6-K 1 d6k.htm FORM 6-K Form 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 


 

Report of Foreign Private Issuer

 

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

of the Securities Exchange Act of 1934

 

For the month of May, 2003

 

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  ¨

 

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):         

 

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):         

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes  ¨    No  x

 

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

 



CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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 the 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 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 March 31, 2002 and 2003 are as follows:

 

    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Assets

         

Current assets

  

1,073,771

  

1,195,514

Net fixed assets

  

3,758,728

  

3,920,382

Other assets

  

44,476

  

85,257

    
  

Total assets

  

4,876,975

  

5,201,153

    
  
    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Liabilities and Shareholders Equity

         

Current liabilities

  

166,999

  

264,335

Long-term liabilities

  

1,619,480

  

1,657,174

Minority interest

  

6,185

  

6,149

Shareholders’ equity

  

3,084,311

  

3,273,495

    
  

Total liabilities

  

4,876,975

  

5,201,153

    
  

 

1


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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

 

 

Total assets increased by 6.6%, or U.S.$ 324 million, from March 31, 2002 to March 31, 2003. This increase is mainly attributable to a U.S.$ 74 million increase in time deposits, a U.S.$ 42 million increase in inventories, a U.S.$ 54 million increase in other current assets, a U.S.$ 162 million increase in property, plant and equipment and U.S.$ 16 in deferred taxes, partially offset by decreases of U.S.$ 76 million in marketable securities.

 

Total liabilities increased by U.S.$ 135 million from March 31, 2002 to March 31, 2003. This increase is mainly attributable to a U.S.$ 122 million net increase in bank borrowings.

 

The main financial and operating ratios are as follows:

 

Liquidity ratios


  

3/31/2002


  

12/31/2002


  

3/31/2003


Current ratio

  

6.43

  

3.62

  

4.52

Acid ratio

  

4.24

  

2.33

  

2.98

 

The decrease in the current and acid ratios from 2002 to 2003 is primarily attributable to an increase in moving bank borrowings and bonds in the amount of U.S.$ 91 million.

 

Debt indicators


  

03/31/2002


  

12/31/2002


  

03/31/2003


Debt to equity ratio

  

0.58

  

0.57

  

0.59

Short-term debt to total debt

  

0.09

  

0.17

  

0.14

Long-term debt to total debt

  

0.91

  

0.83

  

0.86

Financial expenses covered

  

1.76

  

3.77

  

5.92

 

The debt ratio is similar for the period in both 2002 and 2003.

 

Current liabilities went from 9% of total liabilities at the end of 2002 to 14% of total liabilities at March 31, 2003, due to the movement of obligations from being long-term to being short-term.

 

The ratio of financial expenses covered increased 4.16 points from the same period in 2002. The increase is primarily attributable to a U.S.$ 5 million decrease in financial expenses and a U.S.$ 81 million increase in net income from March 31, 2002 to March 31, 2003.

 

Operational ratios


  

03/31/2002


  

12/31/2002


  

03/31/2003


Inventory turnover

  

0.39

  

1.59

  

0.38

Inventory permanence (days)

  

231.11

  

226.37

  

234.46

 

2


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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

 

 

b)   Analysis of the Income Statement

 

The breakdown of operating income and costs is as follows:

 

Operating income


  

2002


  

2003


  

2002


  

2003


    

ThU.S.$

  

ThU.S.$

  

%

  

%

Export sales

                   

Pulp

  

135,847

  

153,478

  

50.42

  

47.14

Sawn timber and cut wood

  

58,368

  

68,798

  

21.66

  

21.13

Plywood and fiber panels

  

27,522

  

49,607

  

10.22

  

15.24

Forestry products

  

4,012

  

2,044

  

1.49

  

0.64

    
  
  
  

Total export sales

  

225,749

  

273,927

  

83.79

  

84.15

    
  
  
  

Pulp

  

5,906

  

11,184

  

2.19

  

3.43

Sawn timber and cut wood

  

12,967

  

19,771

  

4.82

  

6.07

Forestry products

  

7,808

  

5,347

  

2.9

  

1.64

Plywood and fiber panels

  

12,945

  

13,811

  

4.8

  

4.24

Other

  

4,047

  

1,539

  

1.5

  

0.47

    
  
  
  

Total domestic sales

  

43,673

  

51,652

  

16.21

  

15.85

    
  
  
  

Total operating income

  

269,422

  

325,579

  

100.00

  

100.00

    
  
  
  

Operating costs


  

2002


  

2003


  

2002


  

2003


    

ThU.S.$

  

ThU.S.$

  

%

  

%

Timber

  

38,603

  

32,710

  

27.06

  

21.88

Forestry work

  

28,139

  

31,134

  

19.72

  

20.82

Depreciation

  

23,855

  

25,124

  

16.72

  

16.80

Maintenance costs

  

10,281

  

11,879

  

7.21

  

7.94

Chemical products

  

12,012

  

14,933

  

8.42

  

9.99

Sawing services

  

15,234

  

17,090

  

10.68

  

11.43

Other raw materials and indirect costs

  

8,406

  

9,381

  

5.89

  

6.27

Energy and fuel costs

  

6,128

  

7,267

  

4.30

  

4.87

    
  
  
  

Total operating costs

  

142,658

  

149,518

  

100.00

  

100.00

    
  
  
  

 

3


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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

 

 

Analysis of Operating Income

 

Operating income includes net income of U.S.$ 115 million compared to U.S.$ 42 million in 2002, an increase of U.S.$ 73 million. The increase is primarily due to a U.S.$ 49 million increase in the gross margin.

 

Analysis of Non-Operating Income (Loss)

 

There was a non-operating loss of U.S.$ 2 million during 2003, compared to a non-operating loss of U.S.$ 57 million in 2002. The change was primarily caused by the foreign currency exchange rate loss, which changed from a loss of U.S.$ 31 million in 2002, largely due to the impact of the devaluation of the Argentine peso in 2002, to income of U.S.$ 17 million in 2003.

 

Profitability ratios


  

03/31/2002


  

12/31/2002


  

03/31/2003


Equity yield

  

0.59

  

8.77

  

3.11

Asset performance ratio

  

0.38

  

5.55

  

1.96

Operating asset ratio

  

1.54

  

7.89

  

2.32

Income per share (U.S.$)

  

0.16

  

2.45

  

0.87

EBITDA (*)

  

71,359

  

436,901

  

164,120

Income after tax (ThU.S.$)

  

13,481

  

257,990

  

97,288


(*)   Income before income tax, interest, depreciation, amortization and extraordinary items.

 

4


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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

 

 

3.   MARKET SITUATION

 

a) Pulp

 

There was a significant increase in the price of pulp during the first quarter of 2003, due to a raw material supply problem that affected North American producers.

 

Despite this price increase, paper producers increased their demand for pulp in order to restore their inventories, which had been depleted due to the lower price of their product in the second half of 2002.

 

The weakness of the U.S. dollar in relation to other currencies allowed the market to demand a higher price for pulp, which is mainly quoted in United States dollars.

 

Arauco’s competitors in the production of pulp are primarily found in Brazil, Canada, the United States and the Scandinavian countries.

 

Arauco’s percentage share of the global fiber bleached pulp market has historically been approximately 6%. During the first quarter of 2003, there was no increase in installed capacity.

 

b) Plywood

 

The closing of some plywood mills in the United States caused the plywood market to improve, although prices have continued to decrease. They are expected to recover by the second quarter of 2003. The Mexican market is quite contracted, particularly due to variations in the exchange rate and a safeguard Mexico is considering to protect their domestic plywood producers against Chilean plywood products.

 

Sales in the European market continued to be relatively good, but the activity in Asia has been affected by the Unites States’ slow activity and by the uncertainty generated by the situation in Iraq. There has been no change in prices. However, the demand for hard board mills continues to be high.

 

The local market continues to be depressed due to the introduction of Argentinean products with lower prices; however, the improvement of the Argentine peso should lead to lower volumes of exports to Chile in the second quarter.

 

5


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Ratio Analysis of the Consolidated Financial Statements

March 31, 2003

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

 

 

c) Remanufactured wood products

 

The United States had the lowest prices for wood during this quarter, due to excess supply throughout the United States. Latin America, except Chile, had better sales and prices as compared to March 2002. Mexico had a 42% increase in volume of sales. The war in Iraq did not significantly affect the Middle East market, where they experienced record sales volumes and good prices.

 

Activity in Asia was stronger than in the previous period, with a 29% increase in sales volume as compared to March 2002, although the impact of SARS could affect the market the rest of the year.

 

4.   ANALYSIS OF CASH FLOW

 

    

03/31/2002


    

12/31/2002


    

03/31/2003


 
    

ThCh$

    

ThU.S.$

    

ThU.S.$

 

Operating cash flow

  

50,086

 

  

433,652

 

  

72,268

 

Cash flow from financing activities

  

(38,962

)

  

(126,418

)

  

80,177

 

Cash flow from investment activities

  

(52,595

)

  

(379,969

)

  

(116,636

)

    

  

  

Net cash flow for the year

  

(41,471

)

  

(72,735

)

  

35,809

 

    

  

  

 

The increase in operating cash flows is largely due to an increase in collections from other income of U.S.$ 14 million and a decrease in payments to suppliers and staff of U.S.$ 16 million.

 

The net negative cash flows from financing activities in 2002 was largely due to loan payments. The net positive cash flow in 2003 is primarily due to a bank borrowing which was only partially offset by loan payments.

 

The variation in cash flows from investment activities is largely due to the impact of an increase in purchases of property, plant and equipment in 2003 as compared to 2002, due to the construction of Valdivia Mill Project.

 

5.   MARKET RISK ANALYSIS

 

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, as of January 1, 2002, the Company and its subsidiaries Aserraderos Arauco S.A. and Paneles Arauco S.A. 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.

 

6


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Consolidated Balance Sheets

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

 

 

    

At March 31,


 

ASSETS


  

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

CURRENT ASSETS :

             

Cash

  

14,030

 

  

9,778

 

Time deposits

  

4,395

 

  

77,976

 

Marketable securities (note 3)

  

380,809

 

  

304,227

 

Trade accounts receivable (note 4)

  

207,004

 

  

204,487

 

Notes receivable

  

5,649

 

  

4,164

 

Other receivables

  

23,050

 

  

43,183

 

Notes and accounts receivable from related parties (note 18)

  

1,101

 

  

991

 

Inventories (note 5)

  

344,066

 

  

386,243

 

Recoverable taxes

  

34,361

 

  

28,481

 

Prepaid expenses

  

22,017

 

  

20,850

 

Deferred tax assets (note 15)

  

4,601

 

  

27,717

 

Other current assets

  

32,688

 

  

87,417

 

    

  

Total current assets

  

1,073,771

 

  

1,195,514

 

    

  

PROPERTY, PLANT AND EQUIPMENT: (note 6)

             

Land

  

365,711

 

  

355,932

 

Forests

  

1,919,923

 

  

1,833,294

 

Buildings and other infrastructure

  

1,345,684

 

  

1,369,616

 

Machinery and equipment

  

1,381,677

 

  

1,405,698

 

Other

  

247,507

 

  

556,786

 

Technical revaluation

  

68,866

 

  

68,769

 

Less: Accumulated depreciation

  

(1,570,640

)

  

(1,669,713

)

    

  

Net property, plant and equipment

  

3,758,728

 

  

3,920,382

 

    

  

OTHER NON-CURRENT ASSETS:

             

Investments in related companies (note 7)

  

18,474

 

  

37,691

 

Investments in other companies

  

143

 

  

135

 

Goodwill (note 8)

  

4,021

 

  

15,011

 

Negative goodwill (note 8)

  

(27,939

)

  

(10,826

)

Long-term receivables

  

5,378

 

  

3,900

 

Intangibles

  

523

 

  

995

 

Amortization

  

(142

)

  

(156

)

Other (note 9)

  

44,018

 

  

38,507

 

    

  

Total other non-current assets

  

44,476

 

  

85,257

 

    

  

Total assets

  

4,876,975

 

  

5,201,153

 

    

  

 

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

 

7


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Consolidated Balance Sheets

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

 

 

    

At March 31,


 

LIABILITIES AND SHAREHOLDERS’

EQUITY


  

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

CURRENT LIABILITIES:

             

Current bank borrowings (note 10)

  

71

 

  

56

 

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

  

39,978

 

  

10,539

 

Current portion of bonds (note 12)

  

13,824

 

  

90,536

 

Current portion of other long term liabilities

  

879

 

  

286

 

Dividends payable

  

1,679

 

  

1,296

 

Trade account payable

  

71,536

 

  

101,367

 

Notes payable

  

6

 

  

—  

 

Sundry accounts payable

  

12,202

 

  

8,968

 

Notes and accounts payable to related companies (note 18)

  

773

 

  

998

 

Accrued liabilities (note 13)

  

20,607

 

  

18,866

 

Withholding taxes

  

4,012

 

  

4,871

 

Income tax payable

  

—  

 

  

24,433

 

Deferred income

  

1,415

 

  

1,596

 

Other current liabilities

  

17

 

  

523

 

    

  

Total current liabilities

  

166,999

 

  

264,335

 

    

  

LONG-TERM LIABILITIES:

             

Long-term bank borrowings (note 14)

  

250,938

 

  

402,363

 

Bonds (note 12)

  

1,281,450

 

  

1,157,500

 

Notes payable

  

1

 

  

1

 

Sundry accounts payable

  

6,004

 

  

282

 

Accrued liabilities (note 13)

  

8,192

 

  

8,154

 

Deferred tax liabilities (note 15)

  

69,180

 

  

88,248

 

Other long-term liabilities

  

3,715

 

  

626

 

    

  

Total long-term liabilities

  

1,619,480

 

  

1,657,174

 

    

  

Minority interest (note 25)

  

6,185

 

  

6,149

 

    

  

SHAREHOLDERS’ EQUITY: (note 20)

             

Paid-up in capital

  

347,551

 

  

347,551

 

Share premium

  

5,625

 

  

5,625

 

Forestry and other reserves

  

1,420,008

 

  

1,323,071

 

Retained earnings

  

1,297,997

 

  

1,536,932

 

Net income for the period

  

18,487

 

  

98,998

 

Interim dividends

  

(5,357

)

  

(38,682

)

    

  

Total shareholders’ equity

  

3,084,311

 

  

3,273,495

 

    

  

Total liabilities and shareholders’ equity

  

4,876,975

 

  

5,201,153

 

    

  

 

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

 

8


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Consolidated Statements of Income

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

 

 

    

At March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

OPERATING INCOME:

             

Sales revenue (note 21)

  

269,422

 

  

325,579

 

Cost of sales (note 22)

  

(142,658

)

  

(149,518

)

Gross profit

  

126,764

 

  

176,061

 

Administration and selling expenses (note 22)

  

(53,333

)

  

(60,569

)

    

  

Operating income

  

73,431

 

  

115,492

 

    

  

NON-OPERATING INCOME:

             

Interest earned

  

6,494

 

  

5,223

 

Share of net income of related companies (note 7)

  

503

 

  

968

 

Other non-operating income (note 23)

  

1,687

 

  

1,945

 

Amortization of goodwill (note 8)

  

(285

)

  

(1,053

)

Interest expenses

  

(28,913

)

  

(23,366

)

Other non-operating expenses (note 24)

  

(4,474

)

  

(2,529

)

Price-level restatement (note 1)

  

(225

)

  

49

 

Foreign currency exchange rate (note 1)

  

(31,387

)

  

16,564

 

    

  

Non-operating loss

  

(56,600

)

  

(2,199

)

    

  

Income before taxes, minority interest and amortization of negative goodwill

  

16,831

 

  

113,293

 

Income taxes (note 15)

  

(3,350

)

  

(16,005

)

Income before minority interest and amortization of negative goodwill

  

13,481

 

  

97,288

 

Minority interest (note 18)

  

(47

)

  

(75

)

Income before amortization of negative goodwill

  

13,434

 

  

97,213

 

Amortization of negative goodwill (note 8)

  

5,053

 

  

1,785

 

    

  

Net income

  

18,487

 

  

98,998

 

    

  

 

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

 

9


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Statements of Consolidated Cash Flows

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

 

 

    

At March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

CASH FLOWS FROM OPERATING ACTIVITIES

             

Net income

  

18,487

 

  

98,998

 

Loss (Profit) on sale of assets

             

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

  

(32

)

  

95

 

Items affecting income not involving the movement of cash:

             

Depreciation

  

25,377

 

  

26,483

 

Amortization of intangibles

  

7

 

  

6

 

Write-offs and provisions

  

194

 

  

876

 

Profit from investments accounted for under the equity method

  

(507

)

  

(968

)

Loss from investments accounted for under the equity method

  

4

 

  

—  

 

Amortization of goodwill

  

285

 

  

1,053

 

Amortization of negative goodwill

  

(5,053

)

  

(1,785

)

Net price level restatement

  

225

 

  

(49

)

Foreign currency exchange rate

  

31,387

 

  

(16,564

)

Others

  

8,127

 

  

3,018

 

Decrease (Increase) in current assets:

             

Clients and debtors

  

(50,847

)

  

(113,136

)

Inventory

  

7,257

 

  

5,162

 

Other current assets

  

(20,334

)

  

22,220

 

Increase (Decrease) in current liabilities:

             

Suppliers and creditors

  

50,849

 

  

78,367

 

Interest payable

  

(15,080

)

  

(18,373

)

Provision for income taxes

  

4,235

 

  

10,301

 

Other current liabilities

  

(4,495

)

  

(23,436

)

    

  

Net cash flows from operating activities

  

50,086

 

  

72,268

 

    

  

 

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

 

10


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

Statements of Consolidated Cash Flows, continued

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

 

 

    

At March 31,


 
    

2002

 

  

2003

 

    

ThU.S.$

    

ThU.S.$

 

CASH FLOWS FROM FINANCING ACTIVITIES

             

Loans from financial institutions

  

118

 

  

151,416

 

Dividends paid

  

(2

)

  

—  

 

Loans paid

  

(37,623

)

  

(69,861

)

Repayments of bonds

  

(1,455

)

  

(1,378

)

    

  

Net cash flow from financing activities

  

(38,962

)

  

80,177

 

    

  

CASH FLOWS FROM INVESTING ACTIVITIES

             

Sales of property, plant and equipment

  

86

 

  

629

 

Sales of financial instruments

  

4

 

  

1,125

 

Purchase of property, plant and equipment

  

(52,712

)

  

(112,731

)

Permanent investments

  

—  

 

  

(28,500

)

Purchases of financial instruments

  

(1

)

  

(129

)

Other investments

  

28

 

  

22,970

 

    

  

Net cash flow from investment activities

  

(52,595

)

  

(116,636

)

    

  

Net cash flows from operating, investing and financing activities

  

(41,471

)

  

35,809

 

    

  

Effect of inflation

  

4,027

 

  

8,305

 

    

  

Net decrease in cash and cash equivalents

  

(37,444

)

  

44,114

 

Initial balance of cash and cash equivalents

  

439,147

 

  

399,426

 

    

  

FINAL BALANCE OF CASH AND CASH EQUIVALENTS

  

401,703

 

  

443,540

 

    

  

 

The accompanying notes 1 to 30 form an integral part of these consolidated financial statements.

 

11


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 (U.S.).

 

The consolidated financial statements as of March 31, 2002 and 2003 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

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(a)   Organization and basis of presentation, continued

 

    

Interest of the Company

as of March 31, 2003


    

Total

as of March 31, 2002


Subsidiary company


  

Direct


  

Indirect


  

Total


    

Total


    

%

  

%

  

%

    

%

Agenciamiento y Servicios Profesionales S.A. (Mexico)

  

—  

  

99.99

  

99.99

    

—  

Alto Paraná S.A. (Argentina)

  

—  

  

99.97

  

99.97

    

99.97

Arauco Denmark ApS (Denmark)

  

0.00

  

99.93

  

99.93

    

99.99

Arauco Do Brasil Ltda. (Brazil)

  

—  

  

99.99

  

99.99

    

—  

Arauco Ecuador S.A. (Ecuador)

  

0.10

  

99.89

  

99.99

    

99.90

Arauco Europe S.A. (Switzerland)

  

0.01

  

58.79

  

58.80

    

—  

Arauco Forest Products B.V.(The Netherlands)

  

—  

  

99.93

  

99.93

    

99.99

Arauco Generación S.A.

  

99.00

  

0.99

  

99.99

    

99.99

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

  

1.00

  

98.99

  

99.99

    

99.99

Arauco Internacional S.A. (previously Inversiones Cholguán S.A.)

  

98.03

  

1.96

  

99,99

    

99.92

Arauco Perú S.A. (previously—Cholguán Lima 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

Controladora de Plagas Forestales S.A.

  

—  

  

51.09

  

51.09

    

50.89

Distribuidora Centromaderas S.A.

  

—  

  

99.99

  

99.99

    

99.99

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

  

10.00

  

89.99

  

99.99

    

99.93

Forestal Arauco Guatemala S.A. (Guatemala)

  

0.15

  

99.84

  

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.

  

—  

  

97.31

  

97.31

    

97.28

Forestal Conosur S.A. (Uruguay)

  

—  

  

99.99

  

99.99

    

98.07

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)

  

—  

  

99.99

  

99.99

    

99.99

Inversiones Celco S.L. (Spain)

  

99.93

  

0.06

  

99.99

    

—  

Investigaciones Forestales Bioforest S.A.

  

1.00

  

98.93

  

99.93

    

99.93

Paneles Arauco S.A.

  

99.00

  

0.99

  

99.99

    

99.99

Servicios Logísticos Arauco S.A. (previously Portuaria Arauco S.A.)

  

45.00

  

54.96

  

99.96

    

99.96

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

  

0.00

  

99.61

  

99.61

    

—  

Trupán Argentina S.A. (Argentina)

  

—  

  

99.99

  

99.99

    

99.99

 

13


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 period presented in the consolidated financial statements;

 

  (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”); and

 

  (ii)   Changes in purchasing power

 

The effect of the changes in the purchasing power of the Chilean peso during each period presented in the consolidated financial statements (including 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 monetary assets and liabilities (other than UF—and foreign currency—denominated assets and liabilities) held by Arauco.

 

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

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(ii)   Changes in purchasing power, continued

 

The values of the CPI were as follows:

 

    

Index


    

Change from previous

March 31,


 

March 31, 2002

  

110.26

    

2.6

%

March 31, 2003

  

115.21

    

4.5

%

 

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

 

    

Index


    

Change from previous

February 28,


 

February 28, 2002

  

109.68

    

2.5

%

February 28, 2003

  

113.88

    

3.8

%

 

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 period the gain or loss in purchasing power arising from the holding of monetary assets and liabilities exposed to the effects of inflation.

 

15


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

  (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 indexations of the UF.

 

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

 

    

Ch$


March 31, 2002

  

16,197.66

March 31, 2003

  

16,783.60

 

  (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.

 

  (v)   Assets and liabilities denominated in foreign currency

 

Assets and liabilities denominated in foreign currency are detailed in note 17 and have been translated into U.S. dollar at the observed exchange rates, as reported by the Central Bank of Chile. The observed exchange rates for foreign currencies were as follows:

 

    

At March 31,


    

2002


  

2003


    

U.S.$ 1

  

U.S.$ 1

Chilean peso

  

655,90

  

731,56

Yen

  

132,57

  

118,10

Euro

  

1,14

  

0,91

GBP

  

0,70

  

0,63

Argentine peso

  

3,00

  

2,98

 

The differences arising in the valuations of assets and liabilities denominated in foreign currency 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 forward foreign exchange contracts and currency swaps are accounted for under the account headings “Interest and other financial expenses” and “Interest earned” in the year in which they arise. See note 1(n).

 

16


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 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:

 

      

Year ended March 31,


 
      

2002


      

2003


 
      

ThU.S.$

Credit (Charge)


      

ThU.S.$

Credit (Charge)


 

Assets, liabilities and equity restating by CPI

                 

Shareholders’ equity of subsidiaries in Chilean pesos

    

8,834

 

    

(127

)

Property, plant and equipment, net

    

(8,012

)

    

84

 

Inventories

    

(680

)

    

40

 

Other assets and liabilities, net

    

(377

)

    

60

 

      

    

Net effect on income

    

(235

)

    

57

 

      

    

Price-level restatement of income statement accounts

    

10

 

    

(8

)

      

    

Credit (charge) to income by CPI

    

(225

)

    

49

 

      

    

 

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

 

      

Year ended March 31,


 
      

2002


      

2003


 
      

ThU.S.$

Credit (Charge)


      

ThU.S.$

Credit (Charge)


 

Assets restating by foreign currency

                 

Trade accounts receivable

    

453

 

    

244

 

Inventories

    

9,496

 

    

(30

)

Other assets

    

(51,400

)

    

15,514

 

Liabilities restating by foreign currency

                 

Bank borrowings

    

142

 

    

57

 

Bonds

    

85

 

    

(5

)

Other liabilities

    

9,837

 

    

784

 

      

    

Net effect on income by foreign currency

    

(31,387

)

    

16,564

 

      

    

 

17


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

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

 

Time deposits are shown at cost plus price-level restatement and accrued interest.

 

Marketable securities are shown at the lower of cost plus accrued interest and price-level restatement, or market value.

 

Financial instruments purchased under agreements to resell are held at acquisition cost plus accrued interest and price-level restatement.

 

(e)   Inventories

 

Inventories of raw materials, spare parts and supplies have been stated at the latest purchase 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.

 

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.

 

(f)   Property, plant and equipment

 

  (i)   Property, plant and equipment, excluding forests

 

The property, plant and equipment of the Company, Aserraderos Arauco S.A. and Paneles Arauco S.A. are valued at cost. The property, plant and equipment of the other Chilean subsidiaries, excluding forests, are valued at cost plus price-level restatement. The carrying value of property, plant and equipment was adjusted in 1979 in accordance with the regulations of the Chilean Securities Commission. See note 6.

 

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

 

18


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(f)   Property, plant and equipment, continued

 

  (j)   Property, plant and equipment, excluding forests, continued

 

The estimated average remaining useful lives of the property, plant and equipment are as follows:

 

    

Years


Buildings and other infrastructure

  

44

Machinery and equipment

  

13

Other

  

2

Technical revaluation

  

11

 

  (i)   Property, plant and equipment, excluding forests, continued

 

Arauco generally capitalizes the interest costs associated with financing its work in progress. 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.

 

  (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. 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 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.

 

19


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 10% 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.

 

(h)   Income taxes

 

Arauco has made provisions at each period-end for income taxes currently payable in accordance with current tax regulations. A detail of provisions for income taxes is shown in note 15.

 

At March 31, 2003, deferred income taxes have been recognized at the end of each period for all temporary differences between the financial reporting and tax bases of assets and liabilities. Until December 31, 1999, Arauco recognized deferred income taxes in the same manner except for the tax loss carry forwards of certain subsidiaries.

 

(i)   Bonds

 

Bonds are shown at face value plus accrued interest and price-level restatement as of each period-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.

 

(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 8%.

 

(k)   Research and development expenses

 

The cost of research, project development and special studies are charged to income in the year 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.$ 496 thousand and U.S.$ 468 thousand for the periods ended March 31, 2002 and 2003, respectively.

 

20


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(l)   Negative goodwill on investments

 

Any excess of the book value 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.

 

(m)   Goodwill on investments

 

Any consideration paid to acquire a company in excess of its book value is accounted for as an increase of the consolidated assets in the balance sheet and is amortized over a five-year period.

 

(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.

 

(o)   Forward foreign exchange contracts and currency swaps

 

Arauco’s open forward foreign exchange contracts and currency swaps are revalued according to the current spot rate on a monthly basis. Losses are accounted for in the income statement, whereas gains are deferred and accounted for as liabilities. Such gains are realized as income when the underlying contract expires.

 

Initial discounts, premiums or commissions on these contracts are deferred and amortized over the lives of the underlying contracts.

 

(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 of 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 are recorded based on uncollectibility analyses 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.

 

21


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(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 at the time of shipment of products to the customer or upon performance of services.

 

(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.”

 

(x)   Translation of foreign subsidiaries

 

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 period-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 period.

 

22


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

(x)   Translation of foreign subsidiaries, continued

 

Until December 31, 2001 under B.T. No.64, the investment in the foreign subsidiary 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 years ended March 31, 2003 and 2002, 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.

 

The Company uses an exchange rate of 2.98 Argentine pesos per U.S. dollar in translating its assets and liabilities denominated in Argentine pesos into U.S. dollars, pursuant to Chilean Securities Commission instructions and in accordance with B.T. No. 64. The recognition resulted in an income of U.S.$ 8.0 million.

 

As of March 31, 2003 the Company’s investments in Argentina represented 12.9% of its consolidated assets, compared to 12.7% at March 31, 2002.

 

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 effect developments in other emerging markets including Chile. The Company’s financial statements include the financial effects of recent current Argentine developments in accordance with both Chilean Securities Commission instructions and Technical Bulletin guidelines.

 

2.   CHANGES IN ACCOUNTING POLICIES

 

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

 

3.   MARKETABLE SECURITIES

 

Marketable securities as of each period-end, the majority of which are denominated in local currency, were as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Bonds

  

495

  

—  

Units in mutual funds

  

379,897

  

304,227

Shares

  

9

  

—  

Investment funds quotes

  

408

  

—  

    
  

Total marketable securities

  

380,809

  

304,227

    
  

 

23


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

4.   TRADE ACCOUNTS RECEIVABLE

 

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

 

    

As of March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

Trade accounts receivable

  

208,584

 

  

207,123

 

Allowance for doubtful accounts

  

(1,580

)

  

(2,636

)

    

  

Total trade accounts receivable

  

207,004

 

  

204,487

 

    

  

 

As of March 31, 2002 and 2003, 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(d). The principal components were as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Finished goods (pulp)

  

26,617

  

28,473

Finished goods (sawn timber)

  

65,157

  

88,916

Finished goods on consignment (pulp)

  

23,567

  

18,432

Work in progress

  

12,999

  

13,088

Sawlogs, pulpwood and chips

  

18,762

  

12,189

Raw material

  

24,973

  

39,523

Forests under exploitation

  

160,595

  

173,142

Pending imports

  

—  

  

989

Other

  

11,396

  

11,491

    
  

Total inventories

  

344,066

  

386,243

    
  

 

24


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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(e).

 

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 March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Buildings and other infrastructure

  

3,629

  

3,256

Machinery and equipment

  

646

  

489

Other

  

3

  

1

    
  

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

  

4,278

  

3,746

    
  

 

25


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

6.   PROPERTY, PLANT AND EQUIPMENT, continued

 

The depreciation charge to income of property, plant and equipment was calculated as described in note 1(e) and was as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Depreciation of:

         

Property, plant and equipment (excluding land and forests)

  

25,250

  

26,380

Technical revaluation

  

127

  

103

    
  

Total

  

25,377

  

26,483

    
  

 

Accumulated depreciation was as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Accumulated depreciation of:

         

Property, plant and equipment (excluding land and forests)

  

1,507,037

  

1,605,619

Technical revaluation

  

63,603

  

64,094

    
  

Total

  

1,570,640

  

1,669,713

    
  

 

Forests

 

The price-level restated cost and the commercial valuation increment of the forests, determined as described in note 1(e), was as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Price-level restated cost of forests

  

659,867

  

545,241

Commercial valuation increment

  

1,260,056

  

1,288,053

    
  

Total

  

1,919,923

  

1,833,294

    
  

 

26


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

7.   INVESTMENTS IN RELATED COMPANIES

 

During 2003, Arauco made the following investments in related companies:

 

On January 2, 2003 the Company contributed through Eka Chila S.A. for U.S.$ 25 million and acquired U.S.$ 3.5 million for additional shares. The investment resulted in negative goodwill of U.S.$ 12.1 million.

 

Between January and March 2002 the subsidiary Arauco Internacional S.A. made a capital contribution of U.S.$ 36 thousand in Forestal Conosur S.A.

 

During 2002, Arauco made the following investments in related companies:

 

In March 2002, the Company acquired 5,814,617 shares in Paneles Arauco S.A. by making a capital contribution of U.S.$ 20,339 thousand through the capitalization of a loan. Forestal Arauco S.A. acquired 188,769 shares by making a capital contribution of U.S.$ 660 thousand. As a result, the Company now holds a 99% controlling interest and Forestal Arauco S.A. holds a 1% interest in Paneles Arauco S.A.

 

Between January and March, 2002 the Company and its subsidiary Arauco Internacional S.A. made a capital contribution of U.S.$ 125 thousand in Forestal Conosur S.A.

 

In February 2002, the Company and its subsidiary Forestal Arauco S.A. made a capital contribution of U.S.$ 30 thousand to form Forestal Arauco Costa Rica S.A.

 

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.

 

Liabilities that hedge investments in related companies

 

The Company maintains debt with the public (the Company’s Yankee Bonds 2nd Issue) that were specifically designated as hedging instruments for the Company’s investment in Industrias Forestales S.A., in Argentina.

 

27


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

7.   INVESTMENTS IN RELATED COMPANIES, continued

 

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

 

    

As of March 31,


    

Percentage

Participation


  

Investment

Value


  

Net income of investee


    

2002


  

2003


  

2002


  

2003


  

2002


    

2003


    

%

  

%

  

ThU.S.$

  

ThU.S.$

  

ThU.S.$

    

ThU.S.$

Puerto de Lirquén S.A.

  

20.14

  

20.14

  

14,068

  

14,052

  

352

 

  

445

Inversiones Puerto Coronel S.A.

  

33.33

  

50.00

  

4,070

  

6,818

  

143

 

  

285

Sociedad CDEC-SIC Ltda.

  

8.33

  

7.69

  

34

  

50

  

12

 

  

3

Servicios Corporativos Sercor S.A.

  

20.00

  

20.00

  

302

  

336

  

(4

)

  

18

Eka Chile S.A.

  

0.00

  

50.00

  

—  

  

16,435

  

—  

 

  

217

              
  
  

  

Total

            

18,474

  

37,691

  

503

 

  

968

              
  
  

  

 

28


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

8.   GOODWILL AND NEGATIVE GOODWILL

 

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

 

      

As of March 31,


      

2002


    

2003


      

Amortization
for the year


  

Balance of
negative
goodwill


    

Amortization for

the year


  

Balance of
negative
goodwill


      

ThU.S.$

  

ThU.S.$

    

ThU.S.$

  

ThU.S.$

Alto Paraná S.A.

    

449

  

1,937

    

314

  

653

Industrial y Forestal Misiones S.A.

    

3,028

  

9,085

    

—  

  

—  

Licancel S.A.

    

227

  

2,268

    

227

  

1,361

Forestal Cholguán S.A.

    

1,172

  

13,873

    

1,106

  

8,671

Maderas Prensadas Cholguán S.A.

    

177

  

776

    

138

  

141

      
  
    
  

Total negative goodwill

    

5,053

  

27,939

    

1,785

  

10,826

      
  
    
  

 

  b)   Goodwill as of each period-end was as follows:

 

      

As of March 31,


      

2002


    

2003


      

Amortization
for the year


  

Balance of
goodwill


    

Amortization for

the year


  

Balance of
goodwill


      

ThU.S.$

  

ThU.S.$

    

ThU.S.$

  

ThU.S.$

Forestal El Aguaray S.A.

    

10

  

92

    

10

  

46

Paneles Arauco S.A.

    

196

  

2,751

    

197

  

1,965

Inversiones Puerto Coronel S.A.

    

79

  

1,178

    

241

  

—  

Eka Chile S.A.

    

—  

  

—  

    

605

  

11,500

Southwoods-Arauco Lumber L.L.C.

    

—  

  

—  

    

—  

  

1,500

      
  
    
  

Total goodwill

    

285

  

4,021

    

1,053

  

15,011

      
  
    
  

 

 

29


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

9.   OTHER NON-CURRENT ASSETS

 

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

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Recoverable taxes

  

22,423

  

21,641

Bond issue expenses

  

17,500

  

14,048

Discounts on bond issues

  

2,655

  

2,201

Financial instruments

  

819

  

—  

Other

  

621

  

617

    
  

Total other non-current assets

  

44,018

  

38,507

    
  

 

10.   CURRENT BANK BORROWINGS

 

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

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Total outstanding

  

71

  

56

Principal outstanding

  

71

  

56

Weighted average annual interest rate

  

—  

  

—  

 

Current bank borrowings were denominated as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Obligations in foreign currency

  

71

  

—  

Obligations in local currency

  

—  

  

56

    
  

Total current bank borrowings

  

71

  

56

    
  

 

30


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

11.   CURRENT LIABILITIES

 

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

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Current portion of bonds

  

13,824

  

90,536

Current portion of other long-term liabilities

  

879

  

286

Trade accounts payable

  

71,536

  

101,367

Notes payable

  

6

  

—  

Accounts and notes payable to related parties

  

773

  

998

Current provisions

  

20,607

  

18,866

Sundry accounts payable and other liabilities

  

19,325

  

41,687

    
  

Total

  

126,950

  

253,740

    
  

 

(b)   The percentages of these obligations in foreign and local currency, excluding the effects of forward foreign exchange contracts and currency swaps, were as follows at period-end:

 

    

As of March 31,


    

2002


  

2003


    

%

  

%

Foreign currency

  

40.04

  

40.55

Local currency

  

59.96

  

59.45

    
  

Total

  

100.00

  

100.00

    
  

 

31


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

12.   BONDS

 

Arauco had two series of domestic bonds and seven series of Yankee Bonds outstanding as of March 31, 2003.

 

The balances of the bonds were as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Current

         

Series A bonds

  

3,987

  

877

Series B bonds

  

320

  

293

Yankee Bonds 1st Issue

  

3,621

  

83,836

Yankee Bonds 2nd Issue

  

1,198

  

1,198

Yankee Bonds 3rd Issue

  

3,234

  

2,916

Yankee Bonds 4th Issue

  

1,464

  

1,416

    
  

Total current (including accrued interest)

  

13,824

  

90,536

    
  

Long-term

         

Series A bonds

  

926

  

—  

Series B bonds

  

309

  

—  

Yankee Bonds 1st Issue

  

180,215

  

100,000

Yankee Bonds 2nd Issue

  

400,000

  

400,000

Yankee Bonds 3rd Issue

  

300,000

  

270,500

Yankee Bonds 4th Issue

  

400,000

  

387,000

    
  

Total long-term

  

1,281,450

  

1,157,500

    
  

Less total accrued interest

  

9,295

  

10,321

    
  

Total principal outstanding

  

1,290,745

  

1,167,821

    
  

 

32


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

12.   BONDS, continued

 

These bonds have the following characteristics:

 

    

Domestic

Issue


  

Domestic

Issue


  

Yankee

Bonds 1st Issue


  

Yankee

Bonds 2nd Issue


  

Yankee
Bonds 3rd Issue


  

Yankee

Bonds 4th
Issue


Issue date

  

Jan. 28, 1991

  

Nov. 28, 1991

  

Dec.15, 1995

  

Oct. 3, 1997

  

Aug. 15, 2000

  

Sept. 10, 2001

Authorized Amount (nominal)

  

Series A

ThUF 4,800

  

Series A

ThUF 2,250

Series B

ThUF 250

  

8 years

ThU.S.$200,000

12 years

ThU.S.$ 100,000

  

8 years

ThU.S.$ 175,000

12 years

ThU.S.$ 100,000

20 years

ThU.S.$ 125,000

  

10 years

ThU.S.$300,000

  

10 years

ThU.S.$400,000

Issue amount

  

Series A

ThUF 4,800

  

Series A

ThUF 1,650

Series B

ThUF 160

  

8 years

ThU.S.$200,000

12 years

ThU.S.$100,000

  

8 years

ThU.S.$ 175,000

12 years

ThU.S.$ 100,000

20 years

ThU.S.$ 125,000

  

10 years

ThU.S.$300,000

  

10 years

ThU.S.$400,000

Amounts Authorized but not issued

       

Series A

ThUF 600

Series B

ThUF 90

                   

Principal Repayment

  

Semi-annually

Between

Aug.1995

And

Feb.2003

  

Semi-annually

Between

Jun.1994

And

Dec.2003

  

8 years

Dec. 2003

12 years

Dec.2007

  

8 years

September 2005

12 years

September 2009

20 years

September 2017

  

August 2010

  

September 2011

Interest rate (excluding effects of any interestrate swap)

  

Series A 6%

  

Series A and B 6%

  

8 years 6.75%

12 years 7.00%

  

8 years

6.95%

12 years

7.20%

20 years

7.50%

  

8.62 %

  

7.75%

Interest Payment

  

Semi-annually

  

Semi-annually

  

Semi-annually

  

Semi-annually

  

Semi-annually

  

Semi-annually

 

33


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

12.   BONDS, continued

 

As of March 31, 2003, the principal and interest amounts due with respect to these bonds were as follows:

 

Year


  

ThU.S.$


2003(*)

  

90,536

2004

  

—  

2005

  

175,000

2006

  

—  

2007 and thereafter

  

982,500

    

Total

  

1,248,036

    

(*)   This amount includes U.S.$ 10,321 thousand of accrued interest.

 

The principal financial covenants contained in the instruments or agreements with respect to such bonds are as follows:

 

    Arauco’s debt to equity ratio must not exceed the ratio of 1:2.1

 

    Arauco’s current liabilities must not exceed its current assets.

 

34


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

13.   ACCRUED LIABILITIES

 

(a)   Accrued liabilities were as follows:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Accrued liabilities

         

Accrual for staff vacations

  

3,100

  

3,088

Plant maintenance accrual

  

7,269

  

5,918

Standby letters of credit

  

934

  

940

Accrual for contingencies

  

1,199

  

1,210

Staff severance indemnities

  

427

  

502

Selling and other transportation costs provisions

  

1,354

  

2,861

Electrical expense provision

  

1,351

  

789

Salary and benefits of the staff

  

401

  

328

Forestry activity expenses

  

1,202

  

107

Other current liabilities

  

3,370

  

3,123

    
  

Total accrued liabilities

  

20,607

  

18,866

    
  

 

(b)   Liability for staff severance indemnities

 

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

 

    

As of March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

Balance at beginning of year

  

8,190

 

  

8,637

 

Provision during the period

  

730

 

  

121

 

Payments during the period

  

(316

)

  

(102

)

    

  

Balance as of period-end

  

8,604

 

  

8,656

 

    

  

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Shown in the balance sheet as:

         

Current

  

427

  

502

Long-term

  

8,177

  

8,154

    
  

Total

  

8,604

  

8,656

    
  

 

35


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 March 31,

2002


  

As of March 31,

2003


Bank or financial institution


    

Denomination


  

Long-term

Portion


  

Short-term

Portion


  

Long-term

Portion


  

Short-term

Portion


           

ThU.S.$

  

ThU.S.$

  

ThU.S.$

  

ThU.S.$

Morgan Guaranty Trust Company(1)(a)

    

U.S.$

  

—  

  

37,561

  

—  

  

8,350

J.P. Morgan-Chase(1)(b)

    

U.S.$

  

250,000

  

2,346

  

250,000

  

475

Tesoro Argentino(2)

    

U.S.$

  

938

  

71

  

2,363

  

590

Banco Galicia

    

U.S.$

  

—  

  

—  

  

—  

  

1,124

J.P. Morgan-Chase Bank(3)

    

U.S.$

  

—  

  

—  

  

150,000

  

—  

           
  
  
  

Total long-term bank borrowings

         

250,938

  

39,978

  

402,363

  

10,539

           
  
  
  

 

The weighted average interest rates for foreign currency-denominated debt for the periods ended March 2002 and 2003 were 3.81% and 7.10%, respectively. Arauco enters into forward foreign exchange contracts and currency swap agreements to swap certain amounts of its non-U.S. dollar denominated payment obligations for U.S. dollar-denominated payment obligations.

 

The UF rate has been expressed as an interest spread in excess of the indexation of the UF. See note 1(b).

 

Six month LIBOR at March 31, 2002 and 2003 was 2.33% and 3.60%, respectively.

 

36


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

14.   LONG-TERM BANK BORROWINGS, continued

 

  (1)   Alto Paraná Loans

 

a) The Company obtained a U.S.$ 150 million loan in order to repay outstanding debt. The loan is denominated in U.S. dollars, and has a variable interest rate of LIBOR plus 0.35%. Interest payments are due quarterly, while the loan principal is repayable in four annual payments, which began on March 20, 2000.

 

b) The Argentine subsidiary Alto Paraná S.A. obtained a U.S.$ 250 million loan in order to redeem preferred equity shares. The loan is denominated in U.S. dollars, and has a variable interest rate of LIBOR plus a market spread.

 

  (2)   Tesoro Argentino

 

Alto Paraná owed an aggregate principal amount of U.S.$ 13 million and additional accrued interest payable to the Argentine government in respect of certain loans originally made by Banco Nacional de Desarrollo to Alto Paraná. These loans were originally covered by guarantees issued by the governments of other countries which sought reimbursement from the Argentine government for payment made under these guarantees. The Argentine government renegotiated its debt with the “Paris Club” countries and, pursuant to Resolution 40/95 issued by the Ministry of Economy and Public Works and Services, has extended these terms to the Argentine companies that originally incurred this debt, including Alto Paraná. According to their terms, those Governmental Obligations have been restructured to mature in installments between 1995 and 2008 and accrue interest at a contractual rate of LIBOR plus a spread of up to 0.625%.

 

  (3)   The Company obtained a U.S.$ 150 million loan in order to repay outstanding debt. The loan is denominated in U.S. dollars, and has a variable interest rate of LIBOR plus 0.85%. Interest payments are due semi-annually, while the loan principal is repayable in five semi-annual payments, which began on February 7, 2006.

 

37


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

14.   LONG-TERM BANK BORROWINGS, continued

 

(b)   Debt distribution

 

As of March 31, 2002 and 2003 long-term bank borrowings, including both the current portion and interest accrued, were denominated almost exclusively in foreign currencies.

 

(c)   Maturity of long-term bank borrowings

 

As of March 31, 2003, the maturities of long-term bank borrowings payable were as follows:

 

Year


  

ThU.S.$


2003

  

10,539

2004

  

100,343

2005

  

130,414

2006

  

171,049

2007 and thereafter

  

557

    

Total

  

412,902

    

 

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.

 

38


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 compute 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.$ 6,192 thousand and U.S.$ 14,141 thousand for the periods ended March 31, 2002 and 2003, respectively. Furthermore, Arauco established provisions for U.S.$ 11 thousand as of March 31, 2002 and U.S.$ 21 thousand as of March 31, 2003 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 March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

Income tax

  

(6,192

)

  

(14,141

)

Provisions estimated in accordance with Article N° 21 of the Income Tax Law in Chile

  

(11

)

  

(21

)

Deferred income tax

  

3,039

 

  

(1,642

)

Tax benefits for tax losses

  

—  

 

  

—  

 

Amortization of complementary accounts

  

(186

)

  

(201

)

Adjustment expense taxes last year

  

—  

 

  

—  

 

Changes in valuation provision

  

—  

 

  

—  

 

    

  

Total Income Tax

  

(3,350

)

  

(16,005

)

    

  

 

(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 March 31, 2003 were as follows:

 

    

Retained Earnings


    

Shareholders’


    

With

Credit


  

Without

Credit


    

Tax

Credit


    

ThU.S.$

  

ThU.S.$

    

ThU.S.$

Balance as of December 31, 2000

  

4,627

  

54

    

817

Balance as of December 31, 2001

  

27,961

  

1,150

    

4,934

Balance as of December 31, 2002

  

87,310

  

20,026

    

16,619

    
  
    

Total

  

119,898

  

21,230

    

22,370

    
  
    

 

39


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

15.   INCOME TAXES, continued

 

(c)   Deferred taxation

 

As explained in note 1(g), as of March 31, 2002 and 2003, Arauco recorded accumulated deferred taxes arising from temporary differences, as follows:

 

    

As of March 31, 2002


 
    

Deferred tax assets


    

Deferred tax liabilities


 
    

Current


    

Long term


    

Current


  

Long term


 
    

ThU.S.$

    

ThU.S.$

    

ThU.S.$

  

ThU.S.$

 

Allowance for doubtful accounts

  

1,075

 

  

124

 

  

—  

  

—  

 

Deferred revenues

  

230

 

  

38

 

  

—  

  

—  

 

Accrual for staff vacations

  

730

 

  

—  

 

  

—  

  

—  

 

Production costs

  

—  

 

  

—  

 

  

7,437

  

—  

 

Property, plant and equipment depreciation

  

—  

 

  

—  

 

  

—  

  

—  

 

Capitalized expenses

  

—  

 

  

—  

 

  

1,084

  

83,135

 

Obsolescence reserve

  

575

 

  

—  

 

  

—  

  

2,800

 

Debt issue and project expenses

  

—  

 

  

—  

 

  

—  

  

—  

 

Staff severance indemnities

  

1,101

 

  

371

 

  

—  

  

5,449

 

Leasing assets

  

—  

 

  

—  

 

  

—  

  

—  

 

Tax loss carry forwards

  

3,565

 

  

3,456

 

  

—  

  

—  

 

Property, plant and equipment valuation

  

—  

 

  

92,689

 

  

—  

  

29,628

 

Accrual for contingencies

  

1,256

 

  

—  

 

  

—  

  

—  

 

Plant maintenance accrual

  

933

 

  

—  

 

  

—  

  

—  

 

Argentine peso devaluation

  

3,487

 

  

12,777

 

  

—  

  

—  

 

Inventories valuation

  

300

 

  

739

 

  

—  

  

—  

 

Other

  

587

 

  

1,096

 

  

80

  

915

 

    

  

  
  

Total

  

13,839

 

  

111,290

 

  

8,601

  

121,927

 

    

  

  
  

Complementary accounts, net of
accumulated amortization(1)

  

(637

)

  

(52,930

)

  

—  

  

(37,457

)

Valuation provision

  

—  

 

  

(43,070

)

  

—  

  

—  

 

    

  

  
  

Total

  

13,202

 

  

15,290

 

  

8,601

  

84,470

 

    

  

  
  

 

 

40


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

15.   INCOME TAXES, continued

 

(c)   Deferred taxation, continued

 

    

As of March 31, 2003


 
    

Deferred tax assets


    

Deferred tax liabilities


 
    

Current


    

Long term


    

Current


    

Long term


 
    

ThU.S.$

    

ThU.S.$

    

ThU.S.$

    

ThU.S.$

 

Allowance for doubtful accounts

  

823

 

  

123

 

  

—  

 

  

—  

 

Deferred revenues

  

944

 

  

38

 

  

—  

 

  

—  

 

Accrual for staff vacations

  

485

 

  

—  

 

  

—  

 

  

—  

 

Production costs

  

—  

 

  

—  

 

  

5,639

 

  

—  

 

Capitalized expenses

  

—  

 

  

—  

 

  

2,844

 

  

4,568

 

Property, plant and equipment depreciation

  

—  

 

  

—  

 

  

—  

 

  

82,528

 

Staff severance indemnities

  

1,027

 

  

359

 

  

—  

 

  

—  

 

Debt issue and project expenses

  

—  

 

  

—  

 

  

—  

 

  

8,342

 

Obsolescence reserve

  

730

 

  

—  

 

  

—  

 

  

—  

 

Accrual for contingencies

  

405

 

  

—  

 

  

—  

 

  

—  

 

Tax loss carry-forwards

  

28,908

 

  

6,425

 

  

—  

 

  

—  

 

Property, plant and equipment valuation

  

—  

 

  

32,595

 

  

—  

 

  

10,005

 

Leasing assets

  

—  

 

  

—  

 

  

—  

 

  

—  

 

Plant maintenance accrual

  

930

 

  

—  

 

  

—  

 

  

—  

 

Impact of devaluation of Argentine peso

  

1,670

 

  

6,681

 

  

—  

 

  

—  

 

Inventories valuation

  

248

 

  

—  

 

  

—  

 

  

—  

 

Other

  

1,299

 

  

358

 

  

77

 

  

839

 

    

  

  

  

Total

  

37,469

 

  

46,579

 

  

8,560

 

  

106,282

 

    

  

  

  

Complementary accounts, net of accumulated amortization(1)

  

(103

)

  

(17,616

)

  

(153

)

  

(16,297

)

Valuation provision

  

(1,242

)

  

(27,226

)

  

—  

 

  

—  

 

    

  

  

  

Total

  

36,124

 

  

1,737

 

  

8,407

 

  

89,985

 

    

  

  

  


(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 did not receive any forestry grants during the period ending March 31, 2002 and received U.S. $419 thousand during the period ending March 31, 2003.

 

41


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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 local and foreign currency equivalent at each period-end.

 

         

At March 31,


    

Currency


  

2002


    

2003


         

ThU.S.$

    

ThU.S.$

Assets

                

Current Assets:

                

Cash and banks

  

U.S.$

  

10,588

 

  

6,740

Cash and banks

  

Ch$

  

2,345

 

  

2,505

Cash and banks

  

Other currencies

  

1,099

 

  

533

Time deposits and marketable securities

  

U.S.$

  

156,426

 

  

180,067

Time deposits and marketable securities

  

Ch$

  

30,704

 

  

54,561

Time deposits and marketable securities

  

Other currencies

  

198,072

 

  

147,575

Trade accounts receivable

  

U.S.$

  

180,425

 

  

173,721

Trade accounts receivable

  

Ch$

  

20,653

 

  

20,708

Trade accounts receivable

  

Other currencies

  

5,926

 

  

10,058

Other accounts receivable

  

U.S.$

  

8,471

 

  

15,858

Other accounts receivable

  

Ch$

  

14,579

 

  

20,182

Other accounts receivable

  

Other currencies

  

—  

 

  

7,143

Inventories

  

U.S.$

  

127,211

 

  

332,910

Inventories

  

Ch$

  

216,855

 

  

53,333

Other current assets

  

U.S.$

  

42,548

 

  

36,504

Other current assets

  

Ch$

  

57,869

 

  

93,625

Other current assets

  

Other currencies

  

—  

 

  

39,491

         

  

Total current assets

       

1,073,771

 

  

1,195,514

         

  

Property, plant and equipment and other assets:

                

Property, plant and equipment

  

U.S.$

  

1,754,722

 

  

3,757,915

Property, plant and equipment

  

Ch$

  

2,004,006

 

  

162,467

Other assets

  

U.S.$

  

54,774

 

  

45,353

Other assets

  

Ch$

  

(10,298

)

  

16,121

Other assets

  

Other currencies

  

—  

 

  

23,783

         

  

Total property, plant and equipment and other assets

       

3,803,204

 

  

4,005,639

         

  

Total assets

       

4,876,975

 

  

5,201,153

         

  

 

42


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

17.   ASSETS AND LIABILITIES DENOMINATED IN LOCAL AND FOREIGN CURRENCY, continued

 

         

At March 31,


    

Currency


  

2002


  

2003


         

ThU.S.$

  

ThU.S.$

Liabilities

              

Current liabilities:

              

Current bank borrowings

  

U.S.$

  

71

  

—  

Current bank borrowings

  

Ch$

  

—  

  

56

Current portion of long-term bank borrowings

  

U.S.$

  

39,978

  

9,415

Current portion of long-term bank borrowings

  

Other currencies

  

—  

  

1,124

Current portion of bonds

  

U.S.$

  

9,517

  

89,366

Current portion of bonds

  

Ch$

  

4,307

  

1,170

Notes and trade accounts payable

  

U.S.$

  

20,602

  

21,200

Notes and trade accounts payable

  

Ch$

  

50,490

  

57,154

Notes and trade accounts payable

  

Other currencies

  

265

  

12,944

Other current liabilities

  

U.S.$

  

22,863

  

23,589

Other current liabilities

  

Ch$

  

18,727

  

38,183

Other current liabilities

  

Other currencies

  

179

  

10,134

         
  

Total current liabilities

       

166,999

  

264,335

         
  

Long-term liabilities:

              

Long-term bank borrowings

  

U.S.$

  

250,938

  

402,363

Bonds

  

U.S.$

  

1,280,215

  

1,157,500

Bonds

  

Ch$

  

1,235

  

—  

Other long-term liabilities

  

U.S.$

  

9,231

  

3,275

Other long-term liabilities

  

Ch$

  

77,861

  

93,563

Other long-term liabilities

  

Other currencies

  

—  

  

473

         
  

Total long-term liabilities

       

1,619,480

  

1,657,174

         
  

Total liabilities

       

1,786,479

  

1,921,509

         
  

 

43


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

18.   BALANCES AND TRANSACTIONS WITH RELATED PARTIES

 

         

As of March 31,


    

Company


  

Relationship


  

2002


  

2003


  

Transaction


         

ThU.S.$


  

ThU.S.$


    

(a) Current assets

                   

Cía. de Seguros Generales Cruz del Sur S.A.

  

Affiliate

  

994

  

976

  

Accounts receivable

Fundación Educacional Arauco

  

Affiliate

  

107

  

—  

  

Accounts receivable

Compañía Puerto de Coronel S.A.

  

Affiliate

  

—  

  

15

  

Accounts receivable

         
  
    

Total current assets

       

1,101

  

991

    
         
  
    

(b) Current liabilities

                   

Compañía de Petróleos de Chile S.A.

  

Shareholder

  

472

  

694

  

Accounts payable

Puerto de Lirquén S.A.

  

Affiliate

  

171

  

280

  

Accounts payable

Compañía Puerto de Coronel S.A.

  

Affiliate

  

125

  

—  

  

Accounts payable

Abastible S.A.

  

Affiliate

  

1

  

5

  

Accounts payable

Sigma Servicios Informáticos S.A.

  

Affiliate

  

—  

  

2

  

Accounts payable

Servicios Corporativos Sercor S.A.

  

Affiliate

  

—  

  

6

  

Accounts payable

Fundación Educacional Arauco

  

Affiliate

  

—  

  

8

  

Accounts payable

Compañía de Turismo de Chile Ltda.

  

Affiliate

  

4

  

3

  

Accounts payable

         
  
    

Total current liabilities

  

773

  

998

    
         
  
    

 

44


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

18.   BALANCES AND TRANSACTIONS WITH RELATED PARTIES, continued

 

During the period-ended March 31, 2002 and 2003, Arauco had the following related party transactions that affected net income:

 

    

Purchases (sales)
Period ended March 31,


 
    

2002


    

2003


 
    

ThU.S.$

    

ThU.S.$

 

(a) Compañía de Petróleos de Chile S.A.:

             

Purchases of fuel

  

1,759

 

  

3,212

 

Other Sales

  

(1

)

  

(1

)

(b) Puerto de Lirquén S.A.:

             

Port services

  

533

 

  

503

 

(c) ABC Comercial S.A.:

             

Other Purchases

  

80

 

  

—  

 

(d) Abastible S.A.:

             

Purchases of fuel

  

9

 

  

27

 

(e) Compañía de Seguros Generales Cruz del Sur S.A.:

             

Direct insurance premiums

  

346

 

  

145

 

(f) Compañía de Turismo de Chile Ltda.

             

Purchase of tickets

  

3

 

  

—  

 

(g) Cía. Puerto de Coronel S.A:

             

Stockpiling services

  

296

 

  

505

 

Other sales

  

—  

 

  

—  

 

(h) Portaluppi, Guzmán y Bezanilla Abogados

             

Legal advice

  

273

 

  

19

 

(i) Eka Chile S.A.

             

Purchase of sodium chlorate

  

—  

 

  

1,696

 

 

45


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

19.   CONTINGENCIES AND COMMITMENTS

 

(a)   Arauco

 

Arauco is not currently involved in any court proceedings or other legal actions which could significantly affect its financial or operational condition.

 

The liabilities included in current and long-term bank borrowings require Arauco to comply with certain financial restrictions. Non-compliance could result in these debts becoming fully payable upon demand.

 

The minimum financial restrictions are:

 

i) The debt ratio must not be higher than 1.2.

 

ii) The current ratio must not be less than 1.0.

 

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

 

46


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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-end March 31, 2002 and 2003 are as follows:

 

March 31, 2002


  

Paid-in

capital


  

Share

premium


  

Forestry

and other

reserves


    

Retained

earnings

from prior

years


  

Interim

dividends


    

Net

income

for the

period


    

Total


 
                    
                    
                    
    

ThU.S.$

  

ThU.S.$

  

ThU.S.$

    

ThU.S.$

  

ThU.S.$

    

ThU.S.$

    

ThU.S.$

 

Balance as of March 31, 2001

  

347,551

  

5,625

  

1,470,901

 

  

1,158,087

  

(5,357

)

  

139,910

 

  

3,116,717

 

Prior period income allocation

  

—  

  

—  

  

—  

 

  

139,910

  

—  

 

  

(139,910

)

  

—  

 

Cumulative translation adjustment

  

—  

  

—  

  

(12,445

)

  

—  

  

—  

 

  

—  

 

  

(12,445

)

Forestry reserve

  

—  

  

—  

  

(37,808

)

  

—  

  

—  

 

  

—  

 

  

(37,808

)

Forestry reserve adjustment related to subsidiaries

  

—  

  

—  

  

(640

)

  

—  

  

—  

 

  

—  

 

  

(640

)

Net income for the period

  

—  

  

—  

  

—  

 

  

—  

  

—  

 

  

18,487

 

  

18,487

 

    
  
  

  
  

  

  

Balance as of March 31, 2002

  

347,551

  

5,625

  

1,420,008

 

  

1,297,997

  

(5,357

)

  

18,487

 

  

3,084,311

 

    
  
  

  
  

  

  

 

47


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

20. SHAREHOLDERS’ EQUITY, continued

 

March 31, 2003


  

Paid-in
capital


  

Share
premium


  

Forestry
and other
reserves


    

Earnings
from prior
years


  

Interim
dividends


    

Net
income
for the
period


    

Total


 
                    
    

ThU.S.$

  

ThU.S.$

  

ThU.S.$

    

ThU.S.$

  

ThU.S.$

    

ThU.S.$

    

ThU.S.$

 

Balance as of March 31, 2002

  

347,551

  

5,625

  

1,356,030

 

  

1,259,743

  

(38,682

)

  

277,189

 

  

3,207,456

 

Prior period income allocation

  

—  

  

—  

  

—  

 

  

277,189

  

—  

 

  

(277,189

)

  

—  

 

Forestry reserve

  

—  

  

—  

  

(31,808

)

  

—  

  

—  

 

  

—  

 

  

(31,808

)

Forestry reserve adjustment related to subsidiaries

  

—  

  

—  

  

(387

)

  

—  

  

—  

 

  

—  

 

  

(387

)

Conversion adjustment related to subsidiaries

  

—  

  

—  

  

(764

)

  

—  

  

—  

 

  

—  

 

  

(764

)

Net income for the period

  

—  

  

—  

  

—  

 

  

—  

  

—  

 

  

98,998

 

  

98,998

 

    
  
  

  
  

  

  

Balance as of March 31, 2003

  

347,551

  

5,625

  

1,323,071

 

  

1,536,932

  

(38,682

)

  

98,998

 

  

3,273,495

 

    
  
  

  
  

  

  

 

The number of shares authorized, issued and outstanding as of March 31, 2002 and 2003 was 113,152,446. The Company’s shares are of a single series without a fixed nominal value.

 

48


CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

 

March 31, 2003

Notes to the Consolidated Financial statements

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

 

 

21.   SALES REVENUE

 

Arauco’s sales revenues were derived from export and domestic sales of the following products:

 

    

As of March 31,


    

2002


  

2003


    

ThU.S.$

  

ThU.S.$

Export sales

         

Bleached pulp

  

102,567

  

120,880

Unbleached pulp

  

33,280

  

32,598

Sawlogs

  

714

  

—  

Flitches

  

1,402

  

1,848

Sawn timber

  

34,355

  

37,395

Remanufactured wood products

  

22,611

  

29,555

Plywood and fiber panels

  

27,522

  

49,607

Posts

  

3,298

  

2,044

    
  

Total export sales revenue

  

225,749

  

273,927

    
  

Domestic sales

         

Bleached pulp

  

5,193

  

10,736

Unbleached pulp

  

713

  

448

Sawlogs

  

4,991

  

4,488

Pulplogs

  

2,817

  

859

Sawn timber

  

11,707

  

19,530

Remanufactured wood products

  

1,260

  

241

Chips

  

417

  

212

Electric power

  

961

  

584

Plywood and fiber panels

  

12,945

  

13,811

Other

  

2,669

  

743

    
  

Total domestic sales revenue

  

43,673

  

51,652

    
  

Total sales revenue

  

269,422

  

325,579

    
  

 

 

49


CELULOSA ARAUCO Y CONSTITUCION S.A.