

 

 

In regards to panels used for furniture (Trupan, Faplac y Cholguan), they have reinstated their commercial operations in Asia with the objective of keeping the inventories of the factories under control due to the large supply available in Latin America.

 

 

 

In the case of Truchoise (MDF), despite the Sub Prime crisis, it has been possible to increase prices, due to a decrease in the available supply of moldings from MDF, as well as Finger Joint.

 

 

 

At the production level, all the factories are currently operating as anticipated.

5



 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

4.

ANALYSIS OF CASH FLOW


 

 

 

 

 

 

 

 

 

 

 

 

 









 

 

 

06/30/2007
ThU.S.$

 

12/31/2007
ThU.S.$

 

06/30/2008
ThU.S.$

 

 












 

Operating cash flow

 

 

521,371

 

 

1,029,042

 

 

347,840

 

 

Cash flow from financing activities

 

 

(175,649

)

 

(188,764

)

 

(79,665

)

 

Cash flow from investment activities

 

 

(320,762

)

 

(768,194

)

 

(244,144

)

 












 

Net cash flow for the period

 

 

24,960

 

 

72,084

 

 

24,031

 

 













 

 

 

We had a positive operating cash flow of U.S.$348 million compared to a U.S.$521 million for the same period in 2007, resulting from an increase in payments to suppliers and personnel, partially offset by higher revenue for sales.

 

 

 

Cash flow from financing activities at June 30, 2008 was a net expense of U.S.$80 million compared to a net expense of U.S.$176 million for the same period in 2007. This change resulted from a lower debt payment compared with the same period in 2007, partially offset by lower bank borrowings and bonds.

 

 

 

Cash flow from investment activities for this period was a lower net expense than for the same period in 2007, due principally to minor disbursements for purchases in property, plant and equipment.

 

 

5.

MARKET RISK ANALYSIS

 

 

 

In respect of the economic risks resulting from interest rate variations, the Company maintains, as of June 30, 2008, a relation between fixed rate debts and total consolidated debt of approximately 70,4%, which it believes is consistent with the industry in which it operates. The Company does not engage in futures or other hedging transactions to hedge against variations in the selling prices of pulp and forest products because it believes that risks resulting from price variations are limited in large part because the Company maintains one of the lowest cost structures in the industry.

 

 

 

In response to economic risks resulting from interest rate variations, the Company has applied policies consistent with the general policies of the industries in which it operates.

 

 

 

As explained in note 2, the Company and most of its subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars. Both their assets and their liabilities are denominated in U.S. dollars, as are the majority of their revenues. As a result, their exposure to changes in the exchange rate has decreased significantly since January 1, 2002, when they began maintaining their accounting records and preparing their financial statements in U.S. dollars.

6


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

 

 

 

 

 





 

 

At June 30,

 

ASSETS

 

2007
ThU.S.$

 

2008
ThU.S.$

 







CURRENT ASSETS:

 

 

 

 

 

 

 

Cash

 

 

28,129

 

 

25,972

 

Time deposits

 

 

26,253

 

 

65,157

 

Marketable securities (note 3)

 

 

157,263

 

 

179,406

 

Trade accounts receivable (note 4)

 

 

523,857

 

 

705,430

 

Notes receivable

 

 

3,685

 

 

5,260

 

Other receivables

 

 

87,235

 

 

99,119

 

Notes and accounts receivable from related parties (note 18)

 

 

6,115

 

 

12,815

 

Inventories (note 5)

 

 

679,957

 

 

846,073

 

Recoverable taxes

 

 

80,554

 

 

61,201

 

Prepaid expenses

 

 

75,988

 

 

88,002

 

Other current assets

 

 

60,954

 

 

85,294

 









Total current assets

 

 

1,729,990

 

 

2,173,729

 









PROPERTY, PLANT AND EQUIPMENT: (note 6)

 

 

 

 

 

 

 

Land

 

 

529,588

 

 

643,661

 

Forests

 

 

2,567,459

 

 

2,835,619

 

Buildings and other infrastructure

 

 

1,993,588

 

 

2,097,624

 

Machinery and equipment

 

 

2,842,991

 

 

2,961,578

 

Other

 

 

521,909

 

 

548,516

 

Technical revaluation

 

 

68,769

 

 

68,769

 

Less: Accumulated depreciation

 

 

(2,384,813

)

 

(2,594,162

)









Net property, plant and equipment

 

 

6,139,491

 

 

6,561,605

 









 

 

 

 

 

 

 

 

OTHER NON-CURRENT ASSETS:

 

 

 

 

 

 

 

Investments in related companies (note 7)

 

 

83,654

 

 

148,951

 

Investments in other companies

 

 

256

 

 

291

 

Goodwill (note 8)

 

 

5,125

 

 

3,041

 

Negative goodwill (note 8)

 

 

(57,825

)

 

(89,534

)

Long-term receivables

 

 

11,490

 

 

10,548

 

Intangibles

 

 

752

 

 

831

 

Amortization

 

 

(399

)

 

(475

)

Other (note 9)

 

 

49,667

 

 

47,927

 









Total other non-current assets

 

 

92,720

 

 

121,580

 









Total assets

 

 

7,962,201

 

 

8,856,914

 









The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

7


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets, continued
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

 

 

 

 

 





 

 

At June 30,

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

2007
ThU.S.$

 

2008
ThU.S.$

 







CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current bank borrowings (note 10)

 

 

152,955

 

 

289,469

 

Current portion of long-term bank borrowings (note 14)

 

 

29,397

 

 

174,549

 

Current portion of bonds (note 12)

 

 

135,376

 

 

34,852

 

Current portion of other long term liabilities

 

 

636

 

 

497

 

Dividends payable

 

 

203

 

 

228

 

Trade accounts payable

 

 

250,799

 

 

245,368

 

Notes payable

 

 

4,997

 

 

7,845

 

Sundry accounts payable

 

 

11,092

 

 

12,540

 

Notes and accounts payable to related companies (note 18)

 

 

5,668

 

 

11,175

 

Accrued liabilities (note 13)

 

 

52,196

 

 

50,237

 

Withholding taxes

 

 

21,020

 

 

24,581

 

Income tax payable

 

 

24,060

 

 

 

Deferred income

 

 

4,004

 

 

3,852

 

Deferred taxes

 

 

2,223

 

 

5,960

 

Other current liabilities

 

 

623

 

 

620

 









Total current liabilities

 

 

695,249

 

 

861,773

 









LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term bank borrowings (note 14)

 

 

259,769

 

 

327,691

 

Bonds (note 12)

 

 

1,852,500

 

 

1,822,500

 

Sundry accounts payable

 

 

2,582

 

 

861

 

Accrued liabilities

 

 

29,276

 

 

34,476

 

Deferred tax liabilities (note 15)

 

 

167,381

 

 

222,961

 

Other long-term liabilities

 

 

45,107

 

 

51,444

 









Total long-term liabilities

 

 

2,356,615

 

 

2,459,933

 









Minority interest (note 23)

 

 

11,947

 

 

68,693

 









SHAREHOLDERS’ EQUITY: (note 20)

 

 

 

 

 

 

 

Paid-up in capital

 

 

347,551

 

 

347,551

 

Share premium

 

 

5,625

 

 

5,625

 

Forestry and other reserves

 

 

1,544,966

 

 

1,733,805

 

Retained earnings

 

 

2,653,979

 

 

3,025,310

 

Net income for the period

 

 

346,269

 

 

354,224

 









Total shareholders’ equity

 

 

4,898,390

 

 

5,466,515

 









Total liabilities and shareholders’ equity

 

 

7,962,201

 

 

8,856,914

 









The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

8


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Consolidated Statements of Income
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

 

 

 

 

 





 

 

At June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







OPERATING INCOME:

 

 

 

 

 

 

 

Sales revenue

 

 

1,688,727

 

 

1,964,902

 

Cost of sales

 

 

(889,777

)

 

(1,091,130

)

Gross profit

 

 

798,950

 

 

873,772

 

Administration and selling expenses

 

 

(288,531

)

 

(366,466

)









Operating income

 

 

510,419

 

 

507,306

 









NON-OPERATING INCOME:

 

 

 

 

 

 

 

Interest earned

 

 

11,509

 

 

12,208

 

Share of net income of related companies (note 7)

 

 

5,181

 

 

11,198

 

Other non-operating income (note 21)

 

 

9,148

 

 

10,268

 

Investment loss of related companies

 

 

 

 

(1,060

)

Amortization of goodwill (note 8)

 

 

(1,454

)

 

(93

)

Interest expenses

 

 

(92,059

)

 

(86,994

)

Other non-operating expenses (note 22)

 

 

(12,095

)

 

(15,474

)

Price-level restatement (note 1)

 

 

(258

)

 

(627

)

Foreign currency exchange rate (note 1)

 

 

2,271

 

 

15,155

 









Non-operating loss

 

 

(77,757

)

 

(55,419

)









Income before taxes, minority interest and amortization of negative goodwill

 

 

432,662

 

 

451,887

 

Income taxes (note 15)

 

 

(88,673

)

 

(98,093

)

Income before minority interest and amortization of negative goodwill

 

 

343,989

 

 

353,794

 

Minority interest (note 23)

 

 

231

 

 

(2,340

)

Income before amortization of negative goodwill

 

 

344,220

 

 

351,454

 

Amortization of negative goodwill (note 8)

 

 

2,049

 

 

2,770

 









Net income

 

 

346,269

 

 

354,224

 









The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

9


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Statements of Consolidated Cash Flows
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

 

 

 

 

 





 

 

At June 30,

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2007
ThU.S.$

 

2008
ThU.S.$

 





Net income

 

 

346,269

 

 

354,224

 

Loss (Profit) on sale of assets

 

 

 

 

 

 

 

Loss (profit) on sale of property, plant and equipment

 

 

121

 

 

363

 

Items affecting income not involving the movement of cash:

 

 

 

 

 

 

 

Depreciation

 

 

119,664

 

 

118,156

 

Amortization of intangibles

 

 

19

 

 

20

 

Write-offs and provisions

 

 

462

 

 

5,888

 

Profit from investments accounted for under the equity method

 

 

(5,181

)

 

(11,198

)

Interest loss of related companies

 

 

 

 

1,060

 

Amortization of goodwill

 

 

1,454

 

 

93

 

Amortization of negative goodwill

 

 

(2,049

)

 

(2,770

)

Net price level restatement

 

 

258

 

 

627

 

Foreign currency exchange rate

 

 

(2,271

)

 

(15,155

)

Others

 

 

47,426

 

 

53,136

 

Decrease (Increase) in current assets:

 

 

 

 

 

 

 

Clients and debtors

 

 

(15,948

)

 

(163,310

)

Inventory

 

 

(29,215

)

 

(100,177

)

Other current assets

 

 

(5,520

)

 

53,837

 

Increase (Decrease) in current liabilities:

 

 

 

 

 

 

 

Suppliers and creditors

 

 

26,208

 

 

62,239

 

Interest payable

 

 

27,074

 

 

32,379

 

Provision for income taxes

 

 

8,524

 

 

(17,425

)

Other current liabilities

 

 

4,076

 

 

(26,146

)









Net cash flows from operating activities

 

 

521,371

 

 

345,841

 









The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

10


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Statements of Consolidated Cash Flows, continued
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

 

 

 

 

 







 

 

At June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







CASH FLOWS FROM FINANCING ACTIVITIES

Loans from financial institutions

 

 

564,078

 

 

459,809

 

Loans paid

 

 

(832,061

)

 

(342,377

)

Bonds issue

 

 

268,110

 

 

 

Dividends paid

 

 

(172,466

)

 

(197,097

)

Other

 

 

(3,310

)

 

 









Net cash flow from financing activities

 

 

(175,649

)

 

(79,665

)









CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Sales of property, plant and equipment

 

 

362

 

 

1,295

 

Purchase of property, plant and equipment

 

 

(320,282

)

 

(240,655

)

Permanent investments

 

 

(163

)

 

(2,353

)

Capitalized interest paid

 

 

(704

)

 

 

Other investments

 

 

25

 

 

(431

)









Net cash flow from investment activities

 

 

(320,762

)

 

(242,144

)









Net cash flows from operating, investing and financing activities

 

 

24,960

 

 

24,032

 









Effect of inflation

 

 

5,177

 

 

(1,820

)









Net decrease in cash and cash equivalents

 

 

30,137

 

 

22,212

 

Initial balance of cash and cash equivalents

 

 

184,296

 

 

267,229

 









FINAL BALANCE OF CASH AND CASH EQUIVALENTS

 

 

214,433

 

 

289,441

 









The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

11


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

(a)

Organization and basis of presentation

 

 

 

Celulosa Arauco y Constitución S.A., a Chilean corporation (the “Company”), and its subsidiaries are engaged principally in the production of pulp, forestry and wood products and the management of its subsidiaries’ forestry assets.

 

 

 

The financial statements of the Company and its subsidiaries (collectively known as “Arauco”) are presented on a consolidated basis and have been prepared on the basis of accounting principles generally accepted in Chile and specific guidelines issued by the Superintendencia de Valores y Seguros (the “Chilean Securities Commission”). The Company consolidates the financial statements of the companies in which it controls a majority of voting shares. All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

 

Certain minor reclassifications among account headings have been made to these consolidated financial statements in order to present them on a basis more familiar to readers of financial statements in the United States (the “U.S.”).

 

 

 

The consolidated financial statements as of June 30, 2007 and 2008 include the following direct and indirect subsidiaries of the Company, all of which are incorporated in Chile (except as otherwise noted).

12


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 


 

(a)

Organization and basis of presentation, continued


 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

Interest of the Company
as of June 30, 2008

 

Total
June 30,
2007

 







Subsidiary company

 

Direct
%

 

Indirect
%

 

Total
%

 

Total
%

 











Agenciamiento y Servicios Profesionales S.A. (Mexico)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Alto Paraná S.A. (Argentina)

 

 

 

 

99.98

 

 

99.98

 

 

99.97

 

Arauco Denmark ApS (Denmark)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Arauco Distribución S.A.

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Arauco Ecuador S.A. (Ecuador)

 

 

0.10

 

 

99.89

 

 

99.99

 

 

99.99

 

Arauco Florestal Arapoti S.A. (Brazil)

 

 

 

 

79.99

 

 

79.99

 

 

 

Arauco Forest Brazil S.A. (Ex-L.D. Forest Products S.A.) (Brazil)

 

 

42.93

 

 

57.06

 

 

99.99

 

 

99.99

 

Arauco Forest Products B.V. (The Netherlands)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Arauco Generación S.A.

 

 

98.00

 

 

1.99

 

 

99.99

 

 

99.99

 

Arauco Honduras S. de R.L. de C.V. (Honduras)

 

 

0.06

 

 

99.93

 

 

99.99

 

 

99.99

 

Arauco Internacional S.A.

 

 

98.03

 

 

1.96

 

 

99.99

 

 

99.99

 

Arauco Perú S.A. (Peru)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Arauco Wood Products, Inc. (U.S.A.)

 

 

0.39

 

 

99.60

 

 

99.99

 

 

99.99

 

Araucomex S.A. de C.V. (Mexico)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Aserraderos Arauco S.A.

 

 

99.00

 

 

0.99

 

 

99.99

 

 

99.99

 

Bosques Arauco S.A.

 

 

1.00

 

 

98.93

 

 

99.93

 

 

99.93

 

Caif S.A. (Argentina)

 

 

 

 

 

 

 

 

99.99

 

Controladora de Plagas Forestales S.A.

 

 

 

 

61.17

 

 

61.17

 

 

61.17

 

Ecoboard S.A. (Argentina)

 

 

 

 

 

 

 

 

99.99

 

Ecoresin S.A. (Argentina)

 

 

 

 

 

 

 

 

99.99

 

Faplac S.A. (Argentina)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Flooring S.A. (Argentina)

 

 

 

 

99.99

 

 

99.99

 

 

60.00

 

Forestal Arauco Costa Rica S.A. (Costa Rica)

 

 

8.47

 

 

91.52

 

 

99.99

 

 

99.99

 

Forestal Arauco Guatemala S.A. (Guatemala)

 

 

0. 12

 

 

99.87

 

 

99.99

 

 

99.99

 

Forestal Arauco S.A.

 

 

99.92

 

 

 

 

99.92

 

 

99.92

 

Forestal Celco S.A.

 

 

1.00

 

 

98.93

 

 

99.93

 

 

99.93

 

Forestal Cholguán S.A.

 

 

 

 

97.43

 

 

97.43

 

 

97.43

 

Forestal Concepción S.A. (Panamá)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Forestal Cono Sur S.A. (Uruguay)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Forestal Los Lagos S.A.

 

 

 

 

79.94

 

 

79.94

 

 

79.94

 

Forestal Misiones S.A. (Argentina)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 

Forestal Valdivia S.A.

 

 

1.00

 

 

98.93

 

 

99.93

 

 

99.93

 

Industrias Forestales S.A. (Argentina)

 

 

10.00

 

 

89.99

 

 

99.99

 

 

99.99

 

Inversiones Celco S.L. (Spain)

 

 

32.02

 

 

67.97

 

 

99.99

 

 

99.99

 

Investigaciones Forestales Bioforest S.A.

 

 

1.00

 

 

98.93

 

 

99.93

 

 

99.93

 

Forestal Nuestra Señora del Carmen S.A. (Ex - La Señora del Milagro S.R.L.) (Argentina)

 

 

10.00

 

 

89.99

 

 

99.99

 

 

99.99

 

Molduras Trupán S.A.

 

 

1.00

 

 

98.99

 

 

99.99

 

 

99.99

 

Paneles Arauco S.A.

 

 

99.00

 

 

0.99

 

 

99.99

 

 

99.99

 

Placas Do Paraná S.A. (Brazil)

 

 

7.82

 

 

92.17

 

 

99.99

 

 

99.99

 

Servicios Logísticos Arauco S.A.

 

 

45.00

 

 

54.99

 

 

99.99

 

 

99.99

 

Southwoods Arauco-Lumber and Millwork LLC (U.S.A.)

 

 

 

 

99.61

 

 

99.61

 

 

99.61

 

Trupán Argentina S.A. (Argentina)

 

 

 

 

99.99

 

 

99.99

 

 

99.99

 















13


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

(b)

Currency records

 

 

 

On January 1, 2002, the Company and its subsidiaries Aserraderos Arauco S.A. and Paneles Arauco S.A. began maintaining their accounting records and preparing their financial statements in U.S. dollars.

 

 

 

On January 1, 2003, the subsidiaries Forestal Arauco S.A., Forestal Celco S.A., Bosques Arauco S.A., Forestal Valdivia S.A., Forestal Cholguán S.A. and Arauco Internacional S.A. also began maintaining their accounting records and preparing their financial statements in U.S. dollars.

 

 

 

 

The Company’s other Chilean subsidiaries maintain their accounting records and prepare their financial statements in Chilean pesos.

 

 

 

(c)

Price-level restatement and foreign currency exchange rate

 

 

 

 

(i)

Price-level restatement

 

 

 

 

The charge or credit for price-level restatement of the subsidiaries that record and prepare their financial statements in Chilean pesos in the consolidated financial statements is comprised of the following two factors:

 

 

 

 

(A)

the effect of changes in the purchasing power of the Chilean peso during each year presented in the consolidated financial statements; and

 

 

 

 

(B)

the change in the value of assets and liabilities which are denominated in inflation index-linked units of account called Unidades de Fomento (“UF”).

 

 

 

 

(ii)

Changes in purchasing power

 

 

 

 

The effect of the changes in the purchasing power of the Chilean peso during each year presented in the consolidated financial statements, relating to the effect of the changes on the assets, liabilities and net income of the subsidiaries that record and prepare their financial statements in Chilean pesos, is calculated by restating non-monetary assets, liabilities, shareholders’ equity and income statement accounts to reflect changes in the Chilean consumer price index from the date they were acquired or incurred to the end of the year. The net purchasing power gain or loss calculated as described above, and included in net income, reflects the effect of Chilean inflation on the value of non-monetary assets and liabilities (other than UF- and foreign currency-denominated assets and liabilities) held by these subsidiaries.

 

 

 

 

The restatements were calculated using the official consumer price index of the Chilean National Institute of Statistics and are based on the “prior month rule,” according to which inflation adjustments are based on the CPI at the close of the month preceding the close of the relevant period or transaction. This index is considered by the business community, the accounting profession and the Chilean government to be the index which most closely complies with the technical requirement to reflect the variation in the general level of prices in Chile and, consequently, is widely used for financial reporting purposes in Chile.

14



 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

(c)

Price-level restatement and foreign currency exchange rate, continued

 

 

 

 

(ii)

Changes in purchasing power, continued

 

 

 

 

The values of the CPI were as follows:


 

 

 

 

 

 

 

 









 

 

Index

 

Change from
previous
June 30,

 









June 30, 2007

 

 

127.61

 

 

3.2

%

June 30, 2008

 

 

139.70

 

 

9.5

%










 

 

 

The values of the CPI used for the price-level restatement for the two most recent fiscal periods were as follows:


 

 

 

 

 

 

 

 









 

 

Index

 

Change from
previous
May 31,

 









May 31, 2007

 

 

126.43

 

 

2.9

%

May 31, 2008

 

 

137.65

 

 

8.9

%










 

 

 

 

The above-mentioned price-level restatements do not purport to represent appraisal or replacement values and are intended only to restate all non-monetary financial statement components in terms of local currency of a single purchasing power and to include in the net result for each year the gain or loss in purchasing power arising from the holding of monetary assets and liabilities exposed to the effects of inflation.

 

 

 

 

(iii)

Inflation Index-linked units of account (UF)

 

 

 

 

Assets and liabilities that are denominated in inflation index-linked units of account are stated at the period-end values of the respective units of account. The principal inflation index-linked unit used in Chile is the UF, which changes daily to reflect the changes in Chile’s CPI.

 

 

 

 

Interest-bearing assets and liabilities that are denominated in UFs have their interest rates expressed in terms of an interest rate spread in excess of the indexation of the UF.

 

 

 

 

Values for the UF were as follows (historical pesos per UF):


 

 



 

Ch$



June 30, 2007

18,624.17

June 30, 2008

20,252.71




 

 

 

 

(iv)

Foreign currency exchange rate

 

 

 

 

The charge or credit for foreign currency exchange rate is comprised of the change in the value of assets and liabilities denominated in foreign currencies.

15


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

(c)

Price-level restatement and foreign currency exchange rate, continued

 

 

 

 

(v)

Assets and liabilities denominated in foreign currencies

 

 

 

 

Assets and liabilities denominated in foreign currencies other than U.S. dollars are detailed in note 17 and have been translated into U.S. dollars at the relevant observed exchange rate reported by the Central Bank of Chile. The observed exchange rates for foreign currencies reported by the Central Bank on the specified dates were as follows:


 

 

 

 

 

 

 

 


 

 

At June 30,

 

 

 

2007
U.S.$ 1

 

2008
U.S.$ 1

 


Chilean peso (Ch$)

 

 

526.86

 

 

526.05

 

Euro

 

 

0.74

 

 

0.64

 

Argentine peso (Ar$)

 

 

3.09

 

 

3.03

 

Brazilian real (R$)

 

 

1.93

 

 

1.60

 

Unidad de Fomento (UF)

 

 

0.03

 

 

0.03

 










 

 

 

The differences arising in the valuation of assets and liabilities denominated in foreign currencies as a result of variations in the exchange rates are accounted for in the income statement as an item of foreign currency exchange rate in the year in which they arise. Realized and unrealized losses and realized gains on interest rate swaps are accounted for under the account headings “Interest and other financial expenses” and “Interest earned” in the period in which they arise. See note 1(o).

 

 

 

Credit (charge) to income for price-level restatement in each of the reporting periods was comprised of the restatements of non-monetary assets, UF and foreign currency-denominated monetary assets and liabilities, shareholders’ equity and income statement accounts as follows:

 

 

 

Credit (charge) to income for price-level restatement:


 

 

 

 

 

 

 

 


 

 

Period ended June 30,

 

 

 

2007
ThU.S.$
Credit (Charge)

 

2008
ThU.S.$
Credit (Charge)

 


Assets, liabilities and equity restated by CPI

 

 

 

 

 

 

 

Shareholders’ equity of subsidiaries in Chilean pesos

 

 

(482

)

 

(1,436

)

Property, plant and equipment, net

 

 

283

 

 

490

 

Inventories

 

 

 

 

 

Other assets and liabilities, net

 

 

12

 

 

383

 









Net effect on income

 

 

(187

)

 

(563

)









Price-level restatement of income statement accounts

 

 

(71

)

 

(64

)









Credit (charge) to income by CPI

 

 

(258

)

 

(627

)









16


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

(c)

Price-level restatement and foreign currency exchange rate, continued

 

 

 

Credit (charge) to income for foreign currency exchange rate:


 

 

 

 

 

 

 

 


 

 

Period ended June 30,

 

 

 

2007
ThU.S.$
Credit (Charge)

 

2008
ThU.S.$
Credit (Charge)

 


Assets restated by foreign currency

 

 

 

 

 

 

 

Trade accounts receivable

 

 

3,083

 

 

8,407

 

Other assets

 

 

13,644

 

 

16,987

 

Liabilities restated by foreign currency

 

 

 

 

 

 

 

Bank borrowings

 

 

(3,088

)

 

(1,694

)

Trade accounts payable

 

 

(1,243

)

 

(345

)

Dividends payable

 

 

(2,154

)

 

17,832

 

Other liabilities

 

 

(7,971

)

 

(26,032

)









Net effect on income from foreign currency

 

 

2,271

 

 

15,155

 










 

 

(d)

Time deposits, marketable securities and investments purchased under agreements to resell

 

 

 

Time deposits are shown at cost plus accrued interest. Marketable securities are shown at the lower of cost plus accrued interest or market value.

 

 

 

Financial instruments purchased under agreements to resell are held at acquisition cost plus accrued interest.

 

 

 

Investments in money market funds are stated at market value based on period-end quoted values.

 

 

(e)

Inventories

 

 

 

Inventories of raw materials, spare parts and supplies have been stated at the average price or restated cost as determined by price-level restatement principles for those subsidiaries that maintain their accounting records and prepare their financial statements in Chilean pesos. Imports in transit are held at accumulated cost at the balance sheet date plus price-level restatement for subsidiaries that maintain their accounting records and prepare their financial statements in Chilean pesos.

 

 

 

For those subsidiaries that maintain their accounting records and prepare their financial statements in Chilean pesos, finished goods are stated at an average unit production cost for the year, including production overhead and depreciation of fixed assets, plus price-level restatement.

 

 

 

Inventory of forests in exploitation is stated at the commercially appraised value at which these forests were transferred from fixed assets.

 

 

 

Finished goods are valued at the lower of average cost of production or market value. For those subsidiaries that maintain their accounting records and prepare their financial statements in Chilean pesos, inventory is valued at the lower of price-level restated cost (or transferred value in the case of forest inventory) and market value.

17


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

(f)

Property, plant and equipment

 

 

 

 

(i)

Property, plant and equipment, excluding forests

 

 

 

 

The property, plant and equipment of the Company and those of its subsidiaries that maintain their accounting records and prepare their financial statements in U.S. dollars are valued at cost. The property, plant and equipment of the other Chilean subsidiaries, excluding forests, are valued at cost plus price-level restatement. The carrying value of property, plant and equipment was adjusted in 1979 in accordance with the regulations of the Chilean Securities Commission. See note 6.

 

 

 

 

Property, plant and equipment, excluding forests and land, is depreciated on a straight-line basis over the estimated remaining useful lives of the underlying assets.

 

 

 

 

Financing costs of projects requiring major investments in long-term construction and those costs incurred from financing specific projects are capitalized and amortized over the estimated useful lives of the related assets. Profits and losses on the sale of property, plant and equipment, excluding forests, are accounted for as the difference between the book value and the consideration received.

 

 

 

 

The Company has conducted an impairment analysis of its significant assets and concluded that no impairment charge is necessary.

 

 

 

 

(ii)

Forests

 

 

 

 

Radiata pine that is less than 16 years old is valued at the cost of development, maintenance and protection plus price-level restatement (until December 31, 2002). Finance costs related to the development of the forests are not capitalized but are expensed in the income statement.

 

 

 

 

Radiata pine that is 16 or more years old is valued in accordance with a commercial valuation performed by Arauco based on sample measurements of forest growth carried out by independent third parties. The difference between the commercial valuation at year-end and the prior year’s valuations plus price-level restatement (until December 31, 2002) is accounted for as an adjustment to “Forests” and to shareholders’ equity under the account heading “Forestry and other reserves”.

 

 

 

 

Forests which are due to be exploited within one year are reallocated to inventory under current assets.

 

 

 

 

On the sale of a related finished good, the shareholders’ equity account “Forestry and other reserves” is reduced by the amount of the commercial valuation allocable to such finished good. Such commercial valuation is excluded from cost of sales.

 

 

 

 

Commercial valuations are not performed on native forests.

18


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

(g)

Investments in related companies

 

 

 

Investments in companies over which Arauco exercises significant, but not controlling, influence are shown under other non-current assets and are accounted for using the equity method. Arauco is presumed to exercise significant influence where its participation in a company is between 20% and 50%.

 

 

 

Arauco’s proportionate share in the net income and losses of related companies is recognized in non-operating income in the statement of income on an accrual basis, after eliminating any unrealized profits from transactions between related companies.

 

 

 

Investment in related companies acquired through December 31, 2003 are accounted for using the equity method, in accordance with Circular Letter No. 368 of the Chilean Securities Commission.

 

 

 

Investment in related companies acquired after December 31, 2003 are accounted for using the proportional net worth method, in accordance with Circular Letter No. 1697 of the Chilean Securities Commission.

 

 

 

Investments in foreign companies are accounted for in accordance with Technical Bulletin No. 64 of the Accountants Association of Chile.

 

 

(h)

Income taxes

 

 

 

Effective January 1, 2000, the effects of deferred income taxes arising from temporary differences between the basis of assets and liabilities for tax and financial statement purposes are recorded in accordance with Technical Bulletins Nos. 60, 68 and 69 of the Chilean Institute of Accountants and Circular 1466 of the Chilean Securities Commission. The effects of deferred income taxes up to January 1, 2000 that were not previously recorded were recognized in accordance with the transitional period provided by Technical Bulletin No. 60, against asset or liability account (“complementary accounts”) and were recorded. Complementary accounts are amortized to income over the estimated average reversal periods corresponding to underlying temporary differences to which the deferred tax asset or liability related. Deferred income taxes by January 1, 2000 are recognized in income as the temporary differences are reversed.

 

 

 

Deferred income tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred income tax assets to an amount that is more likely than not to be realized.

 

 

(i)

Bonds

 

 

 

Bonds are shown at face value plus accrued interest as of each year-end. The discount on, and expenses incurred in, the issue of the bonds are shown under other non-current assets and are amortized over the term of the instruments.

19


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

(j)

Staff severance indemnities

 

 

 

Arauco has recorded a liability for long-term severance indemnities in accordance with the collective agreements entered into with its employees. Generally, upon leaving Arauco, employees who have completed five years of service are entitled to one month’s salary for each year of service, up to the retirement age of 60 and 65 years for women and men, respectively. The provision for severance compensation is calculated on the basis of the present value of the total accrued cost of this benefit, discounted at a real annual interest rate of 5%.

 

 

(k)

Research and development expenses

 

 

 

The cost of research, project development and special studies are charged to income in the period in which they are incurred, except for the cost of fixed assets once development has been approved. The cost of research and development charged to income was U.S.$1,453 thousand and U.S.$1,959 thousand for the period ended June 30, 2007 and 2008, respectively.

 

 

(l)

Negative goodwill on investments

 

 

 

Any excess of the fair value of net assets (book value until December 31, 2003) of a company acquired over the purchase consideration paid is accounted for as a reduction of the consolidated assets in the balance sheet and is amortized to the income statement over a five-year period or the life time of acquired assets.

 

 

 

Since January 2004, the lower and higher value of investments represent the difference between the acquisition value of the investment of the related business and the fair value of said investment as of the acquisition date, which is depreciated according to the expected return period of said investment.

 

 

 

The modifications to the fair value, higher and/or lower values are completed in a timeframe no longer than a year since the acquisition date.

 

 

(m)

Goodwill on investments

 

 

 

Any consideration paid to acquire a company in excess of fair value of net assets (book value until December 31, 2003) is accounted for as an increase of the consolidated assets in the balance sheet and is amortized over a five-year period or the life time of acquired assets.

 

 

 

Since January 2004, the lower and higher value of investments represent the difference between the acquisition value of the investment of the related business and the fair value of said investment as of the acquisition date, which is depreciated according to the expected return period of said investment.

 

 

 

The modifications to the fair value, higher and/or lower values are completed in a timeframe no longer than a year since the acquisition date.

 

 

(n)

Cash and cash equivalents

 

 

 

Arauco considers cash and cash equivalents as representing cash and cash instruments with an original maturity of less than three months. Cash flows from operating activities include all business-related cash flows as well as interest paid, financial income and in general, all cash flows not defined as resulting from financing or investing activities. The operating concept used in this statement is broader than that in the consolidated statements of income.

20


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

(o)

Interest rate swaps

 

 

 

Interest rate swap agreements are considered hedges of existing items and accounted for in accordance with Technical Bulletin No. 57 of the Accountants Association of Chile.

 

 

(p)

Government grants awarded for forestry activities

 

 

 

Grants that are received from the Chilean government for forestry activities are accounted for as a credit to shareholders’ equity or as a reduction in the cost of the forests. These amounts are realized as income on sale of the related finished goods.

 

 

(q)

Provision for vacation pay

 

 

 

Vacation pay earned by employees but not paid is accounted for on an accrual basis.

 

 

(r)

Allowance for doubtful accounts

 

 

 

Allowance for doubtful accounts is recorded based on analyses of collectibility on an individual account basis.

 

 

(s)

Leasing assets

 

 

 

Financing leases are recorded at the present value of the minimum lease payments, discounted by the purchase option interest rate indicated in the contract. The obligations are recorded as current and long-term liabilities net of deferred interest.

 

 

(t)

Intangibles

 

 

 

Intangible assets are recorded at cost, adjusted for price-level restatement, and are amortized over 20 years.

 

 

(u)

Revenue recognition policy

 

 

 

Revenues are recorded in accordance with Technical Bulletin No. 70 of the Accountants Association of Chile.

 

 

(v)

Interest rate swap contracts

 

 

 

Interest expense on swap contract-related debt is adjusted for the net amount receivable or payable under the swap contract. The initial premium payable upon entry into the swap contract is amortized over the period of the underlying contract.

 

 

(w)

Software

 

 

 

Internal development software costs are expensed when incurred. Purchased software is capitalized and amortized over the estimated useful life up to a maximum of four years. Capitalized software assets are classified in “Property, plant and equipment” as “other assets.”

21


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

 

(x)

Translation of foreign subsidiaries, continued

 

 

 

 

Beginning January 1, 2002, the financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars in accordance with B.T. No. 64. In accordance with B.T. No. 64, the financial statements of foreign subsidiaries whose activities do not constitute an extension of the Chilean parent company’s operations and operate in countries that are exposed to significant risks, restrictions or inflation/exchange fluctuations, are remeasured into U.S. dollars before translation into the accounting records of the parent company. The Company has remeasured the operations of its Argentinean subsidiaries and the Panamanian agency that are not considered an extension of Arauco’s operations into U.S. dollars as follows:

 

 

 

Monetary assets and liabilities are translated at year-end rates of exchange between the U.S. dollar and the local currency.

 

 

 

All non-monetary assets and liabilities and shareholders’ equity are translated at historical rates of exchange between the U.S. dollar and the local currency.

 

 

 

Income and expense accounts are translated at average rates of exchange between the U.S. dollar and the local currency.

 

 

 

The effects of any exchange rate fluctuations as compared to the U.S. dollar are included in the results of operations for the relevant year.

 

 

 

 

Until December 31, 2001, under B.T. No. 64, each investment in foreign subsidiaries was price-level restated, in order to separate the effect of price-level restating the foreign investment, which was reflected in income, from the effect of the foreign currency translation gain or loss, which was reflected in equity in the account “Cumulative Translation Adjustment,” as the foreign investment itself was measured in U.S. dollars. For the periods ended June 30, 2008 and 2007, as allowed by B.T. No. 64, the Company designated U.S. dollar denominated debt as an economic hedge of its net foreign investment in Argentina.

 

 

 

 

As of June 30, 2008, the Company’s investments in Argentina represented 7.3% of its consolidated assets, compared to 7.8% as of June 30, 2007.

 

 

 

 

It is not possible to predict what developments will occur in the Argentine economy, what effects the Argentine economic crisis and the devaluation of the Argentine peso may have on the economic and financial condition of the Company’s Argentine subsidiaries or whether the Argentine economic crisis may affect developments in other emerging markets including Chile. The Company’s financial statements include the financial effects of recent current Argentine developments in accordance with both Chilean Securities Commission instructions and Technical Bulletin guidelines.

 

 

 

2.

CHANGES IN ACCOUNTING POLICIES

 

 

 

 

There are no significant changes in accounting principles or presentation for the years covered in these consolidated financial statements.

22


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

3.

MARKETABLE SECURITIES

 

 

 

Marketable securities as of each period-end, were as follows:


 

 

 

 

 

 

 

 

 

 









 

 

 

As of June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 

 









 

Mutual fund units

 

 

157,263

 

 

179,406

 

 









 

Total marketable securities

 

 

157,263

 

 

179,406

 

 










 

 

4.

TRADE ACCOUNTS RECEIVABLE

 

 

 

Trade accounts receivable as of each period-end were as follows:


 

 

 

 

 

 

 

 

 

 









 

 

 

As of June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 

 









 

Trade accounts receivable

 

 

532,526

 

 

717,716

 

 

Allowance for doubtful accounts

 

 

(8,669

)

 

(12,286

)

 









 

Total trade accounts receivable

 

 

523,857

 

 

705,430

 

 










 

 

 

As of June 30, 2007 and 2008, no single customer accounted for more than 10% of the outstanding balance of accounts receivable. Arauco takes steps to reduce the risk of non-payment for goods sold, including the use of letters of credit, receipt of advance payments and the use of insurance policies. If such measures were to fail, Arauco would be exposed to a maximum credit loss equivalent to the accounting balance. Arauco has not experienced any significant losses as a result of non-payment of accounts receivable.

 

 

5.

INVENTORIES

 

 

 

Inventories have been valued in accordance with the policy described in note 1(e). The principal components were as follows:


 

 

 

 

 

 

 

 

 

 









 

 

 

As of June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 

 









 

Finished goods (pulp)

 

 

59,515

 

 

89,965

 

 

Finished goods (timber and panels)

 

 

206,079

 

 

201,935

 

 

Work in progress

 

 

16,601

 

 

27,109

 

 

Sawlogs, pulpwood and chips

 

 

58,735

 

 

108,245

 

 

Raw material

 

 

80,343

 

 

86,618

 

 

Forests under exploitation

 

 

228,129

 

 

286,901

 

 

Pending imports

 

 

4,619

 

 

6,675

 

 

Other

 

 

25,936

 

 

38,625

 

 









 

Total inventories

 

 

679,957

 

 

846,073

 

 









23


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements

June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 


 

 

6.

PROPERTY, PLANT AND EQUIPMENT

 

 

 

Property, plant and equipment, including forests, have been valued as described in note 1(f).

 

 

 

Technical revaluation and adjustment of book value

 

 

 

The balances of buildings and other infrastructure, machinery and equipment and other include amounts arising from the technical revaluation of certain assets performed during 1979, in accordance with regulations of the Chilean Securities Commission.

 

 

 

The accumulated net book value of these revaluations as of each period-end is detailed below by class of asset:

 

 

 

 

 

 

 

 







 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Buildings and other infrastructure

 

 

2,332

 

 

2,218

 

Machinery and equipment

 

 

185

 

 

152

 









Total increase in value due to technical revaluation of property, plant and equipment

 

 

2,517

 

 

2,370

 









 

 

 

Depreciation of property, plant and equipment was calculated as described in note 1(f) and was as follows:

 

 

 

 

 

 

 

 







 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Depreciation of:

 

 

 

 

 

 

 

Property, plant and equipment (excluding land and forests)

 

 

119,591

 

 

118,083

 

Technical revaluation

 

 

73

 

 

73

 









Total

 

 

119,664

 

 

118,156

 









 

 

 

Accumulated depreciation was as follows:

 

 

 

 

 

 

 

 







 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Accumulated depreciation of:

 

 

 

 

 

 

 

Property, plant and equipment (excluding land and forests)

 

 

2,319,490

 

 

2,528,692

 

Technical revaluation

 

 

65,323

 

 

65,470

 









Total

 

 

2,384,813

 

 

2,594,162

 









24


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements

June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 


 

 

6.

PROPERTY, PLANT AND EQUIPMENT, continued

 

 

 

Forests

 

 

 

The cost and the commercial valuation increment of the forests, determined as described in note 1(f), was as follows:


 

 

 

 

 

 

 

 







 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Cost of forests

 

 

1,083,690

 

 

1,170,295

 

Commercial valuation increment

 

 

1,483,769

 

 

1,665,324

 









Total

 

 

2,567,459

 

 

2,835,619

 










 

 

7.

INVESTMENTS IN RELATED COMPANIES

 

 

a)

Effected Investments

 

 

 

On April 24, 2008 a contribution for a capital increase in Inversiones Puerto Coronel S.A. for an amount of US$2 million was made.

 

 

 

As of March 28, 2008, our subsidiary, Faplac S.A., completed the purchase of 20% participation in Grupo Savitar S.A. for US$2.3 million.

 

 

 

In accordance with Circular No. 1.697 of the Superintendencia de Valores y Seguros, the determination of the fair value of the purchase can eventually change through an analysis of the value of the acquired assets.

 

 

 

As of June 30, 2007, there are no investments to disclose.

 

 

b)

Received dividends

 

 

 

Dividends were received as of June 30, 2008 and 2007 according to the following detail:

 

 

 

 

 

 

 

 







 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Puerto de Lirquén S.A.

 

 

1,111

 

 

880

 

Dynea Brasil S.A.

 

 

 

 

2,500

 









Total

 

 

1,111

 

 

3,380

 










 

 

c)

Taxes on unremitted earnings

 

 

 

Deferred taxes have not been recorded, nor has the investment been adjusted, for taxes that may arise on the distribution or remittance of earnings from investments in related companies as these earnings will either be indefinitely reinvested or will not result in the imposition of additional taxes.

25


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

7.

INVESTMENTS IN RELATED COMPANIES, continued

 

 

d)

Investments in Brazil

 

 

 

On September 27, 2007, our negotiations with Stora Enso Oyj, of Switzerland and Finland, concluded successfully, incorporating into our acquisitions the assets that Stora Enso Oyj had acquired from International Paper in Brazil.

 

 

 

A summary of the agreements reached and subscribed are as follows:

 

 

a)

Our Brazilian subsidiary Arauco Florestal S.A. acquired 80% of the shares of Stora Enso Arapoti Empreendimentos Agrícolas S.A., which owns 50,000 hectares of land, including plantations of 25,000 hectares of pine and 5,000 hectares of eucalyptus in the town of Arapoti, Paraná, Brazil;

 

 

b)

Our Brazilian subsidiary Placas do Paraná S.A. acquired 20% of the shares in Stora Enso Arapoti Industria de Papel S.A., which owns a paper producing plant with a production capacity of 205,000 tons of paper per year, also located in the town of Arapoti, Paraná in Brazil;

 

 

c)

Our Brazilian subsidiary Placas do Paraná S.A. acquired 100% of the shares or rights in Stora Enso Arapoti Serraria Ltda., which owns a sawmill with a production capacity of 150,000 m3/year, also in Arapoti, Paraná, Brazil.

 

 

 

The structure of the purchase and sale involved the payout on behalf of the purchasing companies of US$208,000,000, which was financed through the subsidiary’s own resources and bank credits contracted by Arauco.

 

 

d)

Others

 

 

 

On January 1st, 2007 Norwood S.A. was merged into the subsidiary Aserraderos Arauco S.A.

 

 

 

The investments in related companies at each period-end were as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




 

 

As of June 30,

 

 

Percentage
Participation

 

Investment
Value

 

Net income of investee

 

 

 

2007
%

 

2008
%

 

2007
ThU.S.$

 

2008
ThU.S.$

 

2007
ThU.S.$

 

2008
ThU.S.$

 















Puerto de Lirquén S.A.

 

 

20.14

 

 

20.14

 

 

25,309

 

 

28,185

 

 

1,695

 

 

1,605

 

Inversiones Puerto Coronel S.A.

 

 

50.00

 

 

50.00

 

 

13,809

 

 

18,972

 

 

1,039

 

 

418

 

Servicios Corporativos Sercor S.A.

 

 

20.00

 

 

20.00

 

 

1,420

 

 

1,382

 

 

123

 

 

(8

)

Eka Chile S.A.

 

 

50.00

 

 

50.00

 

 

26,724

 

 

29,643

 

 

489

 

 

(1,052

)

Dynea Brasil S.A.

 

 

50.00

 

 

50.00

 

 

16,392

 

 

20,549

 

 

1,835

 

 

2,001

 

Genómica Forestal S.A.

 

 

0.00

 

 

25.00

 

 

 

 

2

 

 

 

 

 

Stora Enso Arapoti Industria de Papel S.A.

 

 

0.00

 

 

20.00

 

 

 

 

47,865

 

 

 

 

7,174

 

Savitar

 

 

0.00

 

 

20.00

 

 

 

 

2,353

 

 

 

 

 





















Total

 

 

 

 

 

 

 

 

83,654

 

 

148,951

 

 

5,181

 

 

10,138

 





















26


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

8.

GOODWILL AND NEGATIVE GOODWILL


 

 

a)

Goodwill as of each period-end was as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 



 

 

2007

 

2008

 

 

 





 

 

Amortization
for the period
ThU.S.$

 

Balance of
goodwill
ThU.S.$

 

Amortization for
the period
ThU.S.$

 

Balance of
goodwill
ThU.S.$

 











Eka Chile S.A.

 

 

1,211

 

 

1,211

 

 

 

 

 

Southwoods-Arauco Lumber L.L.C.

 

 

150

 

 

150

 

 

 

 

 

Forestal Los Lagos S.A.

 

 

28

 

 

727

 

 

29

 

 

656

 

Norwood S.A.

 

 

13

 

 

1,007

 

 

7

 

 

270

 

Forestal Nuestra Señora del Carmen S.A. (ex - La Señora del Milagro S.R.L.)

 

 

52

 

 

2,030

 

 

57

 

 

2,115

 















Total goodwill

 

 

1,454

 

 

5,125

 

 

93

 

 

3,041

 
















 

 

b)

Negative goodwill as of each period-end was as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 



 

 

2007

 

2008

 

 

 





 

 

Amortization
for the period
ThU.S.$

 

Balance of
negative
goodwill
ThU.S.$

 

Amortization
for the period
ThU.S.$

 

Balance of
negative
goodwill
ThU.S.$

 











Arauco Forest Brasil S.A. (ex -L.D. Forest Products S.A.)

 

 

2,033

 

 

57,406

 

 

2,152

 

 

53,268

 

Ecoresin S.A.

 

 

6

 

 

271

 

 

10

 

 

291

 

Ecoboard S.A.

 

 

10

 

 

148

 

 

5

 

 

99

 

Arauco Florestal Arapoti S.A. (*)

 

 

 

 

 

 

603

 

 

35,876

 















Total negative goodwill

 

 

2,049

 

 

57,825

 

 

2,770

 

 

89,534

 
















 

 

 

(*)Pursuant to the Chilean Securities Commission’s Circular Letter No. 1697, the Company is conducting additional analyses of some assets that eventually will be added to the currently reported values.

 

 

9.

OTHER NON-CURRENT ASSETS

 

 

 

Other non-current assets as of each period-end were as follows:


 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Recoverable taxes

 

 

19,541

 

 

22,265

 

Bond issue expenses

 

 

11,455

 

 

8,786

 

Discounts on bond issues

 

 

2,828

 

 

4,149

 

Forestry roads

 

 

10,629

 

 

9,127

 

Other

 

 

5,214

 

 

3,600

 









Total other non-current assets

 

 

49,667

 

 

47,927

 









27


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

10.

CURRENT BANK BORROWINGS

 

 

 

Current bank borrowings as of period-end were as follows:


 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Total outstanding

 

 

152,955

 

 

289,469

 

Principal outstanding

 

 

152,153

 

 

287,557

 

Weighted average annual interest rate

 

 

5.42

 

 

3.20

 










 

 

 

Current bank borrowings were denominated as follows:


 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Obligations in foreign currency

 

 

152,802

 

 

289,443

 

Obligations in local currency

 

 

153

 

 

26

 









Total current bank borrowings

 

 

152,955

 

 

289,469

 










 

 

11.

CURRENT LIABILITIES


 

 

(a)

The following liabilities, excluding bank borrowings, fall due within one year:


 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Current portion of bonds

 

 

135,376

 

 

34,852

 

Current portion of other long-term liabilities

 

 

636

 

 

497

 

Trade accounts payable

 

 

250,799

 

 

245,368

 

Accounts and notes payable to related parties

 

 

5,668

 

 

11,175

 

Current provisions

 

 

52,196

 

 

50,237

 

Sundry accounts payable and other liabilities

 

 

68,222

 

 

55,626

 









Total

 

 

512,897

 

 

397,755

 










 

 

(b)

The percentages of these obligations in foreign and local currency, were as follows at period-end:


 

 

 

 

 

 

 

 





 

 

As of June 30,

 

 

 

2007
%

 

2008
%

 







Foreign currency

 

 

64.85

 

 

61.08

 

Local currency

 

 

35.15

 

 

38.92

 









Total

 

 

100.00

 

 

100.00

 









28


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

12.

BONDS

 

 

 

Arauco had five series of Yankee Bonds and one series of bonds sold pursuant to Rule 144A (the “Rule 144A Bonds”) outstanding as of June 30, 2008.

 

 

 

The balances of the bonds were as follows:


 

 

 

 

 

 

 

 

 

 









 

 

 

As of June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 

 







 

Current

 

 

 

 

 

 

 

 

Yankee Bonds 1st Issue

 

 

100,292

 

 

 

 

Yankee Bonds 2nd Issue

 

 

4,834

 

 

4,834

 

 

Yankee Bonds 3rd Issue

 

 

8,749

 

 

8,749

 

 

Yankee Bonds 4th Issue

 

 

8,914

 

 

8,914

 

 

Yankee Bonds 5th Issue

 

 

7,304

 

 

7,304

 

 

Yankee Bonds 6th Issue

 

 

4,375

 

 

4,047

 

 

Rule 144 A Bonds

 

 

908

 

 

1,004

 

 









 

Total current (including accrued interest)

 

 

135,376

 

 

34,852

 

 









 

Long-term

 

 

 

 

 

 

 

 

Yankee Bonds 2nd Issue

 

 

225,000

 

 

225,000

 

 

Yankee Bonds 3rd Issue

 

 

270,500

 

 

270,500

 

 

Yankee Bonds 4th Issue

 

 

387,000

 

 

387,000

 

 

Yankee Bonds 5th Issue

 

 

300,000

 

 

300,000

 

 

Yankee Bonds 6th Issue

 

 

400,000

 

 

370,000

 

 

Rule 144A Bonds

 

 

270,000

 

 

270,000

 

 









 

Total long-term

 

 

1,852,500

 

 

1,822,500

 

 









 

Less total accrued interest

 

 

35,376

 

 

34,852

 

 









 

Total principal outstanding

 

 

1,952,500

 

 

1,822,500

 

 









29


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008
Amounts in thousands of U.S. dollars, except as indicated

 



 

 

12.

BONDS, continued

 

 

 

These bonds have the following characteristics:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















 

 

Yankee
Bonds
1st Issue

 

Yankee
Bonds 2nd
Issue

 

Yankee
Bonds 3rd
Issue

 

Yankee
Bonds 4th
Issue

 

Yankee
Bonds 5th
Issue

 

Yankee
Bonds 6th
Issue

 

Rule 144A Bonds
Issue
















Issue date

 

Dec. 15, 1995

 

Oct. 3, 1997

 

Aug. 15, 2000

 

Sept. 10, 2001

 

Jul. 9, 2003

 

April 20, 2005

 

June 9, 2007
















Authorized

 

12 years

 

12 years

 

10 years

 

10 years

 

10 years

 

10 years

 

10 years

Amount (nominal)

 

ThU.S.$100,000

 

ThU.S.$100,000

 

ThU.S.$300,000

 

ThU.S.$400,000

 

ThU.S.$300,000

 

ThU.S.$400,000

 

ThU.S.$270,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ThU.S.$125,000

 

 

 

 

 

 

 

 

 

 
















Authorized

 

 

 

12 years

 

10 years

 

10 years

 

10 years

 

10 years

 

10 years

Amount

 

 

 

ThU.S.$100,000

 

ThU.S.$270,500

 

ThU.S.$387,000

 

ThU.S.$300,000

 

ThU.S.$370,000

 

ThU.S.$270,000

(outstanding)

 

 

 

20 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ThU.S.$125,000

 

 

 

 

 

 

 

 

 

 
















Issue amount

 

12 years

 

12 years

 

10 years

 

10 years

 

10 years

 

10 years

 

10 years

 

 

ThU.S.$100,000

 

ThU.S.$100,000

 

ThU.S.$300,000

 

ThU.S.$400,000

 

ThU.S.$300,000

 

ThU.S.$400,000

 

ThU.S.$270,000

 

 

 

 

20 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ThU.S.$125,000

 

 

 

 

 

 

 

 

 

 
















Amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized

 

 

 

 

 

 

 

but not issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















Principal

 

December 2007

 

12 years

 

August 2010

 

September 2011

 

July 2013

 

April 2015

 

June 2017

Repayment

 

 

 

September 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 2017

 

 

 

 

 

 

 

 

 

 
















Interest rate

 

7.00%

 

12 years 7.20%

 

8.625%

 

7.75%

 

5.125%

 

5.625%

 

6.375%

(excluding effects

 

 

 

20 years 7.50%

 

 

 

 

 

 

 

 

 

 

of any interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swap)

 

 

 

 

 

 

 

 

 

 

 

 

 

 
















Interest
Payment

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

















 

 

 

As of June 2008, the principal and interest amounts due with respect to these bonds were as follows:


 

 

 

 

 

 

 






 

Year

 

 

ThU.S.$

 

 






 

2008 (*)

 

 

34,852

 

 

2009

 

 

100,000

 

 

2010

 

 

270,500

 

 

2011

 

 

387,000

 

 

2013

 

 

300,000

 

 

2015

 

 

370,000

 

 

2017

 

 

395,000

 

 






 

Total

 

 

1,857,352

 

 






 

 

 

 

 

 

 

(*) This amount corresponds to accrued interest.

 

 

 

 

30


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

13.

ACCRUED LIABILITIES

(a) Accrued liabilities were as follows:

 

 

 

 

 

 

 

 









 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Accrual for staff vacations

 

 

10,573

 

 

13,459

 

Plant maintenance accrual

 

 

6,582

 

 

 

Standby letters of credit

 

 

429

 

 

1,258

 

Staff severance indemnities

 

 

1,762

 

 

2,539

 

Selling and other transportation costs provisions

 

 

4,764

 

 

4,556

 

Electrical expense provision

 

 

5,488

 

 

3,441

 

Staff salary and benefits

 

 

2,605

 

 

2,440

 

Forestry activity expenses

 

 

977

 

 

2,178

 

Pending monthly provisional payments

 

 

7,565

 

 

9,114

 

Chlorate Plant provision

 

 

1,726

 

 

 

Services and fees provision

 

 

2,470

 

 

3,151

 

Provision for trials

 

 

997

 

 

3,311

 

Other current liabilities

 

 

6,258

 

 

4,790

 









Total accrued liabilities

 

 

52,196

 

 

50,237

 









(b) Liability for staff severance indemnities

 

 

 

The liability for staff severance indemnity payments is shown at its present value as described in note 1(j). The movement in this account was as follows:


 

 

 

 

 

 

 

 









 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Balance at beginning of period

 

 

23,380

 

 

30,362

 

Provision during the period

 

 

1,959

 

 

1,850

 

Payments during the period

 

 

(259

)

 

(1,374

)









Balance as of period-end

 

 

25,080

 

 

30,838

 










 

 

 

 

 

 

 

 









 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Shown in the balance sheet as:

 

 

 

 

 

 

 

Current

 

 

1,762

 

 

2,539

 

Long-term

 

 

23,318

 

 

28,299

 









Total

 

 

25,080

 

 

30,838

 









31


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

14.

LONG-TERM BANK BORROWINGS

(a) Long-term bank borrowings including accrued interest outstanding at each period-end were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

 

 

 

As of June 30,
2007

 

As of June 30,
2008

 

Bank or financial institution

 

Denomination

 

 

Long-term
Portion
ThU.S.$

 

 

Short-term
Portion
ThU.S.$

 

 

Long-term
Portion
ThU.S.$

 

 

Short-term
Portion
ThU.S.$

 

















Tesoro Argentino (2)

 

U.S.$

 

 

278

 

 

849

 

 

 

 

567

 

Citigroup (Revolving Facility) (3)

 

U.S.$

 

 

240,000

 

 

1,561

 

 

80,000

 

 

161,407

 

Santander Overseas Bank Inc. (4)

 

U.S.$

 

 

8,400

 

 

2,715

 

 

6,000

 

 

2,616

 

BBVA New York (5)

 

U.S.$

 

 

 

 

 

 

240,000

 

 

1,391

 

Banco Alfa

 

R$

 

 

152

 

 

108

 

 

54

 

 

131

 

Banco Itau

 

R$

 

 

 

 

9,328

 

 

 

 

 

Banco Safra

 

R$

 

 

112

 

 

126

 

 

 

 

136

 

Banco Modal

 

R$

 

 

 

 

8,074

 

 

 

 

906

 

Banco Sampo

 

U.S.$

 

 

4,910

 

 

3,290

 

 

1,637

 

 

3,280

 

Banco ABN

 

U.S.$

 

 

485

 

 

988

 

 

 

 

489

 

International Finance Corporation

 

U.S.$

 

 

5,000

 

 

71

 

 

 

 

 

Banco Do Brasil

 

R$

 

 

432

 

 

2,287

 

 

 

 

3,626

 

















Total long-term bank borrowings

 

 

 

 

259,769

 

 

29,397

 

 

327,691

 

 

174,549

 


















 

 

 

The weighted average interest rates for long-term foreign currency-denominated debt for the periods ended June 30, 2007 and 2008 were 5.82% and 3.35%, respectively. Arauco enters into interest rate swap agreements to swap certain amounts of its non-U.S. dollar denominated payment obligations for U.S. dollar-denominated payment obligations.

 

 

 

Six-month LIBOR on June 30, 2007 and 2008 was 5.39% and 3.10%, respectively.

 

 

(1)

Through the Company’s subsidiary Alto Paraná S.A., Arauco obtained a U.S.$250 million note from Argentine Collateral Trust I on June 13, 2001. Interest was payable semi-annually. The Company had guaranteed repayment of the notes which were paid off in 2007.

 

 

(2)

Arauco has a note payable to the Argentine Tesoro Nacional. The loan was initially obtained by Alto Paraná, a subsidiary of the Company acquired in 1997. The principal amount of the initial loan was U.S.$13 million, payable to Banco Nacional de Desarrollo, and was guaranteed by the Argentine government. The loan was refinanced when Banco Nacional de Desarrollo was taken over by the Argentine government. The note is due in annual installments with final payment due in 2008. Interest is payable semi-annually in arrears.

 

 

(3)

On August 3, 2004, the Company obtained a syndicated loan of U.S.$240 million with a group of banks led by Citigroup, BBVA, Calyon and Dresdner Kleinwort Wasserstein. The syndicated loan is structured as a revolving facility, allowing the Company to borrow, prepay and borrow the committed amount again during the life of the credit facility. Funds will be used for debt refinancing and other corporate purposes. The term of the syndicated loan is five years and the interest rate is LIBOR plus 0.275% if the outstanding amount is less than 50% of the facility, and LIBOR plus 0.30% if the outstanding amount is more than 50% of the facility.

32


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

14.

LONG-TERM BANK BORROWINGS, continued

 

 

(4)

The subsidiary Forestal Los Lagos S.A. obtained a U.S.$ 12 million loan in order to repay outstanding debt. The loan was denominated in U.S. dollars and had a variable interest rate of LIBOR plus 0.50%. Interest payments are due semi-annually while the loan principal is repayable in seven semi-annually payments, which begin on January 2, 2007.

 

 

(5)

On September 27, 2007, the Company entered into two syndicated loan agreements with Banco Bilbao Viscaya Argentaria S.A. for a principal amount of U.S.$150 million and U.S.$90 million, respectively. Each of the loans mature on March 27, 2016 and bear interest at a rate of LIBOR plus 0.2%. Interest is payable semi-annually.

 

 

(b) Debt distribution

 

 

 

As of June 30, 2007 and 2008, long-term bank borrowings, including both the current portion and interest accrued, were denominated in U.S. dollars and Brazilian reals.

 

 

(c) Maturity of long-term bank borrowings

 

 

 

As of June 30, 2008, the maturities of long-term bank borrowings payable were as follows:


 

 

 

 

 






Year

 

ThU.S.$

 






2009

 

 

82,891

 

2010

 

 

4,800

 

2011

 

 

24,000

 

2012

 

 

48,000

 

2013

 

 

48,000

 

2014 and thereafter

 

 

120,000

 






Total

 

 

327,691

 







 

 

 

 

The principal financial covenant contained in the instruments or agreements with respect to such long-term bank borrowings was as follows:

 

 

 

 

The interest coverage ratio must not be less than 2.0.

 

 

 

 

The ratio of debt to consolidated tangible net worth must not be higher than 1.2.

 

 

 

 

Consolidated net worth must not be less than U.S.$ 2,500 million.

33


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

15.

INCOME TAXES

 

 

(a) Taxable income

 

 

 

In accordance with Chilean law, the Company and each of its subsidiaries determine and pay tax on a separate basis and not on a consolidated basis.

 

 

 

On a consolidated basis, Arauco recorded charges for income taxes amounting to U.S.$67,354 thousand and U.S.$78,961 thousand for the periods ended June 30, 2007 and 2008, respectively. Furthermore, Arauco established provisions for U.S.$75 thousand as of June 30, 2007 and U.S.$61 thousand as of June 30, 2008, in accordance with Article 21 of the Income Tax Law. These amounts are shown in “Income tax payable,” net of monthly prepayments and training expenses.

 

 

 

The detail of income tax expense is as follows:


 

 

 

 

 

 

 

 









 

 

As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Income tax

 

 

(67,354

)

 

(78,961

)

Adjustment to prior year’s tax expense

 

 

1,146

 

 

3,113

 

Provisions estimated in accordance with Article No. 21 of the Income Tax Law in Chile

 

 

(75

)

 

(61

)

Deferred income tax

 

 

(23,128

)

 

(22,617

)

Tributary benefit for tributary losses

 

 

 

 

 

Amortization of complementary accounts

 

 

(46

)

 

(396

)

Other charges and credits to the account

 

 

784

 

 

829

 









Total Income Tax

 

 

(88,673

)

 

(98,093

)










 

 

(b) Retained taxable earnings

 

 

 

Shareholders of Chilean corporations are entitled to a tax credit against tax due on dividend distributions to the extent of their allocable share of tax paid by the corporation on such earnings prior to distribution. The retained taxable earnings generated by the Company, along with the related tax credit, if any, that would be available to shareholders on distribution of such amounts, are presented below. Under Chilean tax law, dividend distributions must be made from earnings in years with available credits on a first-in, first-out basis. Remaining tax credits on undistributed earnings as of June 30, 2008 were as follows:


 

 

 

 

 

 

 

 

 

 

 












 

 

Retained Earnings

 

 

Shareholders’

 

 

 

With
Credit
ThU.S.$

 

Without
Credit
ThU.S.$

 

Tax
Credit
ThU.S.$

 












Balance as of December 31, 2006

 

 

122,575

 

 

579

 

 

25,106

 

Balance as of December 31, 2007

 

 

207,899

 

 

42,962

 

 

23,100

 












Total

 

 

330,474

 

 

43,541

 

 

48,206

 












34


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 


 


 

 

15.

INCOME TAXES, continued

 

 

(c) Deferred taxation

 

 

As explained in note 1(h), as of June 30, 2007 and 2008 Arauco recorded accumulated deferred taxes arising from temporary differences as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of June 30, 2007

 

 

 



 

 

Deferred tax assets

 

Deferred tax liabilities

 

 

 





 

 

Current
ThU.S.$

 

Long term
ThU.S.$

 

Current
ThU.S.$

 

Long term
ThU.S.$

 











Allowance for doubtful accounts

 

 

3,035

 

 

345

 

 

 

 

 

Deferred revenues

 

 

90

 

 

70

 

 

 

 

 

Accrual for staff vacations

 

 

1,550

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

9,458

 

 

 

Value difference and property, plant and equipment depreciation

 

 

 

 

 

 

482

 

 

174,851

 

Capitalized expenses

 

 

 

 

 

 

9,367

 

 

20,568

 

Obsolescence reserve

 

 

1,358

 

 

223

 

 

 

 

 

Debt issue and project expenses

 

 

 

 

 

 

 

 

5,337

 

Staff severance indemnities

 

 

3,010

 

 

1,207

 

 

 

 

 

Tax loss carry-forwards

 

 

2,719

 

 

32,205

 

 

 

 

 

Property, plant and equipment valuation

 

 

 

 

560

 

 

 

 

8,537

 

Accrual for contingencies

 

 

447

 

 

1,396

 

 

 

 

 

Other

 

 

5,435

 

 

993

 

 

495

 

 

1,794

 

Plant maintenance accrual

 

 

680

 

 

 

 

 

 

 

Leasing assets

 

 

130

 

 

899

 

 

1,148

 

 

770

 

Sales provision

 

 

2,992

 

 

 

 

 

 

 















Total

 

 

21,446

 

 

37,898

 

 

20,950

 

 

211,857

 















Complementary accounts, net of accumulated amortization (1)

 

 

(2,719

)

 

(38

)

 

 

 

(6,616

)

Valuation provision

 

 

 

 

 

 

 

 

 















Total

 

 

18,727

 

 

37,860

 

 

20,950

 

 

205,241

 















35


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 


 


 

 

15.

INCOME TAXES, continued

 

 

(c) Deferred taxation, continued


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of June 30, 2008

 

 

 



 

 

Deferred tax assets

 

Deferred tax liabilities

 

 

 





 

 

Current
ThU.S.$

 

Long term
ThU.S.$

 

Current
ThU.S.$

 

Long term
ThU.S.$

 











Allowance for doubtful accounts

 

 

3,699

 

 

336

 

 

 

 

 

Deferred revenues

 

 

215

 

 

55

 

 

 

 

 

Accrual for staff vacations

 

 

1,837

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

13,531

 

 

24,444

 

Capitalized expenses

 

 

 

 

 

 

12,898

 

 

210,359

 

Value difference and property, plant and equipment depreciation

 

 

 

 

 

 

467

 

 

 

Staff severance indemnities

 

 

3,602

 

 

1,598

 

 

 

 

 

Debt issue and project expenses

 

 

 

 

 

 

 

 

3,687

 

Obsolescence reserve

 

 

2,022

 

 

83

 

 

 

 

 

Accrual for contingencies

 

 

1,159

 

 

1,421

 

 

 

 

 

Tax loss carry-forwards

 

 

2,800

 

 

31,563

 

 

 

 

 

Property, plant and equipment valuation

 

 

 

 

560

 

 

 

 

25,388

 

Other

 

 

6,836

 

 

620

 

 

682

 

 

822

 

Plant maintenance accrual

 

 

 

 

 

 

382

 

 

 

Leasing assets

 

 

451

 

 

894

 

 

1,315

 

 

1,842

 

Sales provision

 

 

3,413

 

 

 

 

 

 

 















Total

 

 

26,034

 

 

37,130

 

 

29,275

 

 

266,542

 















Complementary accounts, net of accumulated amortization (1)

 

 

(2,719

)

 

(25

)

 

 

 

(6,476

)

Valuation provision

 

 

 

 

 

 

 

 

 















Total

 

 

23,315

 

 

37,105

 

 

29,275

 

 

260,066

 
















 

 

 

(1) These accounts reverse over the same period as the timing differences that gave rise to them with an average of approximately 15 years.

 

 

16.

FORESTRY GRANTS

 

 

 

Forestry grants are included in shareholders’ equity under the account heading “Forestry and other reserves.” These grants are transferred to income at the time of sale of the related finished goods. The Company’s forestry subsidiaries received forestry grants of U.S.$77 thousand during the period ending June 30, 2007 and received forestry grants of U.S.$74 thousand during the period ending June 30, 2008.

36


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

17.

ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY

 

 

 

As of each period-end, Arauco had assets and liabilities denominated in local and foreign currencies. These assets and liabilities are shown at their U.S. dollar equivalent at each period-end.


 

 

 

 

 

 

 

 

 

 







 

 

 

 

At June 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Assets

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash and banks

 

U.S.$

 

 

7,950

 

 

8,458

 

Cash and banks

 

Ch$

 

 

5,762

 

 

3,252

 

Cash and banks

 

Ar$

 

 

6,573

 

 

2,966

 

Cash and banks

 

R$

 

 

236

 

 

3,741

 

Cash and banks

 

Euro

 

 

4,579

 

 

4,386

 

Cash and banks

 

Mx$

 

 

1,431

 

 

822

 

Cash and banks

 

Other currencies

 

 

1,598

 

 

2,347

 

Time deposits and marketable securities

 

U.S.$

 

 

120,653

 

 

45,634

 

Time deposits and marketable securities

 

Ch$

 

 

4,120

 

 

45,551

 

Time deposits and marketable securities

 

R$

 

 

24,113

 

 

63,572

 

Time deposits and marketable securities

 

Euro

 

 

34,624

 

 

86,787

 

Time deposits and marketable securities

 

Ar$

 

 

6

 

 

3,019

 

Trade accounts receivable

 

U.S.$

 

 

427,288

 

 

587,457

 

Trade accounts receivable

 

Ch$

 

 

46,400

 

 

43,324

 

Trade accounts receivable

 

Ar$

 

 

7,199

 

 

13,017

 

Trade accounts receivable

 

R$

 

 

25,036

 

 

38,937

 

Trade accounts receivable

 

Euro

 

 

8,653

 

 

11,992

 

Trade accounts receivable

 

Mx$

 

 

4,768

 

 

4,507

 

Trade accounts receivable

 

Other currencies

 

 

4,513

 

 

6,196

 

Other accounts receivable

 

U.S.$

 

 

21,549

 

 

41,795

 

Other accounts receivable

 

Ch$

 

 

39,242

 

 

38,309

 

Other accounts receivable

 

Ar$

 

 

16,726

 

 

12,697

 

Other accounts receivable

 

R$

 

 

1,335

 

 

3,204

 

Other accounts receivable

 

Euro

 

 

6,594

 

 

1,318

 

Other accounts receivable

 

Mx$

 

 

1,222

 

 

1,339

 

Other accounts receivable

 

Other currencies

 

 

567

 

 

457

 

Inventories

 

U.S.$

 

 

671,026

 

 

830,290

 

Inventories

 

Ch$

 

 

8,931

 

 

15,783

 

Other current assets

 

U.S.$

 

 

118,633

 

 

138,000

 

Other current assets

 

Ch$

 

 

81,572

 

 

92,538

 

Other current assets

 

Ar$

 

 

20,794

 

 

9,008

 

Other current assets

 

R$

 

 

4,088

 

 

6,577

 

Other current assets

 

Mx$

 

 

1,152

 

 

4,736

 

Other current assets

 

Euro

 

 

119

 

 

275

 

Other current assets

 

Other currencies

 

 

938

 

 

1,438

 











Total current assets

 

 

 

 

1,729,990

 

 

2,173,729

 











37


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

17.

ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY, continued


 

 

 

 

 

 

 

 

 

 







 

 

 

 

At June 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Property, plant and equipment and other assets:

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

U.S.$

 

 

6,117,594

 

 

6,544,897

 

Property, plant and equipment

 

Ch$

 

 

21,897

 

 

16,708

 

Other assets

 

U.S.$

 

 

56,779

 

 

90,296

 

Other assets

 

Ch$

 

 

10,040

 

 

9,819

 

Other assets

 

Ar$

 

 

24,842

 

 

18,745

 

Other assets

 

R$

 

 

990

 

 

2,596

 

Other assets

 

Mx$

 

 

43

 

 

61

 

Other assets

 

Other currencies

 

 

26

 

 

63

 











Total property, plant and equipment and other assets

 

 

 

 

6,232,211

 

 

6,683,185

 











Total assets

 

 

 

 

7,962,201

 

 

8,856,914

 












 

 

 

 

 

 

 

 

 

 







 

 

 

 

At June 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Liabilities

 

 

 

 

 

 

 

 

 











Current liabilities:

 

 

 

 

 

 

 

 

 

Current bank borrowings

 

U.S.$

 

 

152,802

 

 

289,443

 

Current bank borrowings

 

Ch$

 

 

153

 

 

26

 

Current portion of long-term bank borrowings

 

U.S.$

 

 

9,474

 

 

169,265

 

Current portion of long-term bank borrowings

 

R$

 

 

19,923

 

 

5,284

 

Current portion of bonds

 

U.S.$

 

 

135,376

 

 

34,852

 

Notes and trade accounts payable

 

U.S.$

 

 

77,812

 

 

119,703

 

Notes and trade accounts payable

 

Ch$

 

 

154,635

 

 

100,195

 

Notes and trade accounts payable

 

Euro

 

 

8,268

 

 

8,848

 

Notes and trade accounts payable

 

Mx$

 

 

2,014

 

 

1,158

 

Notes and trade accounts payable

 

Other currencies

 

 

123

 

 

970

 

Notes and trade accounts payable

 

R$

 

 

24

 

 

2,137

 

Notes and trade accounts payable

 

Ar$

 

 

7,923

 

 

12,357

 

Other current liabilities

 

U.S.$

 

 

15,606

 

 

21,601

 

Other current liabilities

 

Ch$

 

 

71,298

 

 

54,609

 

Other current liabilities

 

Euro

 

 

174

 

 

 

Other current liabilities

 

Other currencies

 

 

123

 

 

2

 

Other current liabilities

 

R$

 

 

24,424

 

 

24,952

 

Other current liabilities

 

Ar$

 

 

14,465

 

 

16,266

 

Other current liabilities

 

Mx$

 

 

632

 

 

105

 











Total current liabilities

 

 

 

 

695,249

 

 

861,773

 











38


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements
June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

17.

ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY, continued


 

 

 

 

 

 

 

 

 

 







 

 

 

 

At June 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Long-term liabilities:

 

 

 

 

 

 

 

 

 

Long-term bank borrowings

 

U.S.$

 

 

259,073

 

 

327,637

 

Long-term bank borrowings

 

R$

 

 

696

 

 

54

 

Bonds

 

U.S.$

 

 

1,852,500

 

 

1,822,500

 

Other long-term liabilities

 

U.S.$

 

 

25,214

 

 

46,762

 

Other long-term liabilities

 

Ch$

 

 

144,950

 

 

183,131

 

Other long-term liabilities

 

Other currencies

 

 

1

 

 

5

 

Other long-term liabilities

 

R$

 

 

52,528

 

 

53,202

 

Other long-term liabilities

 

Ar$

 

 

21,528

 

 

26,642

 

Other long-term liabilities

 

Mx$

 

 

125

 

 

 











Total long-term liabilities

 

 

 

 

2,356,615

 

 

2,459,933

 











Total liabilities

 

 

 

 

3,051,864

 

 

3,321,706

 












 

 

18.

BALANCES AND TRANSACTIONS WITH RELATED PARTIES


 

 

 

 

 

 

 

 

 










 

 

 

 

As of June 30,

 

 

Company

 

Relationship

 

2007
ThU.S.$

 

2008
ThU.S.$

 

Transaction










(a) Current assets

 

 

 

 

 

 

 

 

Eka Chile S.A.

 

Affiliate

 

4,148

 

4,483

 

Accounts receivable

CMPC Maderas S.A.

 

Indirect

 

24

 

31

 

Accounts receivable

Dynea S.A.

 

Indirect

 

1,943

 

121

 

Accounts receivable

Stora Enso Arapoti Industria de Papel S.A.

 

Affiliate

 

 

7,428

 

Accounts receivable

Forestal Mininco S.A.

 

Indirect

 

 

372

 

Accounts receivable

Fundación Educacional Arauco

 

Affiliate

 

 

380

 

 










Total current assets

 

 

 

6,115

 

12,815

 

 










(b) Current liabilities

 

 

 

 

 

 

 

 

Compañía de Petróleos de Chile Copec S.A.

 

Affiliate of Shareholder

 

2,227

 

9,636

 

Accounts payable

Puerto de Lirquén S.A.

 

Affiliate

 

864

 

744

 

Accounts payable

Fantoni S.P.A.

 

Indirect

 

1,623

 

 

Accounts payable

Abastible S.A.

 

Indirect

 

235

 

341

 

Accounts payable

Servicios Corporativos Sercor S.A.

 

Indirect

 

8

 

18

 

Accounts payable

Sigma S.A.

 

Indirect

 

4

 

2

 

Accounts payable

Cía. Puerto de Coronel S.A.

 

Affiliate

 

333

 

372

 

Accounts payable

Fundación Educacional Arauco

 

Affiliate

 

62

 

 

Accounts payable

Cía. Sudamericana de Vapores S.A.

 

Indirect

 

294

 

43

 

Accounts payable

Entel S.A.

 

Indirect

 

11

 

12

 

Accounts payable

Depósitos Portuarios Lirquén S.A.

 

Indirect

 

 

2

 

Accounts payable

Forestal del Sur S.A.

 

Indirect

 

3

 

 

Accounts payable

Adm. Est. de Serv. Serco S.A.

 

Indirect

 

3

 

 

Accounts payable

CMPC Celulosa S.A.

 

Indirect

 

1

 

 

Accounts payable

Codelco Chile

 

Indirect

 

 

5

 

Accounts payable










Total current liabilities

 

 

 

5,668

 

11,175

 

 










39


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

18.

BALANCES AND TRANSACTIONS WITH RELATED PARTIES, continued

 

 

 

During the periods ended June 30, 2007 and 2008, Arauco had the following related party transactions, higher than U.S.$200 thousand, that affected net income:


 

 

 

 

 

 

 

 

 






 

 

 

Purchases (sales)
Period ended June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 










(a)

Compañía de Petróleos de Chile Copec S.A.:

 

 

 

 

 

 

 

 

Purchases of fuel

 

 

22,422

 

 

60,049

 

(b)

Puerto de Lirquén S.A.:

 

 

 

 

 

 

 

 

Port services

 

 

3,635

 

 

4,560

 

(c)

Abastible S.A.:

 

 

 

 

 

 

 

 

Purchases of fuel

 

 

1,742

 

 

2,075

 

(d)

Cía. Puerto de Coronel S.A:

 

 

 

 

 

 

 

 

Stockpiling services

 

 

2,528

 

 

1,577

 

(e)

Portaluppi, Guzmán y Bezanilla Abogados:

 

 

 

 

 

 

 

 

Legal advice

 

 

599

 

 

777

 

(f)

Eka Chile S.A.:

 

 

 

 

 

 

 

 

Purchase of sodium chlorate

 

 

18,232

 

 

50,428

 

 

Electricity sale

 

 

(10,135

)

 

(42,087

)

(g)

Forestal del Sur S.A.:

 

 

 

 

 

 

 

 

Purchase of wood and timber

 

 

1,286

 

 

1,300

 

 

Sales of chips

 

 

(2,698

)

 

 

(h)

CMPC Celulosa S.A.:

 

 

 

 

 

 

 

 

Sales timber

 

 

(463

)

 

(368

)

i)

Cía. Sud Americana de Vapores S.A.:

 

 

 

 

 

 

 

 

Freight services

 

 

5,018

 

 

5,239

 

(j)

CMPC Maderas S.A.:

 

 

 

 

 

 

 

 

Purchase timber

 

 

713

 

 

 

(k)

Dynea Brasil S.A.:

 

 

 

 

 

 

 

 

Purchase of chemical products

 

 

15,112

 

 

20,453

 

 

Purchase of melamine paper

 

 

8,927

 

 

10,494

 

 

Services

 

 

(234

)

 

(279

)

 

Other sales

 

 

(208

)

 

(320

)

(l)

Sodimac S.A.:

 

 

 

 

 

 

 

 

Sales timber

 

 

(29,270

)

 

(36,751

)

 

Other purchases

 

 

 

 

469

 










40


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

18.

BALANCES AND TRANSACTIONS WITH RELATED PARTIES, continued


 

 

 

 

 

 

 

 

 










 

 

 

Purchases (sales)
Period ended June 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 








(m)

Codelco Chile:

 

 

 

 

 

 

 

 

Other purchases

 

 

436

 

 

768

 

(n)

Colbún S.A.:

 

 

 

 

 

 

 

 

Sales of electricity

 

 

(1,683

)

 

(3,934

)

(o)

Stora Enso Industria de Papel S.A.:

 

 

 

 

 

 

 

 

Sales Timber

 

 

 

 

(4,866

)

(p)

Entel S.A.:

 

 

 

 

 

 

 

 

Other purchases

 

 

303

 

 

309

 











 

 

19.

CONTINGENCIES AND COMMITMENTS

 

 

 

Warranties

 

 

 

Full, unconditional and irrevocable warranty of the Company on behalf of its subsidiary Alto Paraná S.A., in relation to the issuance of Rule 144A Bonds dated as of June 9th, 2007 for the amount of US$270,000,000 due in June 2017.

 

 

 

Binding bail of the Company on behalf of its subsidiary Arauco Generación S.A. in relation to the construction of a sodium chloride plant of Eka Chile S.A.

 

 

 

Trials or other legal proceedings

 

 

A)

The Company is involved in the following proceedings and legal actions regarding the operation of the Valdivia Plant:

 

 

 

 

1)

Through Exempt Resolution No. 0250 dated April 1, 2004, the Environmental Regional Commission (“COREMA”) opened an investigation in connection with some alleged violations of environmental regulations pursuant to Resolution of Environmental Description No. 279-1998 by the Valdivia Project.

 

 

 

The Company answered the charges before the Commission. Nevertheless, through Resolution No.387 dated May 24, 2004, the Commission resolved, among other things, to (a) fine the Company 900 Monthly Tax Units (“UTM,” a Monthly Tax Unit that is a Chilean inflation-indexed, peso-denominated monetary unit which is set monthly in advance based on the previous month’s inflation rate) (U.S.$60,265 at June 30, 2008) for failure to comply with the terms and conditions set forth in Sections 2, 11, 12 and 13 of the Resolution of Environmental Description; (b) accept the measures proposed by the Company to mitigate the odor problem, establishing a schedule for the execution of such measures and (c) point out that the industrial waste fluids discharge system of the emergency system must comply with the Evaluating System of Environmental Impact (Law 19,300). The aforementioned Resolution No. 387 was judicially appealed in the Civil Court of Puerto Montt on June 4, 2004, in connection with part of the fine mentioned in clause (a) above, and the Company paid 10% of the total claimed. The case is currently in progress.

41


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

2)

Due to the emission of odors in the Valdivia Plant during July 2004, through Resolution 1775 of December 17, 2004 the Department of Health Service of Valdivia fined Arauco 1,000 Monthly Tax Paying Units (U.S.$67 thousand as of June 30, 2008), and established certain obligations to be fulfilled by the Company.

 

 

 

On December 27, 2004, Arauco judicially appealed the aforementioned Resolution, before the First Civil Court of Valdivia, who by the Sentence dated September 2, 2006 rejected the claim. The Company subsequently appealed before the Appeals Court of Valdivia, which on June 4, 2007 resolved to partly accept the appeal, lowering the fine imposed to 200 Monthly Tax Paying Units.

 

 

 

However, the Health Service of Valdivia, (currently the Sanitary Authority), commenced a proceeding challenging the ruling, which must be decided by the Supreme Court. The matter is currently pending resolution.

 

 

3)

Through Resolution No. 860 dated December 21, 2004, COREMA began sanction proceedings against the Company due to the discharge of refrigeration water at the Valdivia Plant, the disposal of solid waste, the accumulation of spills and the spilling of non-authorized effluents.

 

 

 

On January 11, 2005, Arauco filed its response, and through Resolution No. 182 dated March 15, 2005, COREMA resolved to sanction the Company with 800 UTM (U.S.$54 thousand as of June 30, 2008), Arauco appealed that sanction on March 31, 2005 and paid 10% of the total claimed. The case is currently in progress.

 

 

4)

Through resolution dated April 22, 2005, the Regional Ministerial Secretary of Health (the “Health SEREMI”) fined Arauco 1,000 UTM (U.S.$67 thousand as of June 30, 2008), due to a fatal accident involving an employee in January 2005. The Company appealed the fine in the Second Civil Court of Valdivia, through case No. 785-2005, which is currently in progress.

 

 

5)

Through Resolution No. 17 dated January 18, 2005, COREMA began sanction proceedings against the Company due to an alleged increase in the capacity of the plant, an increase of additional discharge waters into the Cruces River, a lack of compliance with the quality and emission guidelines for fluid waste, a lack of compliance with the required measurement of TRS gas and a lack of compliance with other measurement parameters. The Company filed its appeal last January 31, 2005.

 

 

 

Through Resolution No. 197 dated March 18, 2005, COREMA fined Arauco 1,400 UTM (U.S.$94 thousand as of June 30, 2008). Arauco appealed that sanction and paid the required percentage of the total claimed. The case is currently in progress, through case No. 777-05

 

 

6)

Through Resolutions 3300 and 3301 dated December 20, 2004, the Superintendent of Sanitary Services began sanction proceedings against the Company due to the Company exceeding the guidelines of the Resolution on Environmental Description, approved by the Study of Environmental Impact regarding the total emission of phosphate and temperature.

42


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

Through Resolution 290 dated January 26, 2005, the Superintendent of Sanitary Services fined Arauco 200 Annual Tax Units (“UTA”, an Annual Tax Unit that is a Chilean inflation-indexed, peso- denominated monetary unit which is set monthly in advance based on the previous month’s inflation rate) (U.S.$161 thousand at June 30, 2008). This Resolution was judicially appealed on February 9, 2005 in the appropriate Civil Court of Santiago, which rejected the complaint. The resolution was appealed in the Appeal Court, and the matter is currently in progress.

 

 

7)

Several complaints have been filed with the Warranty Court of Valdivia, due to alleged violations in connection with the operations of the Valdivia Plant. All the complaints are being addressed through a single investigation. The complaints charge alleged violations set forth in Article 291 of the Penal Code, Article 136 of the Fishing Law and Article 38 of the National Monuments Law. The investigation is currently in progress in the appropriate District Attorney’s office. In the opinion of the management, based on the reports of its legal counsel, the evidence in the investigation does not credit responsibility neither to the Company nor its employees for these events.

 

 

8)

On April 27, 2005, the State of Chile Defense Committee filed an indemnity demand against the Company in the First Civil Court of Valdivia (Rol 746-2005). The Company filed its response that it is not responsible for the environmental damages and therefore the indemnification payments, as well as the claimed repairs, are inadmissible. The lawsuit is pending resolution.

 

 

9)

Through Resolution 1755 dated June 24, 2005, the Superintendent of Sanitary Services began a sanction proceeding against the Company for exceeding emissions standards regarding temperature, suspended solid waste, arsenic, total phosphorus, hexavalente chrome, molybdenum and nickel. On July 11, 2005, the Company filed its response to the Superintendent. Nevertheless, on December 26, 2005, the Superintendent resolved to sanction the Company with a fine of 400 UTA (U.S.$321 thousand at June 30, 2008). The Company appealed to the 26th Civil Court of Santiago. The claim was denied according to a notification dated September 6, 2007. In virtue of that, the Company filed an appeal, which is currently pending resolution.

 

 

10)

On January 25, 2006, the Health SEREMI commenced a sanitary proceeding with regard to a fatal accident in January 2006 involving an employee of a contractor working in the Valdivia project, but no charges have been presented against Arauco. As a result of the event, the Public Ministry of San José de la Mariquina is conducting an investigation, which was filed in Resolution FR No. 001861-2008 from Fiscalía Regional-Los Ríos.

 

 

11)

As a result of a complaint regarding odors perceived by some citizens of the city of Valdivia on May 19, 2007, the Sanitary Authority initiated a sanitary investigation against the Valdivia Plant. Arauco presented their responses dated May 28, 2007 and the matter is pending final resolution.

43


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

B)

Arauco is subject to the following legal actions and proceedings affecting its Arauco Plant:

 

 

1)

On August 23, 2004, Arauco’s Department of Health Services began a sanitation investigation based on the nuisance caused by a turpentine spill at the Arauco Plant. Through a Resolution dated November 8, 2004, Arauco’s Department of Health Services resolved to fine the Company 1,000 UTM (U.S.$67 thousand at June 30, 2008).

 

 

 

This Resolution was judicially appealed on November 17, 2004 before the Court of Lebu, and is currently pending resolution.

 

 

C)

Arauco is subject to the following legal actions and proceedings affecting its Nueva Aldea Forestry Industrial Complex:

 

 

1)

On April 8, 2005, several appeal claims were filed against the Resolution on Environmental Qualification of the Project of New Works and Updates of the Nueva Aldea Forestry Industrial Complex, which had been approved on March 10, 2005. The aforementioned appeals were filed by individuals who participated in the development of the Study on Environmental Impact, with the participation of citizens. On May 4 and May 31, 2005, respectively, the Company and the Regional Environmental Commission of the Eighth Region informed the public about the appeals, which are currently in progress.

 

 

 

We consider that the Resolution on Environmental Qualification is sufficiently funded and adjusted to current law. In management’s opinion, based on reports of the legal counsel, such appeals should be rejected.

 

 

2)

On December 15, 2005, the Health SEREMI commenced a sanitary proceeding with regard to an accident involving the exposure of three employees of Echeverría Izquierdo Montajes Industriales, S.A., while handling the equipment owned by a subcontractor of Echeverría Izquierdo Montajes Industriales, S.A. The Company was required to appear in the proceeding and submitted all required paperwork. Through Resolution 2810, dated June 29, 2006, the SEREMI resolved to sanction various companies, including Arauco, which the SEREMI fined 300 UTM (US$20 thousand at June 30, 2008). Arauco subsequently presented an appeal to the sanction before the court of Concepción. The proceeding is currently in progress.

 

 

3)

At the end of March 2006, several appeal claims were presented against the Resolution on Environmental Qualification of the Project of New Works and Updates of the Nueva Aldea Forestry Industrial Complex, which were approved on February 20, 2006. The appeals were filed by individuals who participated in the development of the Environmental Impact Study, with the participation of other Chilean citizens. On May 31, 2006, the company informed the Executive Committee of the CONAMA about the appeals. The proceedings are currently in progress.

 

 

 

We consider that the Resolution on Environmental Qualification is sufficiently funded and adjusted to current law. In management’s opinion, based on reports of the legal counsel, such appeals should be rejected.

44


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

4)

On December 27, 2006, a dispute was presented by relatives of Mr. Pablo Reyes Cerda, a former employee of a contracting company of the Nueva Aldea Forestry Industrial Complex, who died on November 24, 2006, relating to his alleged homicide. The State Prosecutor of Quirihue is carrying out the investigation. In the opinion of the management, based on the reports of its legal counsel, the evidence in the investigation does not credit responsibility neither to the Company nor its employees for these matters.

 

 

5)

In October of 2006, Mr. Héctor Manuel Rabanal Baeza filed charges with the corresponding Prosecutor for damages to private property. The complaint alleges damages were caused by operations of the Pulp Plant of the Forestry Industrial Complex of Nueva Aldea. The corresponding Prosecutor is carrying out the investigation. In the opinion of the management, based on the reports of its legal counsel, the evidence in the investigation does not credit responsibility neither to the Company nor its employees for these matters.

 

 

6)

According to the Inspection Records dated June 11, 2007, the Sanitary Authority requested that a Company representative present the files previously mentioned referring to an alleged event of odors occurring on the same date. The proceeding is currently ongoing.

 

 

7)

On March 9, 2007, Mr. Andrés Cáceres Lorca, in representation of don Eduardo Alberto Schwencke Balde and of the Hydro Power Company, submitted a claim for an alleged usurpation of the right to explore underground waters. The State Prosecutor of Quirihue is conducting the investigation. In the opinion of the management, based on the reports of its legal counsel, the evidence in the investigation does not credit responsibility neither to the Company nor its employees for these matters.

 

 

8)

As of December 20, 2007, the Company has been notified of nine similar complaints. Eight complaints are directed against Echeverría Izquierdo Montajes Industriales S.A., as employer and against Celulosa Arauco and Constitución S.A., as the responsible subsidiary, and also directly against Arauco. The other complaint is directed against Mr. Leonel Enrique Espinoza Canales as employer and against Celulosa Arauco and Constitución S.A., as responsible subsidiary, and directly against Arauco.

 

 

 

The complaints requests that all the plaintiffs (72 plaintiffs in total) be indemnified for the damages that they allegedly suffered as a result of the event which took place in December of 2005, referenced in item C.2 above.

 

 

 

Notified of said complaints, the Company opposed on the basis of lack of jurisdiction, and answered the principal complaints, claiming that they are invalid for failure to state a claim. Also, the Company responded to the secondary complaints directly against the Company, requesting them to be rejected for lacking any merit. The matter is currently proceeding.

 

 

9)

On January 29, 2008, the Company received notice of another complaint by a former employee, Fernando Vargas Llanos, requesting indemnification for damages for alleged damages suffered in virtue of the event that took place in December 2005, referred in item C.2 above. The complaint is directed against his former employer Inspección Técnica y Control de Calidad Limitada (ITC), the construction company Echeverría Izquierdo Montajes Industriales S.A. and Celulosa Arauco y Constitución S.A.

 

 

 

The complaint requests that Mr. Vargas be indemnified for the damages that he allegedly suffered as a result of the events that took place on December 2005, referenced in item C.2 above.

45


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

Notified of said complaint, the Company opposed on the basis of lack of jurisdiction, and answered the complaint claiming that they are invalid for failure to state a claim. The matter is currently proceeding.

 

 

10)

On June 9, 2008, the Company was notified of a complaint brought by Mr. Ramon Patricio Valverde Prats, in representation of Mr. Juan Carlos Rozas Alvarado, against Echeverría Izquierdo Montajes Industriales S.A., Mr. Rozas’s former employer, and the Company.

 

 

 

 

 

The complaint requests that Mr. Rozas be indemnified for the damages that he allegedly suffered as a result of the events that took place on December 2005, referenced in item C.2 above.

 

 

 

The Company is currently within the time period allowed to respond to the complaint.

 

 

D)

Arauco is subject to the following legal actions and proceedings affecting its Constitución Plant:

 

 

1)

On January 24, 2006, the Company was notified of a claim for an injunction brought by Alvaro Santa María Prieto and Alejandro Lagos Letelier in the Court of Constitucion, seeking to modify the Company’s activities in the area with respect to air quality control guidelines. In the opinion of the management, based on the reports of its legal counsel and the factual information available to us, this complaint lacks merit.

 

 

2)

Through Inspection Act No. 1118, dated June 6, 2008, a representative of the Company was requested to make an appearance before the Sanitary Authority regarding a sanitary proceeding involving the delivery by the Company of reports related to TRS gases.

 

 

 

On June 17, 2008, the Company presented its responses and the matter is pending resolution.

 

 

E)

Celulosa Arauco y Constitución S.A. has the following legal actions and proceedings affecting its Pulp Plant of Licancel:

 

 

1)

By the Inspection Act No. 3851 dated June 5, 2007 the Sanitary Authority of the Maule Region initiated a Sanitary Indictment regarding the death of fish in the Mataquito River detected on June 5, 2007 that was attributed to spilling of industrial liquids from the Licancel Pulp Plant. The Company presented its responses at the Licantén Office of the Health SEREMI of the Maule Region dated June 12, 2007. On December 5, 2007, through Exempt Resolution No. 7292, the above-mentioned proceeding was concluded without any sanctions issued against the Company under such resolution.

 

 

2)

The Sanitary Indictment (Rit 489-2007) initiated by the Sanitary Authority, according to the Inspection Act number 1150 of June 18, 2007 was initiated regarding leaking of industrial liquid on the ground and the draining to the Louders Channel and the Mataquito River, the creation of chip movement in the collection area and movement of these to such patio since it would result in an infraction to the current operational prohibitions.

 

 

 

Responses were presented on June 22, 2007, date of the citation, and date on which investigations were also conducted resulting in the need for new factual declarations.

46


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

Through a resolution dated August 20, 2007, the company was fined 2,000 UTM. The Company presented an appeal to the same authority, which was rejected on October 11, 2007. The resolution to the Sanitary Authority was the subject of a claim presented to the 4th Civil Court of Talca, dated October 31, 2007, which is still pending.

 

 

3)

Sanitary Indictment (Rit Nº 535-2007) initiated by the Sanitary Authority, according to the Inspection Act No 1153 dated June 21, 2007, regarding the functioning of a Black Liquor (Licor Negro) pool that would infringe the current operational prohibitions, disposing the immediate detention of the process and if necessary, the withdrawal and moving of the product, preventing any effect on the community, environment or workers health. The Company presented its responses but on July 13 the Health SEREMI imposed a fine for 1000 UTM (US$67 thousand at June 30, 2008) and kept the functioning prohibition for a total of 60 business days until they obtain a favorable report from the Sanitary Authority. On July 20, 2007 Arauco presented a reposition recourse to the Health SEREMI of the Maule Region with the purpose of leaving the July 13 resolution without effect, which was denied on September 28, 2007. A judicial claim was filed on October 1, 2007, and matter is currently pending resolution. In any case, the Health SEREMI of the Maule Region lifted the functioning ban (Resolution Nº 6860 dated October 22, 2007).

 

 

4)

Pursuant to Resolution N° 1828 dated June 13, 2007, the Sanitary Services Superintendent initiated an administrative sanctioning process against the Company regarding the surpassing of the maximum levels allowed for the pH parameters and suspended solids. The Company presented its responses within the time established in the resolution, which was June 25, 2007.

 

 

 

Pursuant to a resolution dated June 26, 2007 the Sanitary Services Superintendent resolved to amplify the charges included in resolution 1828.

 

 

 

Arauco presented its respective responses dated as of July 17, 2007. However, by Resolution N° 2589 of August 28, 2007, the Sanitary Services Superintendent sanctioned the Company with a fine of 100 UTA (US$80 thousand as of June 30, 2008) for not following the applicable emission norms and with a fine of 1,000 UTA (US$804 thousand as of June 30, 2008) for risking the health of the population. This last sanctioned was appealed before the Court of Santiago and the matter is currently still pending resolution.

 

 

5)

The Public Ministry initiated an investigation related to the death of fish above-mentioned, to which complaints presented by both public and private entities were accumulated. The investigation is being led by part of the prosecutor’s office of Licanten (Ruc 0700427552-1). The investigation is still pending.

 

 

6)

According to the Inspection Act Nº 1155, dated July 10, 2007, the black liquor pool had been functioning; however, the movement of trucks with pieces of pine during the loading and unloading process would have been observed, and the presence of loaded trucks in the sector west of the aviation field would have also been observed. Pursuant to this, the Company was requested to present their responses regarding the sanitary indictment, which was done on July 20, 2007. The matter is still pending.

 

 

7)

On September 7, 2007, the State Defense Council presented a complaint against the Company for reparations of environmental damages and indemnifications of damages to the Fourth Civil Tribunal of Talca (Rol 322-2007). After the Company was notified, the parties agreed to suspend the proceeding for ninety business days, which was approved by the tribunal on December 21, 2007. On May 16, 2008, the suspension was lifted and the matter is currently pending resolution.

47


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

8)

On April 8, 2008 through Resolution Nº 1340, the Superintendence of Sanitary Services initiated an administrative proceeding against the Company regarding lack of compliance with the conditions imposed by the Environmental Qualification Resolution Nº308 of 2006, specifically items 4.1 and 10, allowing the Company ten days to refute the charges in the resolution.

 

 

 

On April 23, 2008, the company formulated the evidence to refute the charges and requested the establishment of a probation period. The matter is currently pending resolution.

 

 

9)

Through Inspection Act No. 1160, dated August 3, 2007, a representative of the Company was requested to make an appearance before the Sanitary Authority regarding a sanitary proceeding involving the Company’s procedure for transporting dangerous waste.

 

 

 

On August 16, 2007, the Company presented its responses and the matter is pending resolution.

The Company is not currently involved in any other court proceedings or any other legal actions that could significantly affect its financial, economic or operational conditions.

 

 

 

Other contingencies

 

 

a)

The Electricity and Fuel Superintendent imposed sanctions on Arauco’s subsidiary Arauco Generación S.A. for alleged deficiencies in the Central Interconnected System. Arauco Generación S.A. is appealing these sanctions in the Court of Justice and with the Superintendent, and the matter is currently pending resolution. The amounts of the fines in question reach Ch$51,781 thousand (U.S.$98 thousand) and have been recorded in the consolidated financial statements.

 

 

b)

On October 8, 2007 the Administracion Federal de Ingresos Públicos (“AFIP”) notified the subsidiary Alto Paraná S.A. the commencement of an administrative process (“court-initiated proceedings”), where the deductibility to the Income Tax, certain expenses, interests and exchange gains or losses generated by Private Negotiable Obligations that were issued by the Company in 2001 and precanceled in 2007 for a sum of US$250 million are being questioned.

 

 

 

On December 14, 2007, the AFIP notified Alto Paraná S.A. that it rejected the subsidiary’s position and proceeded to demand the income, within fifteen business days, of the calculated differences in the Income Taxes for the financial years 2002, 2003 and 2004 for the sum of US$55,227 thousand in principal and the rest as back interest and penalty fines.

 

 

 

Based on the opinion of the legal counsel and according to the analysis and evaluation of the grounds of the claim, of the applicable norm and the existing judicial precedents, the Company considers that there are solid grounds that credit the legitimacy of it going forward in the determination of its tributary charge, ending up hopeful that the fiscal claim is revoked by the jurisdictional court. For such reasons we have not included a provision for this concept.

As of June 30, 2008, the Company was not involved in any other court proceedings or any other legal actions that could significantly affect its financial, economic or operational conditions.

48


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

Restrictions

 

 

a)

Due to the liabilities presented in the categories of banks borrowings and bonds, there are certain financial restrictions with which Arauco must comply. Non-compliance could result in these debts becoming fully payable upon demand.

 

 

 

The minimum financial restrictions are:

 

 

 

(i) the ratio of debt to consolidated tangible net worth must not be greater than 1.2;

 

(ii) consolidated net worth must not be less than U.S.$2,500 million; and

 

(iii) the interest coverage ratio must not be less than 2.0.

 

 

 

Arauco’s Argentine subsidiary Alto Paraná S.A., due to its obligations with Rule 144A, must comply with the following ratios:

 

 

 

(i) the total financial liabilities (excluding Rule 144A debt) must not be greater than 65% of its shareholders’ equity plus the debt with JPMorgan Chase; and

 

 

 

(ii) the ratio between EBITDA and excluded interests generated by the debt with Rule 144A cannot be less than 1.75.

 

 

 

Both Arauco and its subsidiary Alto Paraná S.A. have complied with these restrictions as of June 30, 2008.

 

 

b)

An agreement of Wood Supply and Future Land Purchases entered into by Celulosa Arauco y Constitución S.A. and a contract of Forestry Administration entered into by certain of Arauco’s forestry subsidiaries, both with the Fondo de Inversión Bío Bío, pursuant to which Arauco is subject to the following minimum financial restrictions. Failure to meet these restrictions could result in the purchase in advance of future obligations.

 

 

 

(i) the ratio of debt to consolidated tangible net worth must not be greater than 1.2;

 

(ii) consolidated net worth must not be less than U.S.$2,500 million; and

 

(iii) the interest coverage ratio must not be less than 2.0.

 

 

 

Pursuant to the agreement of Wood Supply between Arauco and the Fondo de Inversiones Bio Bio, Arauco would be required to advance the future purchases of wood (in part or entirely, depending on the situation) if the Fondo Bío Bío, in the event of “Significant Adverse Event”, as defined by the agreement, cannot meet its financial obligations with its own resources.

49


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

20.

SHAREHOLDERS’ EQUITY

 

 

 

The movements in the capital and reserve accounts for each of the periods ended June 30, 2007 and 2008 are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
























June 30, 2007

 

Paid-in
capital
ThU.S.$

 

Share
premium
ThU.S.$

 

Forestry
and other
reserves
ThU.S.$

 

Retained
earnings
from prior
years
ThU.S.$

 

Interim
dividends
ThU.S.$

 

Net
Income
for the
Period
ThU.S.$

 

Total
ThU.S.$

 

















Balance as of December 31, 2006

 

 

347,551

 

 

5,625

 

 

1,631,736

 

 

2,317,030

 

 

(89,758

)

 

619,421

 

 

4,831,605

 

Prior year income allocation

 

 

 

 

 

 

 

 

619,421

 

 

 

 

(619,421

)

 

 

Dividend paid

 

 

 

 

 

 

 

 

(260,231

)

 

89,758

 

 

 

 

(170,473

)

Forestry reserve

 

 

 

 

 

 

(88,111

)

 

 

 

 

 

 

 

(88,111

)

Forestry reserve of consolidated subsidiaries

 

 

 

 

 

 

(850

)

 

 

 

 

 

 

 

(850

)

Conversion adjustment related to subsidiaries

 

 

 

 

 

 

2,191

 

 

 

 

 

 

 

 

2,191

 

Adjustment of previous year related to subsidiaries

 

 

 

 

 

 

 

 

(22,241

)

 

 

 

 

 

(22,241

)

Interim dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

346,269

 

 

346,269

 
























Balance as of June 30, 2007

 

 

347,551

 

 

5,625

 

 

1,544,966

 

 

2,653,979

 

 

 

 

346,269

 

 

4,898,390

 
























 
























June 30, 2008

 

Paid-in
capital
ThU.S.$

 

Share
premium
ThU.S.$

 

Forestry
and other
reserves
ThU.S.$

 

Earnings
from prior
years
ThU.S.$

 

Interim
dividends
ThU.S.$

 

Net
Income
for the
Period
ThU.S.$

 

Total
ThU.S.$

 

















Balance as of December 31, 2007

 

 

347,551

 

 

5,625

 

 

1,820,426

 

 

2,653,426

 

 

(108,896

)

 

695,665

 

 

5,413,797

 

Prior year income allocation

 

 

 

 

 

 

 

 

695,665

 

 

 

 

(695,665

)

 

 

Dividend paid

 

 

 

 

 

 

 

 

(323,781

)

 

108,896

 

 

 

 

 

Forestry reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(214,885

)

Forestry reserve of consolidated subsidiaries

 

 

 

 

 

 

(83,081

)

 

 

 

 

 

 

 

(83,081

)

Conversion adjustment related to subsidiaries

 

 

 

 

 

 

(1,079

)

 

 

 

 

 

 

 

(1,079

)

Adjustment of the previous year related to affiliate

 

 

 

 

 

 

(2,461

)

 

 

 

 

 

 

 

(2,461

)

Adjustment of the previous year related to subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provisory dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

354,224

 

 

354,224

 
























Balance as of June 30, 2008

 

 

347,551

 

 

5,625

 

 

1,733,805

 

 

3,025,310

 

 

 

 

354,224

 

 

5,466,515

 

























 

 

 

The number of shares authorized, issued and outstanding as of June 30, 2007 and 2008 was 113,152,446.

 

The Company’s shares are of a single series without a fixed nominal value.

50


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

June 30, 2008

Amounts in thousands of U.S. dollars, except as indicated

 



 

 

21.

OTHER NON-OPERATING INCOME

 

 

 

Other non-operating income was as follows:


 

 

 

 

 

 

 

 









 

 

  As of June 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Indemnity for forests acquired

 

 

2,556

 

 

 

Reimbursement of customs duties

 

 

2,600

 

 

2,994

 

Rental income

 

 

628

 

 

1,023

 

Insurance recoveries

 

 

388

 

 

200

 

Sale of materials and others

 

 

117

 

 

702

 

Utility other sales

 

 

938

 

 

1,332

 

Provision excess previous year

 

 

—<