6-K 1 arauco-6kcomments_1126.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 December, 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 x 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 o No x

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
September 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 September 30, 2007 and 2008 are as follows:


 

 

 

 

 

 

 

 


Assets

 

2007
ThU.S.$

 

 

 

2008
ThU.S.$

 


Current assets

 

1,807,978

 

 

 

2,101,739

 

Property, plant and equipment

 

6,101,185

 

 

 

6,559,011

 

Other assets

 

97,963

 

 

 

112,576

 









Total assets

 

8,007,126

 

 

 

8,773,326

 










 

 

 

 

 

 

 

 


Liabilities and Shareholders’ Equity

 

2007
ThU.S.$

 

 

 

2008
ThU.S.$

 


Current liabilities

 

668,420

 

 

 

889,887

 

Long-term liabilities

 

2,294,899

 

 

 

2,274,558

 

Minority interest

 

12,008

 

 

 

65,372

 

Shareholders’ equity

 

5,031,799

 

 

 

5,543,509

 









Total liabilities and shareholders’ equity

 

8,007,126

 

 

 

8,773,326

 










 

 

 

Total assets increased by 9.6%, or U.S.$766 million, from September 30, 2007 to September 30, 2008. This increase is mainly attributable to an increase in property, plant and equipment, inventories, trade accounts receivable and investments in related companies.

 

 

 

Total liabilities increased by U.S.$201 million from September 30, 2007 to September 30, 2008. This increase is mainly attributable to a net increase in bank liabilities of U.S.$326 million and an increase in deferred tax of U.S.$46 million, which was partially offset by a decrease in income tax of U.S.$25 million and bonds of U.S.$133 million.

1


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Ratio Analysis of the Consolidated Financial Statements
September 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

 

09/30/2007

 

12/31/2007

 

09/30/2008

 


Current ratio

 

2.70

 

3.07

 

2.36

 

Acid ratio

 

1.59

 

1.77

 

1.30

 










 

 

 

The liquidity ratio in the current period represents a decrease, due to a proportional increase of the current liabilities in respect to the current assets, which in turn is explained by an increase in short-term bonds, partly compensated by an increase in inventory.

 

 

 

The decrease in the current acid ratio from 2007 to 2008 is attributable to a proportional increase in liabilities explained by greater bank balances and by lower balances of financial investments, in turn offset by an increase in trade receivables.


 

 

 

 

 

 

 

 


Debt indicators

 

09/30/2007

 

12/31/2007

 

09/30/2008

 


Debt to equity ratio

 

0.59

 

0.58

 

0.57

 

Short-term debt to total debt

 

0.23

 

0.20

 

0.28

 

Long-term debt to total debt

 

0.77

 

0.80

 

0.72

 

Financial expenses covered

 

5.94

 

5.83

 

6.05

 










 

 

 

The debt ratio was 0.59 and 0.57 at September 30, 2007 and September 30, 2008, respectively.

 

 

 

Current liabilities increased modestly from 23% of total liabilities at September 30, 2007 to 28% of total liabilities at September 30, 2008. The increase is attributable to a higher proportional increase in current liabilities with respect to a decrease in long-term liabilities, due do an increase in bank debt, partly offset by a decrease in public debt and provisions in current assets, as well as a decrease in the long-term portion of our bond debt.

 

 

 

The ratio of financial expenses covered increased from 5.94 points in 2007 to 6.05 points in 2008. The increase is attributable to a higher increase in profits related to financial expenses.


 

 

 

 

 

 

 

 


Operational ratios

 

09/30/2007

 

12/31/2007

 

09/30/2008

 


Inventory turnover

 

2.07

 

2.79

 

2.10

 

Inventory turnover (excluding forests)

 

3.18

 

4.51

 

3.32

 

Inventory permanence (days)

 

130.54

 

129.01

 

128.86

 

Inventory permanence (excluding forests)

 

85.01

 

79.87

 

81.37

 










 

 

 

The ratio of inventory turnover increased from 2.07% at September 30, 2007 to 2.10% points at September 30, 2008. For this reason, the inventory permanence ratio decreased during the period ended September 30, 2008, due to a proportionally higher increase in sales with regard to the average inventory.

2



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

September 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

 

09/30/2007
ThU.S.$

 

12/31/2007
ThU.S.$

 

09/30/2008
ThU.S.$

 

 












 

Pulp

 

 

1,254,403

 

 

1,729,860

 

 

1,449,282

 

 

Sawn timber, cut wood, plywood and fiber panels

 

 

1,193,493

 

 

1,647,846

 

 

1,309,730

 

 

Forestry products

 

 

56,096

 

 

81,778

 

 

78,531

 

 

Other

 

 

69,642

 

 

116,248

 

 

102,330

 

 












 

Total operating income

 

 

2,573,634

 

 

3,575,732

 

 

2,939,873

 

 













 

 

 

 

 

 

 

 

 

 

 

 

 












 

Operating costs

 

09/30/2007
ThU.S.$

 

12/31/2007
ThU.S.$

 

09/30/2008
ThU.S.$

 

 












 

Timber

 

 

368,377

 

 

529,324

 

 

429,684

 

 

Forestry work

 

 

229,119

 

 

311,896

 

 

305,575

 

 

Depreciation

 

 

168,639

 

 

238,851

 

 

163,126

 

 

Other costs

 

 

593,090

 

 

857,969

 

 

782,182

 

 












 

Total operating costs

 

 

1,359,225

 

 

1,938,040

 

 

1,680,567

 

 













 

 

 

Analysis of Operating Income

 

 

 

Operating income includes net income of U.S.$707 million in 2008 compared to U.S.$764 million in 2007, a decrease of U.S.$57 million, caused by higher operating costs and by higher sales and administration expenses, offset by an increase in operating income.

 

 

 

Analysis of Non-Operating Loss

 

 

 

There was a non-operating loss of U.S.$106 million in 2007, compared to U.S.$104 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.$

 

 






 

Interest earned

 

 

2

 

 

Interest expenses

 

 

14

 

 

Other non-operating expenses

 

 

(3

)

 

Foreign currency exchange rate

 

 

(12

)

 

Others net

 

 

1

 

 






 

Decrease non-operating loss

 

 

2

 

 







 

 

 

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

3


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

September 30, 2008

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

 



 

 

2.

ANALYSIS OF FINANCIAL POSITION, continued


 

 

 

 

 

 

 

 

 

 

 

 

 












 

Profitability ratios

 

09/30/2007

 

12/31/2007

 

09/30/2008

 

 












 

Equity yield

 

 

11.01

 

 

13.58

 

 

9.17

 

 

Asset performance ratio

 

 

6.83

 

 

8.46

 

 

5.78

 

 

Operating asset ratio

 

 

10.13

 

 

12.42

 

 

8.53

 

 

Income per share (U.S.$)

 

 

4.61

 

 

6.15

 

 

4.28

 

 

EBITDA *

 

 

971,558

 

 

1,303,310

 

 

894,248

 

 

Income after tax (ThU.S.$)

 

 

518,302

 

 

692,691

 

 

480,653

 

 













 

 

 

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


 

 

 

 

 

 

 

 

 

 

 

 

 












 

Operational income ThU.S.$

 

 

763,677

 

 

1,008,562

 

 

706,811

 

 

Financial expenses ThU.S.$

 

 

(133,903

)

 

(180,771

)

 

(119,823

)

 

Non-operating expenses ThU.S.$

 

 

(105,659

)

 

(139,134

)

 

(103,670

)

 













 

 

3.

MARKET SITUATION

 

 

 

Pulp

 

 

 

During the third quarter of 2008, the pulp market has shown signs of weakness, partly derived from the increase in supply for the product that has resulted from the launch of our new factories.

 

 

 

Our clients are not only facing growing restrictions of a financial nature, but they have also faced a decrease in demand for paper, which is made principally from pulp and whose consumption is directly associated to the level of economic activity in each country.

 

 

 

This situation brought a moderate decrease in the price levels in our market.

 

 

 

The outlook for pulp in the last quarter of 2008 is not favorable and we do not rule out a stronger decrease in prices. In fact, diverse indicators show that the deterioration of the world economy would get worse in the next months, with the resulting impact in the pulp market and other commodities.

4


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

September 30, 2008

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

 



 

 

3.

MARKET SITUATION, continued

 

 

 

Wood

 

 

 

The real estate and construction market in the United States continues to decrease during the third quarter this year. The construction of houses continues to decrease, reaching levels of 800,000 houses a year, compared to the 2 million houses built two years ago. The actual levels of construction are the lowest in 17 years. There still is a significant stock of unsold houses, which will not allow for the recovery of the sector until next year’s second quarter.

This has negatively affected the sales volume of moldings and wood when compared to last year. The price of moldings and wood in the United States has decreased during the third quarter this year.

Towards the end of the third quarter the financial crisis was affecting all markets. This has generated uncertainty and the devaluation of almost all currencies with respect to the dollar. A decrease in demand and price weakness is present in all markets.

 

 

 

The oil decline and the decrease in activity are also decreasing the sea freight.

 

 

 

Panels

 

 

 

At the closing of the third quarter the sales of the Panels Division showed an increase of 7.2% compared to the same period in 2007 when measured in Dollars. With this result, the aggregate invoicing for 2008 shows an increase of 18.4% through September compared to the same period in 2007. The percentages previously mentioned do not take into account the sale of energy to other business of the Company and the National Energy Grid (Central Interconnected System or CIS).

 

 

 

During this quarter, the sales of plywood (AraucoPly) were within projections. However, sales in Europe showed a decline in returns due to the devaluation of the Euro. The process of launching and remodeling the lines of productions has caused delays in production volumes and exports abroad.

 

 

 

The sales of moldings of MDF (Truchoice) showed an irregular behavior during the third quarter, since it started with a very high demand, only to end September with a very significant contraction in product orders due to the real estate crisis in the United States.

 

 

 

While this situation has not currently affected the demand for boards for the furniture businesses such as MDF, Aglomerados and Hardboard, (that operate under the brands Trupan, Faplac y Cholguan), we have experienced a lower demand for moldings that has forced us to intensify the search for sales options in non-regular markets, principally in Asia. The board sales in Latin America maintain their level.

 

 

 

At a productive level, the previously discussed factories are operating within projections.

 

 

 

At the end of September, in general, all markets started to show signs of deceleration, which caused us to lower our projections for the fourth quarter.

5


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

September 30, 2008

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

 



 

 

4.

ANALYSIS OF CASH FLOW


 

 

 

 

 

 

 

 

 

 

 

 

 












 

 

 

09/30/2007
ThU.S.$

 

12/31/2007
ThU.S.$

 

09/30/2008
ThU.S.$

 

 












 

Operating cash flow

 

 

755,362

 

 

1,029,042

 

 

634,510

 

 

Cash flow from financing activities

 

 

(283,296

)

 

(188,764

)

 

(214,831

)

 

Cash flow from investment activities

 

 

(417,081

)

 

(768,194

)

 

(394,156

)

 












 

Net cash flow for the period

 

 

54,985

 

 

72,084

 

 

25,523

 

 













 

 

 

We had a positive operating cash flow of U.S.$634 million compared to a U.S.$755 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 September 30, 2008 was a net expense of U.S.$215 million compared to a net expense of U.S.$283 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 a bond allocation in 2007.

 

 

 

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 September 30, 2008, a relation between fixed rate debts and total consolidated debt of approximately 74,9%, 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

September 30, 2008

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

 



 

 

 

 

 

 

 

 

 

 









 

 

 

At September 30,

 

 

ASSETS

 

2007
ThU.S.$

 

2008
ThU.S.$

 

 









 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash

 

 

31,178

 

 

38,280

 

 

Time deposits

 

 

14,790

 

 

86,968

 

 

Marketable securities (note 3)

 

 

200,975

 

 

103,611

 

 

Trade accounts receivable (note 4)

 

 

561,761

 

 

637,433

 

 

Notes receivable

 

 

3,675

 

 

7,089

 

 

Other receivables

 

 

86,884

 

 

66,305

 

 

Notes and accounts receivable from related parties (note 18)

 

 

3,761

 

 

7,184

 

 

Inventories (note 5)

 

 

679,725

 

 

849,643

 

 

Recoverable taxes

 

 

93,798

 

 

85,075

 

 

Prepaid expenses

 

 

68,802

 

 

97,803

 

 

Other current assets

 

 

62,629

 

 

122,348

 

 









 

Total current assets

 

 

1,807,978

 

 

2,101,739

 

 









 

PROPERTY, PLANT AND EQUIPMENT: (note 6)

 

 

 

 

 

 

 

 

Land

 

 

533,401

 

 

646,131

 

 

Forests

 

 

2,529,540

 

 

2,804,674

 

 

Buildings and other infrastructure

 

 

2,035,729

 

 

2,104,703

 

 

Machinery and equipment

 

 

2,879,175

 

 

2,972,825

 

 

Other

 

 

500,125

 

 

617,904

 

 

Technical revaluation

 

 

68,769

 

 

68,769

 

 

Less: Accumulated depreciation

 

 

(2,445,554

)

 

(2,655,995

)

 









 

Net property, plant and equipment

 

 

6,101,185

 

 

6,559,011

 

 









 

 

 

 

 

 

 

 

 

 

OTHER NON-CURRENT ASSETS:

 

 

 

 

 

 

 

 

Investments in related companies (note 7)

 

 

86,877

 

 

140,997

 

 

Investments in other companies

 

 

261

 

 

280

 

 

Goodwill (note 8)

 

 

3,672

 

 

2,993

 

 

Negative goodwill (note 8)

 

 

(56,738

)

 

(88,271

)

 

Long-term receivables

 

 

13,770

 

 

9,812

 

 

Intangibles

 

 

812

 

 

852

 

 

Amortization

 

 

(434

)

 

(501

)

 

Other (note 9)

 

 

49,743

 

 

46,414

 

 









 

Total other non-current assets

 

 

97,963

 

 

112,576

 

 









 

Total assets

 

 

8,007,126

 

 

8,773,326

 

 









 

 

 

 

 

 

 

 

 

 

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

September 30, 2008

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

 



 

 

 

 

 

 

 

 





 

 

At September 30,

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

2007
ThU.S.$

 

2008
ThU.S.$

 









CURRENT LIABILITIES:

 

 

 

 

 

 

 

Current bank borrowings (note 10)

 

 

59,500

 

 

239,519

 

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

 

 

95,657

 

 

172,942

 

Current portion of bonds (note 12)

 

 

125,831

 

 

123,040

 

Current portion of other long term liabilities

 

 

616

 

 

460

 

Dividends payable

 

 

235

 

 

217

 

Trade accounts payable

 

 

245,449

 

 

244,937

 

Notes payable

 

 

5,373

 

 

4,643

 

Sundry accounts payable

 

 

14,340

 

 

4,713

 

Notes and accounts payable to related companies (note 18)

 

 

5,394

 

 

11,071

 

Accrued liabilities (note 13)

 

 

55,939

 

 

44,582

 

Withholding taxes

 

 

28,884

 

 

36,416

 

Income tax payable

 

 

25,010

 

 

 

Deferred income

 

 

3,780

 

 

3,494

 

Deferred taxes

 

 

1,791

 

 

3,067

 

Other current liabilities

 

 

621

 

 

786

 









Total current liabilities

 

 

668,420

 

 

889,887

 









LONG-TERM LIABILITIES:

 

 

 

 

 

 

 

Long-term bank borrowings (note 14)

 

 

178,088

 

 

246,455

 

Bonds (note 12)

 

 

1,852,500

 

 

1,722,500

 

Sundry accounts payable

 

 

2,262

 

 

271

 

Accrued liabilities

 

 

30,587

 

 

34,085

 

Deferred tax liabilities (note 15)

 

 

185,054

 

 

229,695

 

Other long-term liabilities

 

 

46,408

 

 

41,552

 









Total long-term liabilities

 

 

2,294,899

 

 

2,274,558

 









Minority interest (note 23)

 

 

12,008

 

 

65,372

 









SHAREHOLDERS’ EQUITY: (note 20)

 

 

 

 

 

 

 

Paid-up in capital

 

 

347,551

 

 

347,551

 

Share premium

 

 

5,625

 

 

5,625

 

Forestry and other reserves

 

 

1,503,207

 

 

1,680,335

 

Retained earnings

 

 

2,653,979

 

 

3,025,310

 

Net income for the period

 

 

521,437

 

 

484,688

 









Total shareholders’ equity

 

 

5,031,799

 

 

5,543,509

 









Total liabilities and shareholders’ equity

 

 

8,007,126

 

 

8,773,326

 










 

 

 

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

September 30, 2008

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

 



 

 

 

 

 

 

 

 





 

 

At September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









OPERATING INCOME:

 

 

 

 

 

 

 

Sales revenue

 

 

2,573,634

 

 

2,939,873

 

Cost of sales

 

 

(1,359,225

)

 

(1,680,567

)

Gross profit

 

 

1,214,409

 

 

1,259,306

 

Administration and selling expenses

 

 

(450,732

)

 

(552,495

)









Operating income

 

 

763,677

 

 

706,811

 









NON-OPERATING INCOME:

 

 

 

 

 

 

 

Interest earned

 

 

14,421

 

 

16,629

 

Share of net income of related companies (note 7)

 

 

6,697

 

 

5,815

 

Other non-operating income (note 21)

 

 

21,417

 

 

21,226

 

Investment loss of related companies

 

 

(464

)

 

(1,066

)

Amortization of goodwill (note 8)

 

 

(2,179

)

 

(141

)

Interest expenses

 

 

(133,903

)

 

(119,823

)

Other non-operating expenses (note 22)

 

 

(18,479

)

 

(21,820

)

Price-level restatement (note 1)

 

 

(640

)

 

(366

)

Foreign currency exchange rate (note 1)

 

 

7,471

 

 

(4,124

)









Non-operating loss

 

 

(105,659

)

 

(103,670

)









Income before taxes, minority interest and amortization of negative goodwill

 

 

658,018

 

 

603,141

 

Income taxes (note 15)

 

 

(140,001

)

 

(120,945

)

Income before minority interest and amortization of negative goodwill

 

 

518,017

 

 

482,196

 

Minority interest (note 23)

 

 

285

 

 

(1,543

)

Income before amortization of negative goodwill

 

 

518,302

 

 

480,653

 

Amortization of negative goodwill (note 8)

 

 

3,135

 

 

4,035

 









Net income

 

 

521,437

 

 

484,688

 










 

 

 

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

September 30, 2008

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

 



 

 

 

 

 

 

 

 





 

 

At September 30,

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Net income

 

 

521,437

 

 

484,688

 

Loss (Profit) on sale of assets

 

 

 

 

 

 

 

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

 

 

108

 

 

313

 

Items affecting income not involving the movement of cash:

 

 

 

 

 

 

 

Depreciation

 

 

177,173

 

 

172,686

 

Amortization of intangibles

 

 

30

 

 

32

 

Write-offs and provisions

 

 

1,362

 

 

5,792

 

Profit from investments accounted for under the equity method

 

 

(6,697

)

 

(5,815

)

Interest loss of related companies

 

 

464

 

 

1,066

 

Amortization of goodwill

 

 

2,179

 

 

141

 

Amortization of negative goodwill

 

 

(3,135

)

 

(4,035

)

Net price level restatement

 

 

640

 

 

366

 

Foreign currency exchange rate

 

 

(7,471

)

 

4,124

 

Others

 

 

62,100

 

 

82,991

 

Decrease (Increase) in current assets:

 

 

 

 

 

 

 

Clients and debtors

 

 

(73,418

)

 

(115,610

)

Inventory

 

 

(19,541

)

 

(105,433

)

Other current assets

 

 

(19,746

)

 

(6,571

)

Increase (Decrease) in current liabilities:

 

 

 

 

 

 

 

Suppliers and creditors

 

 

47,000

 

 

96,171

 

Interest payable

 

 

36,110

 

 

34,342

 

Provision for income taxes

 

 

31,002

 

 

(23,743

)

Other current liabilities

 

 

5,765

 

 

13,005

 









Net cash flows from operating activities

 

 

755,362

 

 

634,510

 










 

 

 

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

September 30, 2008

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

 



 

 

 

 

 

 

 

 









 

 

At September 30,

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Loans from financial institutions

 

 

767,597

 

 

613,455

 

Loans paid

 

 

(1,144,890

)

 

(631,189

)

Bonds issue

 

 

268,110

 

 

 

Dividends paid

 

 

(172,466

)

 

(197,097

)

Other

 

 

(1,647

)

 

 









Net cash flow from financing activities

 

 

(283,296

)

 

(214,831

)









CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Sales of property, plant and equipment

 

 

790

 

 

1,014

 

Purchase of property, plant and equipment

 

 

(417,401

)

 

(380,717

)

Permanent investments

 

 

(185

)

 

(7,353

)

Capitalized interest paid

 

 

(704

)

 

(6,135

)

Other investments

 

 

419

 

 

(965

)









Net cash flow from investment activities

 

 

(417,081

)

 

(394,156

)









Net cash flows from operating, investing and financing activities

 

 

54,985

 

 

25,523

 









Effect of inflation

 

 

7,662

 

 

(13,332

)









Net decrease in cash and cash equivalents

 

 

62,647

 

 

12,191

 

Initial balance of cash and cash equivalents

 

 

184,296

 

 

267,230

 









FINAL BALANCE OF CASH AND CASH EQUIVALENTS

 

 

246,943

 

 

279,421

 










 

 

 

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

September 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 September 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

September 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 September 30, 2008

 

Total
September 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 Colombia S.A. (Colombia)

 

 

1.50

 

 

98.49

 

 

99.99

 

 

 

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

 

 

99.99

 

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

 

 

99.99

 

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)

 

 

9.97

 

 

90.02

 

 

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

September 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

September 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
September 30,

 







September 30, 2007

 

 

131.93

 

5.8

%

 

September 30, 2008

 

 

144.11

 

9.2

%

 









 

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
August 31,

 







August 31, 2007

 

 

130.45

 

4.7

%

 

August 31, 2008

 

 

142.59

 

9.3

%

 










 

 

 

 

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$

 





September 30, 2007

 

 

19,178.94

 

September 30, 2008

 

 

20,988.34

 







 

 

 

 

(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

September 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 September 30,

 

 

 

2007
U.S.$ 1

 

2008
U.S.$ 1

 







Chilean peso (Ch$)

 

 

511,23

 

 

551,31

 

Euro

 

 

7,01

 

 

7,10

 

Argentine peso (Ar$)

 

 

3,15

 

 

3,13

 

Brazilian real (R$)

 

 

1,83

 

 

1,90

 

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 September 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

 

 

(1,649

)

 

(1,687

)

Property, plant and equipment, net

 

 

801

 

 

352

 

Other assets and liabilities, net

 

 

538

 

 

1,140

 









Net effect on income

 

 

(310

)

 

(195

)









Price-level restatement of income statement accounts

 

 

(330

)

 

(171

)









Credit (charge) to income by CPI

 

 

(640

)

 

(366

)









16



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

2007
ThU.S.$
Credit (Charge)

 

2008
ThU.S.$
Credit (Charge)

 







Assets restated by foreign currency

 

 

 

 

 

 

 

Trade accounts receivable

 

 

5,523

 

 

(3,387

)

Other assets

 

 

28,702

 

 

(35,255

)

Liabilities restated by foreign currency

 

 

 

 

 

 

 

Bank borrowings

 

 

(2,983

)

 

2,057

 

Trade accounts payable

 

 

(4,475

)

 

7,387

 

Dividends payable

 

 

(2,154

)

 

17,663

 

Other liabilities

 

 

(17,142

)

 

7,411

 









Net effect on income from foreign currency

 

 

7,471

 

 

(4,124

)










 

 

(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

September 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 Superintendencia de Valores y Seguros. See note 6.

 

 

 

Property, plant and equipment, excluding forests and land, are 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

September 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 Accountants Association of Chile 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

September 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.$2,161 thousand and U.S.$3,215 thousand for the period ended September 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

20



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

 

financing or investing activities. The operating concept used in this statement is broader than that in the consolidated statements of income.

21


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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.”

22


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 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 September 30, 2008, the Company’s investments in Argentina represented 7.5% of its consolidated assets, compared to 7.9% as of September 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 Superintendencia de Valores y Seguros 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.

23


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Mutual fund units

 

 

200,975

 

 

103,611

 









Total marketable securities

 

 

200,975

 

 

103,611

 










 

 

4.

TRADE ACCOUNTS RECEIVABLE

 

 

 

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


 

 

 

 

 

 

 

 





 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Trade accounts receivable

 

 

570,503

 

 

650,916

 

Allowance for doubtful accounts

 

 

(8,742

)

 

(13,483

)









Total trade accounts receivable

 

 

561,761

 

 

637,433

 










 

 

 

As of September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Finished goods (pulp)

 

 

76,373

 

 

113,067

 

Finished goods (timber and panels)

 

 

188,685

 

 

231,314

 

Work in progress

 

 

21,606

 

 

24,048

 

Saw logs, pulpwood and chips

 

 

56,879

 

 

69,805

 

Raw material

 

 

71,261

 

 

83,244

 

Forests under exploitation

 

 

233,584

 

 

275,662

 

Pending imports

 

 

1,696

 

 

5,932

 

Other

 

 

29,641

 

 

46,571

 









Total inventories

 

 

679,725

 

 

849,643

 









24


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Buildings and other infrastructure

 

 

2,370

 

 

2,224

 

Machinery and equipment

 

 

110

 

 

110

 









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

 

 

2,480

 

 

2,334

 










 

 

 

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


 

 

 

 

 

 

 

 





 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Depreciation of:

 

 

 

 

 

 

 

Property, plant and equipment (excluding land and forests)

 

 

177,063

 

 

172,576

 

Technical revaluation

 

 

110

 

 

110

 









Total

 

 

177,173

 

 

172,686

 










 

 

 

Accumulated depreciation was as follows:


 

 

 

 

 

 

 

 





 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Accumulated depreciation of:

 

 

 

 

 

 

 

Property, plant and equipment (excluding land and forests)

 

 

2,380,194

 

 

2,590,487

 

Technical revaluation

 

 

65,360

 

 

65,508

 









Total

 

 

2,445,554

 

 

2,655,995

 









25


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Cost of forests

 

 

1,091,737

 

 

1,192,243

 

Commercial valuation increment

 

 

1,437,803

 

 

1,612,431

 









Total

 

 

2,529,540

 

 

2,804,674

 










 

 

7.

INVESTMENTS IN RELATED COMPANIES

 

 

a)

Effected Investments

 

 

 

On April 24, 2008 and July 18, 2008 a contribution for a capital increase in Inversiones Puerto Coronel S.A. for an amount of US$2 million and US$3 million was made respectively.

 

 

 

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 Chilean Securities Commission, the determination of the fair value of the purchase can eventually change through an analysis of the value of the acquired assets.

 

 

 

As of September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Puerto de Lirquén S.A.

 

 

880

 

 

2,099

 

Dynea Brasil S.A.

 

 

4,436

 

 

3,698

 









Total

 

 

5,316

 

 

5,797

 










 

 

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.

26


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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.

 

 

e)

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 September 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

 

 

26,484

 

 

27,519

 

 

2,432

 

 

2,213

 

Inversiones Puerto Coronel S.A.

 

 

50.00

 

 

50.00

 

 

14,252

 

 

22,473

 

 

1,482

 

 

920

 

Servicios Corporativos Sercor S.A.

 

 

20.00

 

 

20.00

 

 

1,496

 

 

1,262

 

 

118

 

 

(111

)

Eka Chile S.A.

 

 

50.00

 

 

50.00

 

 

27,423

 

 

29,791

 

 

(464

)

 

(547

)

Dynea Brasil S.A.

 

 

50.00

 

 

50.00

 

 

17,222

 

 

17,315

 

 

2,665

 

 

2,682

 

-Genómica Forestal S.A.

 

 

0.00

 

 

25.00

 

 

 

 

2

 

 

 

 

 

Stora Enso Arapoti Industria de Papel S.A.

 

 

0.00

 

 

20.00

 

 

 

 

40,282

 

 

 

 

(408

)

Savitar

 

 

0.00

 

 

20.00

 

 

 

 

2,353

 

 

 

 

 





















Total

 

 

 

 

 

 

 

 

86,877

 

 

140,997

 

 

6,233

 

 

4,749

 





















27


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

7.

GOODWILL AND NEGATIVE GOODWILL

 

 

a)

Goodwill as of each period-end was as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of September 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.

 

 

1,816

 

 

605

 

 

 

 

 

Southwoods-Arauco Lumber L.L.C.

 

 

225

 

 

75

 

 

 

 

 

Forestal Los Lagos S.A.

 

 

48

 

 

707

 

 

44

 

 

641

 

Norwood S.A.

 

 

11

 

 

281

 

 

11

 

 

266

 

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

 

 

79

 

 

2,004

 

 

86

 

 

2,086

 















Total goodwill

 

 

2,179

 

 

3,672

 

 

141

 

 

2,993

 
















 

 

b)

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


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of September 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.)

 

 

3,112

 

 

56,326

 

 

3,170

 

 

52,252

 

Ecoresin S.A.

 

 

10

 

 

267

 

 

16

 

 

285

 

Ecoboard S.A.

 

 

13

 

 

145

 

 

7

 

 

97

 

Arauco Florestal Arapoti S.A. (*)

 

 

 

 

 

 

842

 

 

35,637

 















Total negative goodwill

 

 

3,135

 

 

56,738

 

 

4,035

 

 

88,271

 
















 

 

 

(*)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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Recoverable taxes

 

 

19,047

 

 

21,205

 

Bond issue expenses

 

 

10,789

 

 

8,104

 

Discounts on bond issues

 

 

4,410

 

 

4,014

 

Forestry roads

 

 

12,095

 

 

9,279

 

Other

 

 

3,402

 

 

3,812

 









Total other non-current assets

 

 

49,743

 

 

46,414

 









28


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Total outstanding

 

 

59,500

 

 

239,519

 

Principal outstanding

 

 

59,317

 

 

237,928

 

Weighted average annual interest rate

 

 

5.81

 

 

4.67

 









          Current bank borrowings were denominated as follows:

 

 

 

 

 

 

 

 









 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Obligations in foreign currency

 

 

59,483

 

 

239,519

 

Obligations in local currency

 

 

17

 

 

 









Total current bank borrowings

 

 

59,500

 

 

239,519

 










 

 

11.

CURRENT LIABILITIES

 

 

(a)

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


 

 

 

 

 

 

 

 









 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Current portion of bonds

 

 

125,831

 

 

123,040

 

Current portion of other long-term liabilities

 

 

616

 

 

460

 

Trade accounts payable

 

 

245,449

 

 

244,937

 

Accounts and notes payable to related parties

 

 

5,394

 

 

11,071

 

Current provisions

 

 

55,939

 

 

44,582

 

Sundry accounts payable and other liabilities

 

 

80,034

 

 

53,336

 









Total

 

 

513,263

 

 

477,426

 










 

 

(b)

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


 

 

 

 

 

 

 

 









 

 

As of September 30,

 

 

 

2007
%

 

2008
%

 







Foreign currency

 

 

66.20

 

 

69.76

 

Local currency

 

 

33.90

 

 

30.24

 









Total

 

 

100.00

 

 

100.00

 









29


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30, 2008.

 

 

 

The balances of the bonds were as follows:


 

 

 

 

 

 

 

 









 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Current

 

 

 

 

 

 

 

Yankee Bonds 1st Issue

 

 

102,042

 

 

 

Yankee Bonds 2nd Issue

 

 

691

 

 

100,691

 

Yankee Bonds 3rd Issue

 

 

2,916

 

 

2,916

 

Yankee Bonds 4th Issue

 

 

1,416

 

 

1,416

 

Yankee Bonds 5th Issue

 

 

3,459

 

 

3,459

 

Yankee Bonds 6th Issue

 

 

10,000

 

 

9,251

 

Rule 144 A Bonds

 

 

5,307

 

 

5,307

 









Total current (including accrued interest)

 

 

125,831

 

 

123,040

 









Long-term

 

 

 

 

 

 

 

Yankee Bonds 2nd Issue

 

 

225,000

 

 

125,000

 

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

 

 

1,722,500

 









Less total accrued interest

 

 

25,831

 

 

23,140

 









Total principal outstanding

 

 

1,952,500

 

 

1,822,400

 









30


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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
Amount (nominal)

 

12 years
ThU.S.$ 100,000

 

12 years
ThU.S.$ 100,000
20 years
ThU.S.$ 125,000

 

10 years
ThU.S.$ 300,000

 

10 years
ThU.S.$ 400,000

 

10 years
ThU.S.$ 300,000

 

10 years
ThU.S.$ 400,000

 

10 years
ThU.S.$ 270,000


Authorized
Amount
(outstanding)

 

 

 

12 years
ThU.S.$ 100,000
20 years
ThU.S.$ 125,000

 

10 years
ThU.S.$ 270,500

 

10 years
ThU.S.$ 387,000

 

10 years
ThU.S.$ 300,000

 

10 years
ThU.S.$ 370,000

 

10 years
ThU.S.$ 270,000


Issue amount

 

12 years
ThU.S.$ 100,000

 

12 years
ThU.S.$ 100,000
20 years
ThU.S.$ 125,000

 

10 years
ThU.S.$ 300,000

 

10 years
ThU.S.$ 400,000

 

10 years
ThU.S.$ 300,000

 

10 years
ThU.S.$ 400,000

 

10 years
ThU.S.$ 270,000


Amounts
Authorized
but not issued

 

 

 

 

 

 

 


Principal
Repayment

 

December 2007

 

12 years
September 2009
20 years
September 2017

 

August 2010

 

September 2011

 

July 2013

 

April 2015

 

June 2017


Interest rate (excluding effects of any interest rate swap)

 

7.00%

 

12 years 7.20%
20 years 7.50%

 

8.625 %

 

7.75%

 

5.125%

 

5.625%

 

6.375%


Interest
Payment

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually

 

Semi-annually



 

 

 

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


 

 

 

 

 


Year

 

 

ThU.S.$

 


2008 (*)

 

 

23,040

 

2009

 

 

100,000

 

2010

 

 

270,500

 

2011

 

 

387,000

 

2013

 

 

300,000

 

2015

 

 

370,000

 

2017

 

 

395,000

 


Total

 

 

1,845,540

 


 

(*) This amount corresponds to accrued interest.

31


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

13.

ACCRUED LIABILITIES

 

 

(a)

Accrued liabilities were as follows:


 

 

 

 

 

 

 

 


 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Accrual for staff vacations

 

 

12,099

 

 

13,452

 

Plant maintenance accrual

 

 

8,105

 

 

 

Standby letters of credit

 

 

572

 

 

814

 

Staff severance indemnities

 

 

1,877

 

 

2,463

 

Selling and other transportation costs provisions

 

 

4,158

 

 

3,660

 

Electrical expense provision

 

 

7,981

 

 

2,611

 

Staff salary and benefits

 

 

2,330

 

 

2,356

 

Forestry activity expenses

 

 

1,044

 

 

2,187

 

Pending monthly provisional payments

 

 

8,190

 

 

7,597

 

Chlorate Plant provision

 

 

1,779

 

 

 

Services and fees provision

 

 

1,662

 

 

2,095

 

Provision for trials

 

 

 

 

3,326

 

Technical assistance provision

 

 

1,081

 

 

398

 

Other current liabilities

 

 

5,061

 

 

3,623

 


Total accrued liabilities

 

 

55,939

 

 

44,582

 



 

 

(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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Balance at beginning of period

 

 

24,080

 

 

30,362

 

Provision during the period

 

 

3,014

 

 

914

 

Payments during the period

 

 

(543

)

 

(830

)


Balance as of period-end

 

 

26,551

 

 

30,446

 



 

 

 

 

 

 

 

 


 

 

As of September30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Shown in the balance sheet as:

 

 

 

 

 

 

 

Current

 

 

1,877

 

 

2,463

 

Long-term

 

 

24,674

 

 

27,983

 


Total

 

 

26,551

 

 

30,446

 


32


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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 September 30,
2007

 

As of September 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

 

 

862

 

 

 

 

571

 

Citigroup (Revolving Facility) (3)

 

 

U.S.$

 

 

160,000

 

 

84,442

 

 

 

 

160,839

 

Santander Overseas Bank Inc. (4)

 

 

U.S.$

 

 

7,200

 

 

2,541

 

 

4,800

 

 

2,493

 

BBVA New York (5)

 

 

U.S.$

 

 

 

 

 

 

240,000

 

 

3,202

 

Banco Alfa

 

 

R$

 

 

131

 

 

113

 

 

18

 

 

109

 

Banco Safra

 

 

R$

 

 

84

 

 

132

 

 

 

 

82

 

Banco Bradesco

 

 

R$

 

 

 

 

 

 

 

 

775

 

Banco Sampo

 

 

U.S.$

 

 

4,910

 

 

3,447

 

 

1,637

 

 

3,342

 

Banco ABN

 

 

U.S.$

 

 

485

 

 

1,015

 

 

 

 

494

 

International Finance Corporation

 

 

U.S.$

 

 

5,000

 

 

210

 

 

 

 

 

Banco Do Brasil

 

 

R$

 

 

 

 

2,895

 

 

 

 

1,035

 


















Total long-term bank borrowings

 

 

 

 

 

178,088

 

 

95,657

 

 

246,455

 

 

172,942

 



















 

 

 

The weighted average interest rates for long-term foreign currency-denominated debt for the periods ended September 30, 2007 and 2008 were 5.63% and 4.21%, 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 September 30, 2007 and 2008 was 5.13% 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.

33


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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 September 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 September 30, 2008, the maturities of long-term bank borrowings payable were as follows:


 

 

 

 





Year

 

ThU.S.$




2009

 

1,655

 

2010

 

4,800

 

2011

 

24,000

 

2012

 

48,000

 

2013

 

48,000

 

2014 and thereafter

 

120,000

 





Total

 

246,455

 






 

 

 

 

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.

34


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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.$106,861 thousand and U.S.$103,414 thousand for the periods ended September 30, 2007 and 2008, respectively. Furthermore, Arauco established provisions for U.S.$138 thousand as of September 30, 2007 and U.S.$110 thousand as of September 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 September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 







Income tax

 

 

(106,861

)

 

(103,414

)

Adjustment to prior year’s tax expense

 

 

12

 

 

3,113

 

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

 

 

(138

)

 

(110

)

Deferred income tax

 

 

(34,149

)

 

(28,336

)

Tributary benefit for tributary losses

 

 

 

 

7,049

 

Amortization of complementary accounts

 

 

(333

)

 

(213

)

Other charges and credits to the account

 

 

1,468

 

 

966

 









Total Income Tax

 

 

(140,001

)

 

(120,945

)










 

 

(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 September 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

 












35


 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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 September 30, 2007 and 2008 Arauco recorded accumulated deferred taxes arising from temporary differences as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of September 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

 

 

3,175

 

 

276

 

 

 

 

 

Deferred revenues

 

 

69

 

 

68

 

 

 

 

 

Accrual for staff vacations

 

 

1,764

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

10,586

 

 

 

Value difference and property, plant and equipment depreciation

 

 

 

 

 

 

482

 

 

189,456

 

Capitalized expenses

 

 

 

 

 

 

7,925

 

 

21,205

 

Obsolescence reserve

 

 

617

 

 

 

 

 

 

 

Debt issue and project expenses

 

 

 

 

 

 

 

 

4,515

 

Staff severance indemnities

 

 

3,182

 

 

1,299

 

 

 

 

 

Tax loss carry-forwards

 

 

2,719

 

 

31,416

 

 

 

 

 

Property, plant and equipment valuation

 

 

 

 

560

 

 

 

 

11,215

 

Accrual for contingencies

 

 

579

 

 

1,370

 

 

 

 

 

Other

 

 

5,010

 

 

1,087

 

 

717

 

 

1,539

 

Plant maintenance accrual

 

 

682

 

 

 

 

 

 

 

Leasing assets

 

 

130

 

 

864

 

 

1,065

 

 

728

 

Sales provision

 

 

2,783

 

 

 

 

 

 

 

Inventories value

 

 

993

 

 

223

 

 

 

 

 















Total

 

 

21,703

 

 

37,163

 

 

20,775

 

 

228,658

 















Complementary accounts, net of accumulated amortization (1)

 

 

(2,719

)

 

(38

)

 

 

 

(6,479

)

Valuation provision

 

 

 

 

 

 

 

 

 















Total

 

 

18,984

 

 

37,125

 

 

20,775

 

 

222,179

 















36


 

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

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

 



 

 

15.

INCOME TAXES, continued

 

 

(c)

Deferred taxation, continued


 

 

 

 

 

 

 

 

 

 

 

 

 

 















 

 

As of September 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

 

 

3,932

 

 

330

 

 

 

 

 

Deferred revenues

 

 

271

 

 

53

 

 

 

 

 

Accrual for staff vacations

 

 

1,859

 

 

 

 

 

 

 

Production costs

 

 

 

 

 

 

15,003

 

 

 

Capitalized expenses

 

 

 

 

 

 

11,523

 

 

22,250

 

Value difference and property, plant and equipment depreciation

 

 

 

 

 

 

462

 

 

216,543

 

Staff severance indemnities

 

 

3,728

 

 

1,622

 

 

 

 

 

Debt issue and project expenses

 

 

 

 

 

 

 

 

3,570

 

Obsolescence reserve

 

 

2,040

 

 

83

 

 

 

 

 

Accrual for contingencies

 

 

1,165

 

 

1,404

 

 

 

 

 

Tax loss carry-forwards

 

 

2,807

 

 

32,509

 

 

 

 

 

Property, plant and equipment valuation

 

 

 

 

561

 

 

 

 

26,776

 

Other

 

 

7,510

 

 

529

 

 

688

 

 

2,123

 

Plant maintenance accrual

 

 

 

 

 

 

643

 

 

 

Leasing assets

 

 

342

 

 

836

 

 

1,305

 

 

2,450

 

Sales provision

 

 

5,587

 

 

 

 

 

 

 

Inventory value

 

 

35

 

 

 

 

 

 

 















Total

 

 

29,276

 

 

37,927

 

 

29,624

 

 

273,172

 















Complementary accounts, net of accumulated amortization (1)

 

 

(2,719

)

 

(18

)

 

 

 

(6,108

)

Valuation provision

 

 

 

 

 

 

 

 

 















Total

 

 

26,557

 

 

37,909

 

 

29,624

 

 

267,604

 
















 

 

 

(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.$83 thousand during the period ending September 30, 2007 and received forestry grants of U.S.$97 thousand during the period ending September 30, 2008.

37


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and banks

 

U.S.$

 

10,998

 

22,556

 

Cash and banks

 

Ch$

 

5,004

 

2,931

 

Cash and banks

 

Ar$

 

7,018

 

5,227

 

Cash and banks

 

R$

 

288

 

231

 

Cash and banks

 

Euro

 

4,779

 

4,800

 

Cash and banks

 

Mx$

 

1,035

 

1,149

 

Cash and banks

 

Other currencies

 

2,056

 

1,386

 

Time deposits and marketable securities

 

U.S.$

 

144,173

 

95,548

 

Time deposits and marketable securities

 

Ch$

 

2,450

 

63

 

Time deposits and marketable securities

 

R$

 

11,383

 

72,314

 

Time deposits and marketable securities

 

Euro

 

57,753

 

22,629

 

Time deposits and marketable securities

 

Ar$

 

6

 

25

 

Trade accounts receivable

 

U.S.$

 

444,080

 

524,402

 

Trade accounts receivable

 

Ch$

 

43,423

 

57,142

 

Trade accounts receivable

 

Ar$

 

11,735

 

12,129

 

Trade accounts receivable

 

R$

 

30,025

 

29,265

 

Trade accounts receivable

 

Euro

 

10,871

 

11,207

 

Trade accounts receivable

 

Mx$

 

6,907

 

3,796

 

Trade accounts receivable

 

Other currencies

 

4,070

 

6,581

 

Other accounts receivable

 

U.S.$

 

18,770

 

18,389

 

Other accounts receivable

 

Ch$

 

44,096

 

34,406

 

Other accounts receivable

 

Ar$

 

17,914

 

14,554

 

Other accounts receivable

 

R$

 

1,723

 

3,308

 

Other accounts receivable

 

Euro

 

13,217

 

723

 

Other accounts receivable

 

Mx$

 

1,499

 

1,880

 

Other accounts receivable

 

Other currencies

 

315

 

229

 

Inventories

 

U.S.$

 

625,638

 

830,517

 

Inventories

 

Ch$

 

54,087

 

19,126

 

Other current assets

 

U.S.$

 

73,457

 

148,849

 

Other current assets

 

Ch$

 

135,995

 

126,390

 

Other current assets

 

Ar$

 

16,247

 

10,936

 

Other current assets

 

R$

 

4,151

 

9,689

 

Other current assets

 

Mx$

 

1,956

 

7,679

 

Other current assets

 

Euro

 

119

 

 

Other current assets

 

Other currencies

 

740

 

1,683

 









Total current assets

 

 

 

1,807,978

 

2,101,739

 









38


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

17.

ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY, continued


 

 

 

 

 

 

 

 









 

 

 

 

At September 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Property, plant and equipment and other assets:

 

 

 

 

 

 

 

Property, plant and equipment

 

U.S.$

 

6,078,093

 

6,540,858

 

Property, plant and equipment

 

Ch$

 

23,092

 

18,153

 

Other assets

 

U.S.$

 

64,911

 

79,610

 

Other assets

 

Ch$

 

12,169

 

9,208

 

Other assets

 

Ar$

 

19,711

 

21,164

 

Other assets

 

R$

 

1,129

 

2,274

 

Other assets

 

Mx$

 

43

 

57

 

Other assets

 

Other currencies

 

 

263

 









Total property, plant and equipment and other assets

 

 

 

6,199,148

 

6,671,587

 









Total assets

 

 

 

8,007,126

 

8,773,326

 










 

 

 

 

 

 

 

 







 

 

 

 

At September 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Liabilities

 

 

 

 

 

 

 









Current liabilities:

 

 

 

 

 

 

 

Current bank borrowings

 

U.S.$

 

59,483

 

239,514

 

Current bank borrowings

 

Ch$

 

17

 

5

 

Current portion of long-term bank borrowings

 

U.S.$

 

92,517

 

170,941

 

Current portion of long-term bank borrowings

 

R$

 

3,140

 

2,001

 

Current portion of bonds

 

U.S.$

 

125,831

 

123,040

 

Notes and trade accounts payable

 

U.S.$

 

116,016

 

112,885

 

Notes and trade accounts payable

 

Ch$

 

106,674

 

100,673

 

Notes and trade accounts payable

 

Euro

 

11,710

 

11,920

 

Notes and trade accounts payable

 

Mx$

 

2,258

 

1,372

 

Notes and trade accounts payable

 

Other currencies

 

150

 

2,643

 

Notes and trade accounts payable

 

R$

 

52

 

2,669

 

Notes and trade accounts payable

 

Ar$

 

8,589

 

12,775

 

Other current liabilities

 

U.S.$

 

17,453

 

7,825

 

Other current liabilities

 

Ch$

 

67,745

 

43,679

 

Other current liabilities

 

Euro

 

112

 

97

 

Other current liabilities

 

Other currencies

 

129

 

2

 

Other current liabilities

 

R$

 

26,949

 

41,679

 

Other current liabilities

 

Ar$

 

27,886

 

8,374

 

Other current liabilities

 

Mx$

 

1,709

 

7,793

 









Total current liabilities

 

 

 

668,420

 

889,887

 









39


 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

17.

ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY, continued


 

 

 

 

 

 

 

 







 

 

 

 

At September 30,

 

 

 

Currency

 

2007
ThU.S.$

 

2008
ThU.S.$

 









Long-term liabilities:

 

 

 

 

 

 

 

Long-term bank borrowings

 

U.S.$

 

177,873

 

246,455

 

Long-term bank borrowings

 

R$

 

215

 

 

Bonds

 

U.S.$

 

1,852,500

 

1,722,500

 

Other long-term liabilities

 

U.S.$

 

25,311

 

46,703

 

Other long-term liabilities

 

Ch$

 

160,198

 

170,419

 

Other long-term liabilities

 

Other currencies

 

4

 

6

 

Other long-term liabilities

 

R$

 

53,973

 

58,428

 

Other long-term liabilities

 

Ar$

 

24,825

 

30,047

 









Total long-term liabilities

 

 

 

2,294,899

 

2,274,558

 









Total liabilities

 

 

 

2,963,319

 

3,164,445

 










 

 

18.

BALANCES AND TRANSACTIONS WITH RELATED PARTIES


 

 

 

 

 

 

 

 

 

 









 

 

 

 

As of September 30,

 

 

 

Company

 

Relationship

 

2007
ThU.S.$

 

2008
ThU.S.$

 

Transaction

 











(a) Current assets

 

 

 

 

 

 

 

 

 

Eka Chile S.A.

 

Affiliate

 

3,510

 

311

 

Accounts receivable

 

CMPC Maderas S.A.

 

Indirect

 

24

 

31

 

Accounts receivable

 

Dynea S.A.

 

Indirect

 

85

 

2,412

 

Accounts receivable

 

Stora Enso Arapoti Industria de Papel S.A.

 

Affiliate

 

 

2,806

 

Accounts receivable

 

Forestal Mininco S.A.

 

Indirect

 

 

840

 

Accounts receivable

 

Fundación Educacional Arauco

 

Affiliate

 

142

 

784

 

 

 











Total current assets

 

 

 

3,761

 

7,184

 

 

 











(b) Current liabilities

 

 

 

 

 

 

 

 

 

Compañía de Petróleos de Chile Copec S.A.

 

Affiliate of Shareholder

 

3,848

 

8,670

 

Accounts payable

 

Puerto de Lirquén S.A.

 

Affiliate

 

263

 

935

 

Accounts payable

 

Edipac S.A.

 

Indirect

 

3

 

 

Accounts payable

 

Abastible S.A.

 

Indirect

 

202

 

305

 

Accounts payable

 

Servicios Corporativos Sercor S.A.

 

Indirect

 

7

 

2

 

Accounts payable

 

Sigma S.A.

 

Indirect

 

3

 

 

Accounts payable

 

Cía. Puerto de Coronel S.A.

 

Affiliate

 

562

 

284

 

Accounts payable

 

Cía. Sudamericana de Vapores S.A.

 

Indirect

 

488

 

835

 

Accounts payable

 

Entel S.A.

 

Indirect

 

16

 

17

 

Accounts payable

 

Depósitos Portuarios Lirquén S.A.

 

Indirect

 

1

 

4

 

Accounts payable

 

Forestal del Sur S.A.

 

Indirect

 

 

14

 

Accounts payable

 

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

 

Indirect

 

1

 

 

Accounts payable

 

Codelco Chile

 

Indirect

 

1

 

 

Accounts payable

 

Sodimac S.A.

 

Indirect

 

 

5

 

Accounts payable

 











Total current liabilities

 

 

 

5,394

 

11,071

 

 

 











40


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

 

 


 

 

18.

BALANCES AND TRANSACTIONS WITH RELATED PARTIES, continued

 

 

 

During the periods ended September 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 September 30,

 

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


(a)

Compañía de Petróleos de Chile Copec S.A.:

 

 

 

 

 

 

 

 

Purchases of fuel

 

 

57,969

 

 

99,419

 

(b)

Puerto de Lirquén S.A.:

 

 

 

 

 

 

 

 

Port services

 

 

5,687

 

 

6,878

 

(c)

Abastible S.A.:

 

 

 

 

 

 

 

 

Purchases of fuel

 

 

2,650

 

 

3,230

 

(d)

Cía. Puerto de Coronel S.A:

 

 

 

 

 

 

 

 

Stockpiling services

 

 

4,097

 

 

2,429

 

(e)

Portaluppi, Guzmán y Bezanilla Abogados:

 

 

 

 

 

 

 

 

Legal advice

 

 

920

 

 

1,134

 

(f)

Eka Chile S.A.:

 

 

 

 

 

 

 

 

Purchase of sodium chlorate

 

 

34,654

 

 

80,145

 

 

Electricity sale

 

 

(18,784

)

 

(3,553

)

(g)

Forestal del Sur S.A.:

 

 

 

 

 

 

 

 

Purchase of wood and timber

 

 

1,396

 

 

1,434

 

 

Sales of chips

 

 

(2,698

)

 

(53,482

)

(h)

CMPC Celulosa S.A.:

 

 

 

 

 

 

 

 

Sales timber

 

 

(701

)

 

(368

)

(i)

Cía. Sud Americana de Vapores S.A.:

 

 

 

 

 

 

 

 

Freight services

 

 

7,355

 

 

6,464

 

(j)

CMPC Maderas S.A.:

 

 

 

 

 

 

 

 

Purchase timber

 

 

712

 

 

160

 

(k)

Dynea Brasil S.A.:

 

 

 

 

 

 

 

 

Purchase of chemical products

 

 

21,458

 

 

31,788

 

 

Purchase of melamine paper

 

 

11,930

 

 

15,852

 

 

Services

 

 

(309

)

 

(456

)

 

Other sales

 

 

(359

)

 

(421

)

(l)

Sodimac S.A.:

 

 

 

 

 

 

 

 

Sales timber

 

 

(40,046

)

 

(46,951

)

(m)

Codelco Chile S.A.:

 

 

 

 

 

 

 

 

Purchase of materials

 

 

168

 

 

1,292

 

(n)

Colbún S.A.:

 

 

 

 

 

 

 

 

Electricity sale

 

 

(11,644

)

 

(4,080

)

(o)

Entel S.A.:

 

 

 

 

 

 

 

 

Telephone services

 

 

426

 

 

583

 

(p)

Stora Enso Arapoti Industria de Papel:

 

 

 

 

 

 

 

 

Sales timber

 

 

 

 

(7,445

)

(q)

Empresas Copec S.A.:

 

 

 

 

 

 

 

 

Managing services

 

 

173

 

 

215

 

(r)

Cenelca S.A.:

 

 

 

 

 

 

 

 

Purchase of electricity

 

 

246

 

 

 

(s)

Copec Móbil Ltda.:

 

 

 

 

 

 

 

 

Oil purchase

 

 

404

 

 

 










41


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

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

 

 


 

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.$59,718 at September 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.

42


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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.$66 thousand as of September 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.

 

 

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.$53 thousand as of September 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.$66 thousand as of September 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.$93 thousand as of September 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.

43


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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.$159 thousand at September 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.$318 thousand at September 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.

 

 

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.

44


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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.$66 thousand at September 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 September 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.

45


 

 

CELULOSA ARAUCO Y CONSTITUCION S.A.
AND SUBSIDIARIES
Unaudited Notes to the Consolidated Financial Statements
September 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 investigation is being handled by the Prosecutor’s Office of Quirihue, which, on July 11, 2008 requested the dismissal of the case, which was granted by the Court of Guarantees of Coelemu on July 26, 2008. The decision has been executed.

 

 

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 investigation was carried out by the Prosecutor’s Office of Quirihue, which, on September 12, 2008 requested the dismissal of the case, which was awarded by the Court of Guarantees of Quirihue on October 20, 2008. The decision has not yet been executed.

 

 

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 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 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 2) above.

46



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 2) above.

 

 

 

Once the Company was notified, it challenged the complaint on the basis of a lack of jurisdiction and answered the complaint by requesting its dismissal for failure to state a claim. The matter is currently proceeding.

 

 

11)

On October 16, 2008 the Regional Secretary of the Ministry of Health, Office of Ñuble, initiated a sanitary proceeding relating to a Company worker who was stripping a truck that belonged to a subcontractor of the Company. The representative of Celulosa Arauco y Constitución S.A. was summoned to appear before the relevant authorities on October 20, 2008, the date on which they presented the corresponding charges.

 

 

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)

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.

47



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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.

 

 

2)

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$66 thousand at September 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).

 

 

3)

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 September 30, 2008) for not following the applicable emission norms and with a fine of 1,000 UTA (US$796 thousand as of September 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.

 

 

4)

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.

 

 

5)

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.

 

 

6)

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

48



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

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.

 

 

7)

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. On October 13, 2008, the Superintendence of Sanitary Services resolved to void the sanction proceeding and closed the related administrative file.

 

 

8)

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$61,456 thousand (U.S.$111 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$53,289 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,

49



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 30, 2008

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

 



 

 

19.

CONTINGENCIES AND COMMITMENTS, continued

 

 

 

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 September 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.

 

 

 

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 September 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.

50



 

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statements

September 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 September 30, 2007 and 2008 are as follows:


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















September 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

 

 

 

 

 

 

(133,611

)

 

 

 

 

 

 

 

(133,611

)

Forestry reserve of consolidated subsidiaries

 

 

 

 

 

 

(1,316

)

 

 

 

 

 

 

 

(1,316

)

Conversion adjustment related to subsidiaries

 

 

 

 

 

 

6,398

 

 

 

 

 

 

 

 

6,398

 

Adjustment of previous year related to subsidiaries

 

 

 

 

 

 

 

 

(22,241

)

 

 

 

 

 

(22,241

)

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

521,437

 

 

521,437

 
























Balance as of September 30, 2007

 

 

347,551

 

 

5,625

 

 

1,503,207

 

 

2,653,979

 

 

 

 

521,437

 

 

5,031,799

 

























 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















September 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

 

 

 

 

(214,885

)

Forestry reserve

 

 

 

 

 

 

(135,369

)

 

 

 

 

 

 

 

(135,369

)

Forestry reserve of consolidated subsidiaries

 

 

 

 

 

 

(1,684

)

 

 

 

 

 

 

 

(1,684

)

Conversion adjustment related to subsidiaries

 

 

 

 

 

 

(3,038

)

 

 

 

 

 

 

 

(3,038

)

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

 

484,688

 

 

484,688

 
























Balance as of September 30, 2008

 

 

347,551

 

 

5,625

 

 

1,680,335

 

 

3,025,310

 

 

 

 

484,688

 

 

5,543,509

 

























 

 

 

The number of shares authorized, issued and outstanding as of September 30, 2007 and 2008 was 113,152,446. The Company’s shares are of a single series without a fixed nominal value.

51


 

 

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

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Indemnity for forests acquired

 

 

2,556

 

 

 

Reimbursement of customs duties

 

 

3,905

 

 

4,416

 

Rental income

 

 

935

 

 

1,498

 

Insurance recoveries

 

 

1,104

 

 

8,039

 

Sale of materials and others

 

 

91

 

 

1,059

 

Utility other sales

 

 

653

 

 

692

 

Income for sales of carbon bond

 

 

9,132

 

 

 

Other income

 

 

3,041

 

 

5,522

 









Total other non-operating income

 

 

21,417

 

 

21,226

 










 

 

22.

OTHER NON-OPERATING EXPENSES

 

 

 

Other non-operating expenses were as follows:


 

 

 

 

 

 

 

 


 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Other depreciation and amortization

 

 

525

 

 

907

 

Write-off of damaged forest

 

 

2,452

 

 

1,052

 

Donations

 

 

253

 

 

6

 

Project expenses

 

 

1,826

 

 

765

 

Provision for uncollectible accounts receivable

 

 

598

 

 

5,361

 

Legal expenses

 

 

739

 

 

1,901

 

Taxes

 

 

2,946

 

 

1,184

 

Services and honoraries

 

 

926

 

 

948

 

Fine, readjustment and interests

 

 

315

 

 

84

 

Indemnities

 

 

222

 

 

550

 

Sales expenses adjustment for previous year

 

 

2,076

 

 

697

 

Mill stoppage

 

 

 

 

2,558

 

Other expenses

 

 

5,601

 

 

5,357

 

Write-off of inventory

 

 

 

 

450

 









Total other non-operating expenses

 

 

18,479

 

 

21,820

 









52


 

 

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

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

 

 


 

23.

MINORITY INTEREST

 

 

 

The equity value corresponding to the minority shareholders’ interest in the Company’s subsidiaries was as follows:


 

 

 

 

 

 

 

 


 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Alto Paraná S.A.

 

 

129

 

 

132

 

Forestal Arauco S.A.

 

 

1,815

 

 

1,892

 

Forestal Cholguán S.A.

 

 

5,085

 

 

5,347

 

Controladora de Plagas Forestales S.A.

 

 

220

 

 

191

 

Forestal Los Lagos S.A.

 

 

4,759

 

 

5,616

 

Arauco Florestal Arapoti S.A.

 

 

 

 

52,194

 









Total

 

 

12,008

 

 

65,372

 










 

 

 

Income corresponding to the minority shareholders’ interest in the Company’s subsidiaries was as follows:


 

 

 

 

 

 

 

 


 

 

As of September 30,

 

 

 

2007
ThU.S.$

 

2008
ThU.S.$

 


Alto Paraná S.A.

 

 

(8

)

 

4

 

Forestal Arauco S.A.

 

 

(30

)

 

8

 

Forestal Cholguán S.A.

 

 

(115

)

 

(80

)

Controladora de Plagas Forestales S.A.

 

 

(18

)

 

 

Forestal Los Lagos S.A.

 

 

117

 

 

49

 

Flooring S.A.

 

 

339

 

 

 

Arauco Florestal Arapoti S.A.

 

 

 

 

(1,524

)


Total

 

 

285

 

 

(1,543

)


53


 

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

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

 



 

 

24.

SANCTIONS

 

 

 

From the Chilean Securities Commission

 

 

 

 

 

During the periods ended September 30, 2007 and 2008, neither the Company nor any of its Directors or Executives has received sanctions from the Chilean Securities Commission.

 

 

 

From other administrative authorities

 

 

1)

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

 

 

2)

According to the Inspection Act of June 11 2007, the Sanitary Authority requested a representative of the Nueva Aldea Plant of the Company with the purpose of presenting the files referring to an alleged event of odors that occurred on t