As filed with the Securities and Exchange Commission on June 6, 2003
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-14950
ULTRAPAR PARTICIPACOES S.A.
(Exact name of Registrant as specified in its charter)
ULTRAPAR HOLDINGS INC. THE FEDERATIVE REPUBLIC OF
BRAZIL
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
---------
Av. Brigadeiro Luis Antonio, 1343, 9(0) Andar Sao Paulo, SP,
Brazil 01317-910
(Telephone: 55-11-3177-6482)
(Address and telephone number of principal executive officers)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Name of each stock exchange on
Title of each class which registered
------------------------------------ -------------------------------
Preferred Shares, without par value* New York Stock Exchange
______________
* Traded only in the form of American Depositary Shares (as evidenced by
American Depositary Receipts) each representing
1,000 Preferred Shares which are registered under the Securities
Act of 1933.
Securities registered or to be registered pursuant to Section
12(g) of the Act:
NONE
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
NONE
The number of outstanding shares of each class of stock of
Ultrapar Participacoes S.A. as of December 31, 2002.
Common Shares 51.264.621.778
Preferred Shares 18.426.647.050
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [_] Item 18 [X]
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TABLE OF CONTENTS
INTRODUCTION .............................................................. 3
FORWARD-LOOKING STATEMENTS ................................................ 5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ............ 6
ITEM 2. OFFER STATISTICS AND EXPECTED TIME TABLE ......................... 6
ITEM 3. KEY INFORMATION .................................................. 6
ITEM 4. INFORMATION ON THE COMPANY ....................................... 17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ..................... 58
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ....................... 72
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ................ 78
ITEM 8. FINANCIAL INFORMATION ............................................ 80
ITEM 9. THE OFFER AND LISTING ............................................ 82
ITEM 10. ADDITIONAL INFORMATION ........................................... 83
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....... 92
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ........... 94
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES .................. 94
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS .............................................. 94
ITEM 15. CONTROLS AND PROCEDURES .......................................... 94
ITEM 16. [Reserved] ....................................................... 94
PART III
ITEM 17. FINANCIAL STATEMENTS ............................................. 94
ITEM 18. FINANCIAL STATEMENTS ............................................. 94
ITEM 19. EXHIBITS ......................................................... 95
GLOSSARY .................................................................. 95
SIGNATURES ................................................................
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 ..
2
INTRODUCTION
In this annual report, "Ultrapar", "we", "us" and "our" refer to Ultrapar
Participacoes S.A. "Ultragaz" refers to Ultragaz Participacoes S.A. together
with its subsidiaries. "Oxiteno" refers to Oxiteno S.A. Industria e Comercio,
together with its subsidiaries. "Ultra S.A." refers to Ultra S.A.
Participacoes. "Ultracargo" refers to Ultracargo Participacoes Ltda. "Tequimar"
refers to Terminal Quimico de Aratu S.A. "Transultra" refers to Transultra
Armazenamento e Transporte Especializado Ltda.
All references herein to the "real", "reais", or "R$" are to the Brazilian
real, the official currency of Brazil. All references to "U.S. dollars",
"dollars" or "U.S.$" are to United States dollars.
Some of the figures included in this annual report may not sum due to
rounding.
We will provide without charge to each person to whom this report is
delivered, upon written or oral request, a copy of any or all of the documents
incorporated by reference into this annual report (other than exhibits, unless
such exhibits are specifically incorporated by reference in such documents).
Written requests for such copies should be directed to Ultrapar Participacoes
S.A., Av. Brigadeiro Luiz Antonio, 1343, 9(0) Andar, Sao Paulo, SP, Brazil
01317-910, Attention: Director, Investor Relations. Telephone requests may be
directed to 55-11-3177-6482.
Financial Statements
The audited consolidated balance sheets included in this annual report as of
December 31, 2002 and 2001 and the related consolidated statements of income,
cash flows, changes in financial position and changes in shareholders's equity
for each of the years ended December 31, 2002, 2001 and 2000, including the
notes thereto, are our consolidated financial statements. The selected
financial information presented below should be read in conjunction with our
consolidated financial statements and the notes thereto.
The following paragraphs discuss some important features of the presentation
of the selected financial information and our consolidated financial
statements. These features should be kept in mind in evaluating the selected
financial information and in reading "Item 5. Operating and Financial Review
and Prospects"
Accounting Methodologies in Brazil
Until December 31, 1995, publicly-traded companies in Brazil were required to
prepare financial statements pursuant to one of two methods: (1) the corporate
law method, which was and remains valid for all legal purposes, including for
determining income taxes and calculating mandatory minimum dividends; and (2)
the constant currency method to present supplementary price-level adjusted
financial statements pursuant to standards prescribed by the Brazilian
securities commission, known as the Comissao de Valores Mobiliarios or CVM.
o Corporate law method. The corporate law method, which we refer to as
accounting practices adopted in Brazil in this annual report, provides a
simplified methodology for accounting for the effects of inflation until
December 31, 1995. This method consisted of restating permanent assets
(property, plant and equipment; investments and deferred charges) and
shareholders' equity accounts using indices mandated by the federal
government. The net effect of these restatements was credited or charged
to the statement of operations in a single caption, usually entitled
"monetary correction adjustments" or "inflation adjustments".
o Constant currency method. The Brazilian Institute of Independent Auditors,
or IBRACON, and the Federal Accounting Council, or CFC, required inflation
indexing, when the inflationary effect for the year is significant. Under
the constant currency method, all historical Brazilian real amounts in the
financial statements and notes thereto were expressed in constant
purchasing power as of the latest balance sheet date, in accordance with
standards prescribed by the CVM for publicly- traded entities.
3
Changes in Reporting of Results of Operations
In accordance with the discussion paper issued by the International Task
Force of the American Institute of Certified Public Accountants (AICPA), as of
January 1, 2000, Brazilian companies have been allowed to prepare their
financial statements in accordance with the accounting practices adopted in
Brazil as the primary basis of accounting in fillings with the U.S. Securities
and Exchange Commission, or SEC. Previously, presentation in constant
purchasing power was mandatory.
Until 1999, our consolidated financial statements were prepared in accordance
with the constant currency method. However, for local reporting purposes, we
prepared our consolidated financial statements in accordance with the Brazilian
Corporate Law and accounting standards and procedures established by the CVM.
In order to conform the financial statements for the use of our shareholders
in the United States of America to the same basis used in the primary market in
Brazil, effective from January 1, 2000, our management elected to change the
presentation of our consolidated financial statements to accounting practices
adopted in Brazil. Given that this change constitutes a change in reporting
currency, all prior methods have been restated to be in accordance with the
accounting practices adopted in Brazil and to facilitate comparability with
subsequent periods.
Accounting practices adopted in Brazil and U.S. GAAP
Our consolidated financial statements are prepared in accordance with
accounting practices adopted in Brazil, which include accounting principles
emanating from the Brazilian Corporate Law and accounting standards and
procedures established by the CVM. Such accounting practices differ in certain
material respects from accounting principles generally accepted in the United
States of America, or U.S. GAAP. See note 23 to our consolidated financial
statements for a summary of the differences between the accounting practices
adopt in Brazil and U.S. GAAP, and a reconciliation to U.S. GAAP of
shareholders' equity as of December 31, 2001 and 2002, and net income for each
of the three years in the period ended December 31, 2002. As described above,
current accounting practices in Brazil do not allow price-level accounting for
periods after December 31, 1995. Under U.S. GAAP price-level adjusted
accounting continued until July 1, 1997, when Brazil ceased to be considered a
highly inflationary economy for U.S. GAAP purposes.
4
FORWARD-LOOKING STATEMENTS
The declarations contained in this annual report in relation to our plans,
forecasts, strategies, and projections about future events, are forward-looking
statements which involve risks and uncertainties and which are therefore not
guarantees of future results. Words such as "believe", "expect", "plan",
"strategy", "prospect", foresee", estimate", "project", "anticipate", "can" and
similar words are intended to identify forward-looking statements. We have made
forward-looking statements which cover among other things, our:
o strategy for marketing and operational expansion;
o capital expenditures forecasts; and
o development of additional sources of revenue.
These forward-looking statements are subject to risks and uncertainties, which
could mean that our actual results and performance could differ significantly
from those anticipated and therefore decisions should not be based exclusively
on these forecasts. The risks and uncertainties include, but are not limited
to:
o general economic and business conditions, including the crude oil prices and
other commodities, refining margins and prevailing foreign exchange rates;
o competition;
o ability to produce and deliver products on a timely basis;
o anticipated trends in the liquefied petroleum gas, or LPG industry,
including changes in capacity and industry price movements;
o changes in official regulations;
o receipt of official authorizations and licenses;
o political, economic and social events in Brazil;
o access to sources of financing and our level of debt;
o other factors contained under Item 3 - "Key Information - Risk Factors".
5
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIME TABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following tables present selected consolidated financial information at
the dates and for each of the periods indicated. You should read these tables
in conjunction with our consolidated financial statements, and the notes
thereto, included elsewhere in this annual report. We have derived our selected
consolidated financial information for each of the years 1998 through 2002 from
our annual financial statements, including the consolidated balance sheets at
December 31, 2001 and 2002 and the related consolidated statements of
operations, changes in shareholders' equity and changes in financial position
for the three years ended December 31, 2002.
Our consolidated financial statements are prepared in accordance with
accounting practices adopted in Brazil, which differ in certain material
respects from accounting principles generally accepted in the United States of
America, or U.S. GAAP. See note 23 to our consolidated financial statements for
a summary of the differences between the accounting practices adopted in
Brazil, and U.S. GAAP.
Our selected financial information should be read in conjunction with
"Item 5. Operating and Financial Review and Prospects."
6
Ultrapar Participacoes S.A. and Subsidiary
Year Ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------------------------
(in millions of reais, where indicated, except per share data)
Consolidated Income Statement Data:
Accounting practices adopted in Brazil: R$ R$ R$ R$ R$
Gross sales and services 3,795.3 2,862.5 2,301.2 1,927.0 1,331.3
Taxes on sales and services, rebates,
discounts and returns (800.8) (577.8) (423.2) (332.4) (287.6)
--------- --------- --------- --------- --------
Net Sales and Services 2,994.5 2,284.7 1,878.0 1,594.6 1,043.7
Cost of sales and services (2,247.1) (1,698.3) (1,399.6) (1,106.7) (746.3)
--------- --------- --------- --------- --------
Gross profit 747.4 586.4 478.4 487.9 297.4
Operating (expenses) income
Selling, general and administrative (382.3) (317.7) (266.2) (233.6) (195.1)
Other operating income, net 0.4 10.2 1.3 3.8 4.1
--------- --------- --------- --------- --------
Total operating expenses (381.9) (307.5) (264.9) (229.8) (191.0)
--------- --------- --------- --------- --------
Operating income before financial items 365.5 278.9 213.5 258.1 106.4
Net financial income (expenses) 28.5 (31.1) 43.4 (34.4) (0.9)
Nonoperating expenses, net (44.1) (17.0) (16.5) (18.3) (6.5)
--------- --------- --------- --------- --------
Income before income and social
contribution taxes 349.9 230.8 240.4 205.4 99.0
Income and social contribution taxes (71.4) (27.5) (47.3) (40.6) (14.5)
--------- --------- --------- --------- --------
Income before equity in earnings (losses)
of associated companies and minority
interest 278.5 203.3 193.1 164.8 84.5
--------- --------- --------- --------- --------
Equity in earnings (losses) of
associated companies (1.7) 1.9 9.6 (3.2) (5.7)
Minority interest (54.5) (73.0) (74.2) (73.7) (34.3)
--------- --------- --------- --------- --------
Net income 222.3 132.2 128.5 87.9 44.5
Net Income per thousand shares(1) 3.6 2.5 2.4 1.7 1.2
--------- --------- --------- --------- --------
Dividends per thousand common shares(2) 1.00 4.20 0.57 0.48 3.70
--------- --------- --------- --------- --------
Dividends per thousand preferred shares (2)(3) 1.10 4.63 0.63 0.53 --
U.S. GAAP:
Net income 143.9 123.0 123.8 98.7 59.9
Basic and diluted earnings per
thousand common shares(1) 2.3 2.2 2.2 2.2 1.6
Basic and diluted earnings per thousand
preferred shares(1)(3) 2.5 2.5 2.6 2.5 --
Other financial data (accounting practices
adopted in Brazil) (4)
Cash flows from operating activities(5) 468.8 339.7 302.7 373.9 213.4
Cash flows from investing activities(5) (427.2) (206.7) (170.5) (96.4) (115.9)
Cash flows from financing activities(5) (59.7) (339.2) (126.6) 233.3 (18.4)
Depreciation and amortization(6) 121.8 102.4 90.8 78.9 66.3
EBITDA(7) 487.3 372.5 304.3 337.0 172.7
Number of common shares (in millions)(8) 51,264.6 37,984.0 37,984.0 37,984.0 2.7
Number of preferred shares (in
millions) (8) 18,426.6 15,016.0 15,016.0 15,016.0 --
7
(1) Although not consistent with the accounting practices adopted in Brazil,
for the convenience of the reader, the amounts disclosed in the row
labeled Net Income per thousand shares give retroactive effect to the
15,000:1 stock split which occurred in July 1999. One ADS represents 1,000
preferred shares. Common shares and preferred shares each represent the
same economic interest in Ultrapar. In 2002, our capital increased by 16.7
billion shares in connection with our corporate restructuring and we
therefore base this calculation on the annual weighted average of shares
outstanding.
(2) See "Item 8. Financial Information - Consolidated Statements and other
Financial Information - Dividend and Distribution Policy" for information
regarding declaration and payment of dividends.
(3) Prior to 1999, Ultrapar had no preferred shares outstanding.
(4) Cash flow and EBITDA information has been derived from our consolidated
financial statements prepared in accordance with accounting practices
adopted in Brazil.
(5) See Note 23 (V)(f) to our consolidated financial statements.
(6) Depreciation represents depreciation expenses included in cost of goods
and services sold and in selling, general and administrative expenses.
(7) EBITDA is a measure widely used to approximate operating income.
Management uses EBITDA as one measure of assessing our ability to generate
cash from our operations, along with other measures such as cash flows
from operating activities. EBITDA is equal to operating profit plus
depreciation and amortization expenses. EBITDA is not a measure of
financial performance under U.S. GAAP or accounting practices adopted in
Brazil. EBITDA should not be considered in isolation, or as an alternative
to net income as a measure of operating performance or to cash flows from
operations as a measure of liquidity.
Reconciliation of operating (expenses) income to EBITDA
Year ended December 31,
------------ ------------ ------------ ------------ -------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ -------------
(in millions of reais)
Operating (expenses) income 365.5 278.9 213.5 258.1 106.4
Minus: non-cash operating income included in - (8.8) - - -
"other operating income, net"
Depreciation and amortization 121.8 102.4 90.8 78.9 66.3
EBITDA 487.3 372.5 304.3 337.0 172.7
===== ===== ===== ===== =====
(8) Figures from 1999 and 1998 take into account the 15,000:1 stock split
which occurred in July 1999. In October 1999 our capital was increased by
12.5 billion shares. In 2002, our capital was increased by 16.7 billion
shares in connection with our 2002 corporate restructuring. See "Item 4 A
- History and Development of the Company" for more information on our
corporate restructuring.
8
Ultrapar Participacoes S.A. and Subsidiaries
Year Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------
(in millions of reais, except per share data)
Consolidated Balance Sheet data: R$ R$ R$ R$ R$
Accounting practices adopted in Brazil
Current assets:
Cash and cash equivalents 637.9 656.0 862.2 856.6 345.7
Trade accounts receivable 271.6 149.2 139.2 119.0 78.6
Inventories 106.3 94.5 86.5 79.1 63.6
Other 171.1 145.5 102.9 58.2 44.5
Total current assets 1,186.9 1,190.8 1,112.9 532.4
1,045.2
Long-term assets:
Related companies 2.6 1.7 1.5 1.5 4.9
Other 44.8 40.3 34.3 32.5 22.2
Total long-term assets 47.4 42.0 35.8 34.0 27.1
Permanent assets:
Investments 33.0 88.8 87.8 78.2 85.1
Property, plant and equipment 779.5 707.9 655.9 665.7 722.8
Deferred charges 81.1 68.1 44.2 31.8 27.5
Total permanent assets 893.6 864.8 787.9 775.7 835.4
-------------------------------------------------------------------------------------------------------------------
Total Assets 2,127.9 1,952.0 2,014.5 1,922.6 1,394.9
-------------------------------------------------------------------------------------------------------------------
Current liabilities:
Suppliers 104.4 88.4 86.8 73.0 39.7
Financings 219.8 124.5 134.1 190.1 155.1
Salaries and related charges 64.4 50.2 44.7 38.2 31.4
Other 79.6 60.8 56.0 55.0 47.6
Total current liabilities 468.2 323.9 321.6 356.3 273.8
Long-term liabilities:
Financings 363.6 290.2 291.8 279.1 244.2
Related companies 10.2 11.0 11.6 12.8 13.4
Other 63.8 87.2 80.6 60.4 37.5
Total long-term liabilities 437.6 388.4 384.0 352.3 295.1
Total liabilities 905.8 712.3 705.6 708.6 568.9
Minority interest 31.0 439.8 411.2 394.4 351.9
Shareholders' equity:
Capital 664.0 433.9 433.9 433.9 101.0
Revaluation reserve 26.0 25.9 29.1 53.5 91.2
Profits reserves and retained earnings 501.1 340.1 434.7 332.2 281.9
Total shareholders' equity 1,191.1 799.9 897.7 819.6 474.1
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 2,127.9 1,952.0 2,014.5 1,922.6 1,394.9
-------------------------------------------------------------------------------------------------------------------
U.S. GAAP:
Total Assets 2,013.3 1,892.0 1,967.6 1,838.0 1,274.3
Shareholders' equity 1,076.5 748.5 854.6 760.1 388.2
9
Exchange Rates
There are two principal foreign exchange markets in Brazil:
o the commercial rate exchange market, and
o the floating rate exchange market
The commercial market is dedicated principally to foreign exchange
transactions and those transactions which require prior approval of the
Brazilian monetary authorities such as the buying and selling of registered
investments by foreign entities, the purchase or sale of shares or the payment
of dividends or interest with respect to shares, among other transactions.
Foreign currencies may only be purchased through banks domiciled in Brazil
authorized to operate in these markets. In both markets, rates are freely
negotiated but may be strongly influenced by Central Bank intervention. On
January 25, 1999, the Brazilian government announced the unification of the
exchange positions of the Brazilian banks in the floating rate exchange market
and commercial rate exchange market, which led to a convergence in the pricing
and liquidity of both markets. Since February 1, 1999 the floating market rate
has been the same as the commercial market rate. However, there is no guarantee
that the rates will continue to be the same in the future.
From its introduction on July 1, 1994 through March 1995, the real
appreciated against the U.S. dollar. In 1995, the Central Bank announced that
it would intervene in the market and buy or sell U.S. dollars, establishing a
band in which the exchange rate between the real and the U.S. dollar could
fluctuate. This policy resulted in a gradual devaluation of the real relative
to the U.S. dollar. On January 13, 1999, the band was set between R$1.20 and
R$1.32 per U.S.$1.00. Two days later, on January 15, 1999, due to market
pressures, the Central Bank abolished the band system and allowed the real/U.S.
dollar exchange rate to float freely. As a result, the exchange rate dropped to
R$2.165 per U.S.$1.00 on March 3, 1999. Since then, the exchange rate has been
established by the market, and has fluctuated considerably, reporting a
quotation of R$ 2.966 per US$ 1.00 on May 31, 2003. During this period, the
Central Bank has intervened occasionally to control unstable movements in the
foreign exchange rate. It is not possible to predict whether the Central Bank
will continue to let the real float freely or whether the real will remain at
its present level. Accordingly, it is not possible to predict what impact the
Brazilian government's exchange rate policies may have on us. The Brazilian
government could impose a band system in the future or the real could devalue
or appreciate substantially. See - "Risk Factors -- Risks Relating to Brazil."
The following table sets forth information on prevailing commercial selling
rates for the periods indicated.
Exchange rates of nominal reais per US$ 1.00
Year Ended High Low Average Period-End
---------- ---- --- ------- ----------
December 31, 1998 1.209 1.111 1.168(1) 1.209
December 31, 1999 2.165 1.208 1.851(1) 1.789
December 31, 2000 1.985 1.723 1.835(1) 1.955
December 31, 2001 2.801 1.936 2.353(1) 2.320
December 31, 2002 3.955 2.271 2.998(1) 3.533
Month Ended
December 31, 2002 3.798 3.428 3.613(2) 3.533
January 31, 2003 3.662 3.276 3.469(2) 3.526
February 28, 2003 3.658 3.493 3.576(2) 3.563
March 31, 2003 3.564 3.353 3.458(2) 3.353
April 30, 2003 3.336 2.890 3.113(2) 2.890
May 31, 2003 3.028 2.865 2.947(2) 2.966
(1) Average of the foreign exchange rates on the last day of each month in the
period.
(2) Average of the high and low foreign exchange rates for each month.
Source: Central Bank
10
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant
influence over the Brazilian economy. Brazilian political and economic
conditions have a direct impact on our business and the market price of the
preferred shares.
The Brazilian government frequently intervenes in the Brazilian economy and
occasionally makes drastic changes in policy. The government's actions to
control inflation and effect other policies have often involved wage and price
controls, currency devaluations, capital controls, and limits on imports, among
other things. Our business, financial condition and results of operations may
be adversely affected by changes in policy involving tariffs, exchange controls
and other matters, as well as factors such as:
o currency fluctuations;
o inflation;
o social instability;
o price instability;
o energy shortages;
o monetary policy and interest rates;
o liquidity of domestic capital and lending markets;
o fiscal policy; and
o other political, diplomatic, social and economic developments in or
affecting Brazil.
We cannot predict the effects that the policies of the administration of the
new president Luiz Inacio Lula da Silva, who was elected in October 2002 and
took office on January 2003, may have on Brazilian economic conditions or on
our results of operations.
The Brazilian government's actions to avoid economic instability as well as
public speculation about possible future actions, may contribute significantly
to economic uncertainty in Brazil and to heightened volatility in the Brazilian
securities market.
Inflation, and certain governmental measures to combat inflation, may
contribute significantly to economic uncertainty in Brazil.
Brazil has historically experienced extremely high rates of inflation. Since
the introduction of the real in July 1994 under the Real Plan, Brazil's
inflation rate has been substantially lower than in previous periods. The
inflation rate, as measured by
11
the Indice Geral de Precos -- Mercado, the general market price index in
Brazil, or IGP-M, which was 1.8% in 1998, recorded an increase of 20.1% in 1999
as a result of the devaluation of the real beginning in January 1999,
decreasing again to 10.0% in 2000 and 10.4% in 2001. In 2002, the inflation
rate as measured by the IGP-M once more increased to reach 25.3%, reflecting
the foreign exchange rate devaluation of 52.3%, largely the result of
uncertainties and risks inherent in the Brazilian presidential succession
campaign. During the period from January 1, 2003 to May 31, 2003, the real
appreciated 16% against the U.S. dollar and inflationary pressures declined.
Future governmental actions, including actions to adjust the value of the real
in relation to the U.S. dollar, may trigger increases in inflation. Our cash
operating expenses are substantially all in reais and tend to increase with
Brazilian inflation because our suppliers and providers generally increase
prices to reflect the depreciation of the value of the currency.
Fluctuations in the value of the Brazilian currency against the value of the
U.S. dollar may result in uncertainty in the Brazilian economy and the
Brazilian securities market, which may adversely affect our financial condition
and results of operations and, consequently, the market value of the preferred
shares and ADSs.
The Brazilian currency has historically suffered frequent devaluations. In
the past, the Brazilian government has implemented various economic plans and
utilized a number of exchange rate policies, including sudden devaluations,
periodic mini-devaluations during which the frequency of adjustments has ranged
from daily to monthly, floating exchange rate systems, exchange controls and
dual exchange rate markets. Devaluations over shorter periods have resulted in
significant fluctuations in the exchange rate between the real and the U.S.
dollar and other currencies.
In 1999, the real depreciated 48.0% against the U.S. dollar, as a result of
the exchange rate crisis of that year. In 2000, the real depreciated 9.0%
against the U.S. dollar, and in 2001 the real depreciated 18.7% against the
U.S. dollar. Due to uncertainties as to the outcome of the presidential
elections in October 2002 and the economic policy to be adopted by the new
government, the real depreciated by 52.3% against the U.S. dollar during 2002.
There are no guarantees that the exchange rate between the real and the U.S.
dollar will stabilize at current levels or that the real will appreciate
against the U.S. dollar. Although we have managed our existing U.S. dollar debt
obligations in order to protect against fluctuations in the dollar/real
exchange rate, we could in the future experience monetary losses relating to
these fluctuations. See "Item 11. Quantitative and Qualitative Disclosures
about Market Risk - Foreign Exchange Risk" for information about our foreign
exchange risk hedging policy. In addition, fluctuations in the value of the
real relative to the U.S. dollar can affect the market value of the ADSs.
Devaluation may reduce the U.S. dollar value of distributions and dividends on
the ADSs and may also reduce the market value of the preferred shares and the
ADSs.
Restrictions on the movement of capital out of Brazil may hinder your ability
to receive dividends and distributions on, and the proceeds of any sale of, the
preferred shares.
From time to time the Brazilian government may impose restrictions on capital
outflow that would hinder or prevent the custodian who acts on behalf of the
depositary for the ADSs from converting proceeds from the preferred shares
underlying the ADSs into U.S. dollars and remitting those proceeds abroad.
Brazilian law permits the government to impose these restrictions whenever
there is a serious imbalance in Brazil's balance of payments or reasons to
foresee a serious imbalance.
The Brazilian government imposed remittance restrictions for approximately
six months in 1989 and early 1990. If enacted, similar restrictions would
hinder or prevent the conversion of dividends, distributions or the proceeds
from any sale of preferred shares from reais into U.S. dollars and the
remittance of the U.S. dollars abroad. In such a case, the custodian, acting on
behalf of the depositary, will hold the reais it cannot convert for the account
of the holders of ADSs who have not been paid. The depositary will not invest
the reais and will not be liable for interest on those amounts. Furthermore,
any reais so held will be subject to devaluation risk.
12
Developments in other emerging markets may adversely affect the results of our
operations and the market price of the preferred shares and ADSs.
As a general rule, international investors consider Brazil to be an emerging
market economy. Consequently, economic conditions and the market for emerging
market countries, especially those located in Latin America, influence
investor's perceptions of Brazil and the evaluation of Brazilian companies'
securities. Since the end of 1997, investors have shown a high degree of
concern in relation to the risk of investing in emerging market economies due
to the economic problems faced by some of these countries, including Asian
countries, Russia and Argentina. Consequently, on occasions, Brazil has faced a
significant outflow of U.S. dollars and at the same time Brazilian companies
have shouldered the burden of higher financial costs. Brazilian securities or
the Brazilian economy may continue to be negatively affected by events
(including economic crises or currency fluctuations) that occur in other places
and such events may adversely affect our businesses, financial condition,
results of the operations, prospects and the value of our shares or ADSs.
Risks relating to the Preferred Shares and the American
depositary shares, or ADSs
The ADSs generally do not give you voting rights.
The ADSs represent our preferred shares. Under Brazilian law and our by-laws,
holders of preferred shares do not have the right to vote at shareholder
meetings. This means, among other things, that you are not entitled to vote on
important corporate transactions including mergers or consolidations with other
companies.
The preferred shares and ADSs do not entitle you to a fixed or minimum
dividend.
Under accounting practices adopted in Brazil and our by-laws, unless our
board of directors decides otherwise, we must pay our shareholders a mandatory
distribution equal to at least 50% of our adjusted net income. Therefore,
whether or not you receive a dividend depends on the amount of the mandatory
distribution, if any, and whether the board of directors exercises its
discretion to suspend these payments. See "Item 8. Financial Information --
Consolidated Statements and Other Financial Information -- Distribution Policy
and Dividends" for a more detailed discussion on mandatory distributions.
You might be unable to exercise preemptive rights with respect to the
preferred shares.
In the event of a rights offering or a capital increase, which would maintain
or increase the proportion of capital represented by preferred shares,
preferred shareholders would have preemptive rights to subscribe to newly
issued preferred shares. In the event of a capital increase, which would
maintain or reduce the proportion of capital represented by preferred shares,
preferred shareholders would have preemptive rights to subscribe for preferred
shares in proportion to their shareholdings and for common shares only to the
extent necessary to prevent dilution of their interest in the company.
The holders of ADSs may be unable to exercise their preemptive rights in
relation to the preferred shares represented by the ADSs, unless we file a
registration statement pursuant to the United States Securities Act of 1933
("Securities Act"), or an exemption from the registration requirements applies.
We are not obliged to file registration statements with respect to the
preemptive rights and therefore do not assure holders that such a registration
will be obtained. If the rights are not registered as required, the depository
bank will try to sell the preemptive rights and you will have the right to the
net sale value, if any. However, the preemptive rights will expire should the
depositary not succeed in selling them.
If you exchange the ADSs for preferred shares, you risk losing certain foreign
currency remittance and Brazilian tax advantages.
The ADSs benefit from the depositary's certificate of foreign capital
registration, which permits the depositary to convert dividends and other
distributions with respect to the preferred shares into foreign currency and
remit the proceeds abroad. If you exchange your ADSs for preferred shares, you
will be entitled to rely on the depositary's certificate of foreign capital
registration for five business days from the date of exchange. Thereafter, you
will not
13
be able to remit abroad non-Brazilian currency unless you obtain your own
certificate of foreign capital registration or you qualify under Resolution
2,689 of the Central Bank dated January 26, 2000, known as Resolution 2,689,
which entitles certain investors to buy and sell shares on Brazilian stock
exchanges without obtaining separate certificates of registration. If you do
not qualify under Resolution 2,689, you will generally be subject to less
favorable tax treatment on distributions with respect to the preferred shares.
The depositary's certificate of registration or any certificate of foreign
capital registration obtained by you may be affected by future legislative or
regulatory changes, and additional Brazilian law restrictions applicable to
your investment in the ADSs may be imposed in the future. For a more complete
description of Brazilian tax regulations, see "Item 10. Additional
Information-- Taxation-- Brazil."
The relative volatility and illiquidity of the Brazilian securities markets
may adversely affect you.
Investing in securities, such as the preferred shares or ADSs, of issuers
from emerging market countries, including Brazil, involves a higher degree of
risk than investing in securities of issuers from more developed countries. For
the reasons above, investments involving risks relating to Brazil, such as
investments in ADSs, are generally considered speculative in nature and are
subject to certain economic and political risks, including but not limited to:
o changes to the regulatory, tax, economic and political environment
that may affect the ability of investors to receive payments, in
whole or in part, in respect of their investments; and
o restrictions on foreign investment and on repatriation of capital
invested.
The Brazilian securities market is substantially smaller, less liquid, more
concentrated and more volatile than major securities markets in the United
States. This may limit your ability to sell the preferred shares underlying
your ADSs at the price and time at which you wish to do so. The Sao Paulo Stock
Exchange, known as Bovespa, the only Brazilian stock exchange, had a market
capitalization of approximately U.S.$124 billion as of December 31, 2002 and an
average monthly trading volume of approximately U.S.$4.0 billion for 2002. In
comparison, the NYSE had a market capitalization of U.S.$13 trillion as of
December 31, 2002 and an average monthly trading volume of approximately
U.S.$859 billion for 2002.
There is also a large concentration in the Brazilian securities market. The
ten largest companies in terms of market capitalization represented
approximately 48.2% of the aggregate market capitalization of the Bovespa as of
December 31, 2002. The top ten stocks in terms of trading volume accounted for
approximately 53.5% of all shares traded on the Bovespa in 2002. Ultrapar's
average daily volume in 2002, 2001 and 2000 was R$ 1.233 thousand, R$ 787
thousand, and R$ 978 thousand, respectively.
Our share price may be affected by shares eligible for future sale.
Currently, our total capital consists of approximately 18.4 billion preferred
shares and approximately 51.3 billion common shares. The public holds
substantially all of our preferred shares and ADS representing preferred
shares. Ultra S/A, a holding company, holds approximately 34.2 billion of our
common shares, representing 67% of our voting capital. Two other shareholders,
who may freely sell their respective shares, hold our remaining common shares.
A sale of a large block of common shares could negatively affect the market
value of the preferred shares and ADSs.
If we were treated as a Passive Foreign Investment Company, U.S. Holders of
ADSs would be subject to disadvantageous rules under the U.S. tax laws.
If we are characterized as a passive foreign investment company, or PFIC, in
any year, U.S. holders of ADSs could be subject to unfavorable U.S. federal
income tax treatment. Although we do not believe that we were a PFIC in 2002,
there can be no assurance that our business and activities will not lead to
PFIC status for us in the future. PFIC classification is a factual
determination made annually and thus may be subject to change. Please see "Item
10. Additional Information -- Taxation -- United States" for a description of
the passive foreign investment company, or PFIC, rules.
14
Risks Relating to Ultrapar and the Liquefied Petroleum Gas Distribution
Industry
Ultragaz, our LPG distribution subsidiary, currently depends upon Petrobras
for its supply of LPG.
Prior to 1995, Petrobras benefited from a constitutional monopoly in the
production and importation of petroleum products in Brazil. Although the
Brazilian government removed Petrobras' monopoly from the Federal Constitution
in November 1995, Petrobras effectively remains the sole provider of LPG in
Brazil. See "Item 4. Information on the Company -- Business Overview --
Distribution of Liquefied Petroleum Gas -- Industry and Regulatory Overview."
This may change in the future as LPG prices charged by Petrobras in the
domestic market grow closer to the prices charged in the international market.
At present, however, any interruption in the supply of LPG from Petrobras
immediately affects Ultragaz's ability to provide LPG to its customers.
Government deregulation of LPG prices causes the refinery prices to fluctuate
according to the international markets and may affect our revenues and
operating margin.
The Brazilian government has historically regulated the refinery price of
LPG, which is the price we pay Petrobras and is thus a component of our cost of
goods sold, and the retail price of LPG, which is the price we charge customers
and is thus a component of our gross sales revenue. In the 1990's, the
Brazilian government began to deregulate both prices. From May 2001, the retail
store prices in Brazil were no longer regulated.
In January 2002, Petrobras refinery prices, which are the LPG prices charged
by Petrobras to the distributors, were deregulated and have thereafter been
freely established by Petrobras, although subject to government intervention
when deemed appropriate, such as occurred between August 2002 and October 2002.
In this new deregulated environment, the refinery price fluctuates according to
the international markets, while the retail store price depends on a number of
factors, including the level of competition, brand recognition and the relative
prices of the energy sources that compete with LPG. If we are not able to pass
on increases in the refinery price to our customers by increasing the retail
store prices, our operating margins may be adversely affected.
LPG competes with alternative sources of energy.
LPG competes with natural gas, wood, diesel, fuel oil and electric energy.
Natural gas is currently less expensive than LPG for industrial consumers who
purchase large volumes, but more expensive for residential consumers, since its
supply requires significant investments in pipelines. In 2002, the overall
Brazilian LPG market decreased by 4.8% in part due to an increase in the use of
natural gas derived from the Brazil-Bolivia pipeline. The development of a new
energy source in the future may adversely affect the LPG market and
consequently, our business, financial results and results of operations. See
"Item 4. Information On the Company -- Business Overview -- Distribution of
Liquefied Petroleum Gas -- Competition."
Risks Relating to Ultrapar and the Petrochemical and Chemical
Industries
Ethylene, the principal raw material used in our petrochemical operations,
comes from limited supply sources.
Oxiteno purchases its principal raw material, ethylene, from two of Brazil's
three naphtha crackers, which are the sole sources of ethylene in Brazil.
Braskem S.A., known as Braskem, supplies all of our ethylene requirements at
our plant located at Camacari, and Petroquimica Uniao S.A., known as PQU,
supplies all of our ethylene requirements at our plant located at Maua. Because
of its characteristics, ethylene is difficult and expensive to store and
transport, and cannot be easily imported into Brazil. Therefore, like other
second-generation petrochemical companies, Oxiteno is almost totally dependent
on ethylene produced at Braskem and PQU for its supply of ethylene. In 2002,
Brazilian ethylene imports totaled 9,127 tons, representing less than 1% of
Brazil's installed capacity.
Oxiteno does not store significant quantities of ethylene, and reductions in
supply from Braskem and PQU would have an immediate impact on our production
and results of operations. We have a supply contract with Braskem, which
expires in 2012, setting forth the volume of ethylene that Braskem will supply
and the amount that Oxiteno will purchase. Unlike Braskem, PQU usually does not
enter into long-term supply contracts with its
15
customers. If we further expand our production capacity, there is no assurance
that we will be able to obtain additional ethylene from Braskem and PQU.
Unlike PQU, which acquires all of its naphtha requirements from Petrobras,
Braskem made investments in its plant and equipment which allowed it to import
30% of its naphtha requirements in 2002, thus reducing its acquisition of
supplies from Petrobras to 70%.
While Braskem and Copesul imported naphtha during 2002, Petrobras is still
the principal supplier of naphtha to crackers in Brazil, and any interruption
in the supply of naphtha from Petrobras to the crackers could adversely impact
their ability to supply ethylene to Oxiteno.
The Brazilian petrochemical industry is very closely influenced by the
performance of the international petrochemical industry and its cyclical
behavior.
The decrease in Brazilian tariff rates on petrochemical products, the
increase in demand for such products in Brazil, and the ongoing integration of
regional and world markets for commodities, among other factors, have
contributed to the increasing integration of the Brazilian petrochemical
industry into the international petrochemical marketplace. The international
petrochemical market is cyclical in nature, with alternating periods of tight
supply, increased prices and high margins, and of over-capacity, declining
prices and low margins. Accordingly, prices of certain of our products in
Brazil are becoming more closely related to price trends in the global market.
As a consequence, events affecting the petrochemical industry worldwide could
have a material adverse effect on our business, financial condition and results
of operations.
The reduction in import tariffs on petrochemical products can reduce our
competitiveness in relation to imported products.
Prices paid by importers of petrochemical products are partially based on
transportation costs and tariff rates. Consequently, tariff rates imposed by
the Brazilian government affect the prices we can charge for our products. The
import tariffs on the main categories of products that we produce are between
13.5% and 15.5%. The Brazilian government's negotiation of major commercial and
free trade agreements, principally with NAFTA and the European Union may result
in reductions in Brazilian import duties on petrochemical products reducing the
competitiveness of our products vis-a-vis imported petrochemical products.
The price of ethylene is subject to fluctuations in international oil
prices.
The price of ethylene, which is the principal component of Oxiteno's cost of
goods sold in the petrochemicals business, is directly linked to the price of
naphtha which, in turn, is primarily linked to the price of crude oil.
Consequently, ethylene prices are subject to fluctuations in international oil
prices. A significant increase in the price of crude oil and, consequently,
naphtha and ethylene, could have a material adverse effect on our results of
operations.
Our insurance coverage may be insufficient to cover losses that we might
incur.
The operation of any chemical manufacturing plant and the distribution of
petrochemicals involve substantial risks of property contamination and personal
injury and may result in material costs and liabilities. We maintain insurance
policies that cover material damages caused by leakages of toxic substances and
other events that we are able to eliminate within 72 hours. The occurrence of
losses or other liabilities that are not covered by insurance or that exceed
our insurance limits could result in significant unexpected additional costs.
We may be adversely affected by the imposition and enforcement of more
stringent environmental laws and regulations.
We are subject to stringent environmental laws and regulations in Brazil.
Changes in these laws and regulations, or changes in the enforcement policy of
existing laws and regulations, could adversely affect us. In addition, it is
possible that new laws or additional regulations will come into force, or that
the relevant enforcement agencies will seek a more stringent interpretation of
existing laws and regulations that would require us to spend additional funds
on environmental matters in order to continue to keep our plants and operations
in compliance.
16
The production of petrochemicals and chemicals is inherently hazardous.
The complex manufacturing operations we perform at our plants involve a
variety of safety and other operating risks, including the handling, production
and transportation of highly inflammable, explosive and toxic materials.
Equipment breakdowns, natural disasters, and delays in obtaining imports or
required replacement parts or equipment can also affect our manufacturing
operations. We cannot completely eliminate the risks inherent in the
petrochemical and chemical manufacturing process.
Risks Relating to Ultrapar Generally
We are currently controlled by our senior management, which substantially
limits the ability of non-management shareholders to control the direction of
our business.
Our senior management indirectly controls approximately 67% of our voting
share capital through their control of Ultra S.A. This level of control enables
the management to elect the majority of our directors and to determine the
outcome of all actions requiring shareholder approval. See "Item 7. Major
Shareholders and Related Party Transactions -- Major Shareholders --
Shareholders' Agreement of Ultra S.A.."
Our status as a holding company may limit our ability to pay dividends on the
preferred shares.
As a holding company, we have no significant operating assets other than our
ownership of shares of our subsidiaries. Substantially all of our operating
income comes from our subsidiaries. Consequently, our ability to pay you
dividends depends solely upon our receipt of dividends and other cash flows
from our subsidiaries.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We manage three businesses: Ultragaz, a distributor of liquefied petroleum
gas, or LGP, Oxiteno, a chemical and petrochemical manufacturer, and
Ultracargo, a chemicals, petrochemicals and LPG transportation and storage
company.
We were incorporated on December 20, 1953, with our origins going back to
1937, when Ernesto Igel founded Companhia Ultragaz S.A and brought LGP as a
cooking gas to Brazil using cylinders acquired from Companhia Zeppelin. The gas
stove began to replace the traditional wood stoves and to a lesser degree,
kerosene and coal gas, which dominated the Brazilian kitchens at the time.
In 1966, Transultra was formed to satisfy the demand for high quality
transportation services and focused in both the transportation and storage of
chemicals, petrochemicals and LPG. In 1978, Tequimar was founded for the
specific purpose of operating the storage business.
We were also pioneers in developing the Brazilian petrochemicals industry
with the creation of Oxiteno in 1970, located in the Maua petrochemical complex
in Sao Paulo. In 1986, Oxiteno established its own research and development
center in order to respond to specific customer needs.
Today, we deliver LPG to an estimated 7.5 million homes using our own fleet
of vehicles and approximately 3,000 independent retailers. Oxiteno has four
plants located at the three Brazilian petrochemical complexes and is one of the
largest chemical companies in Brazil with activities in both domestic and
international markets. Oxiteno's business begins in the second tier of the
petrochemical transformation chain and also encompasses downstream activities
in the specialty chemicals business serving more than 30 different market
segments, particularly agricultural chemicals, food, cosmetics, leather,
detergents, packaging for beverages, thread and polyester filaments, brake
fluids, petroleum and paints and varnishes. Ultracargo is the only company in
the market that offers an integrated transportation and liquid bulk storage
service to the petrochemicals sector. Among other solutions,
17
Ultracargo offers, through its subsidiaries Transultra and Tequimar, integrated
multimodal transportation, loading and unloading operations for its customers
and the management of third party fleets. Ultracargo's high storage capacity
together with the strategic location of its assets, facilitates product
movement along its multi-modal logistics system.
On October 6, 1999, we sold 12.5 billion preferred shares in a global primary
offering. On the same date, we placed an additional 2.4 billion preferred
shares through a secondary offering. Of the total number of shares offered,
approximately 20% were placed in Brazil and 80% were placed internationally and
currently trade on the New York Stock Exchange in the form of ADSs. We received
total proceeds in the amount of approximately R$330.6 million from this
offering.
We have invested substantial amounts in our operations to ensure continued
growth. At Ultragaz, we invested in the construction of a new gas filling
plant, expanding our network geographically to cover practically the whole of
Brazil. We have invested heavily in the distribution of bulk LGP for industrial
customers, particularly the commercial sector, at the same time reformulating
our distribution logistics. At Oxiteno, we have been investing in increased
installed capacity and in the modernization of the company's industrial plants.
Ultracargo has been investing in its truck fleet and storage capacity and has
also renewed a 20-year rental contract of a site at Aratu in Bahia State with
Cia. Docas do Estado da Bahia - CODEBA, renewable for an additional 20-years
period.
We have invested in information and technology in order to integrate the
systems among our businesses and to improve decision-making efficiencies and
upgrade our services.
The following table shows our capital expenditures for the periods indicated:
Year Ended December 31,
----------------------------------------------
Company 2002 2001 2000
------- ---- ---- ----
(in millions of reais)
Ultragaz 130.6 148.2 120.4
Oxiteno 55.8 42.9 49.9
Ultracargo 36.2 11.9 11.6
Others(1) 0.2 0.1 0.5
----- ----- -----
Total 222.8 203.1 182.4
===== ===== =====
(1) includes expenditures with our headquarters' maintenance which is
performed by our wholly- owned subsidiary Imaven Imoveis e
Agropecuaria Ltda.
On May 23, 2001, we acquired the 35% voting interest of Transultra that we
did not already own, from Petrobras Distribuidora S.A. We made this acquisition
through our wholly owned subsidiary, Ultracargo, in an auction held at Bovespa.
We paid the minimum price at the auction, which was R$21 million. Of that
amount we paid 5% in cash, and the remaining 95% with government securities,
that we acquired at a 62.7% discount for this purpose.
In March 2002, Oxiteno made a tender offer for the acquisition of the shares
of its subsidiary Oxiteno Nordeste S.A. Industria e Comercio, known as Oxiteno
Nordeste. The tender offer was completed on April 16, 2002, through the
acquisition of 93,871 shares of Oxiteno Nordeste by Oxiteno, representing
approximately 73.3% of the shares held by minority shareholders. Oxiteno
increased its share ownership from 97% to 98.9% for approximately R$4.4
million.
On December 20, 2002, we completed our corporate restructuring process which
we began on October 15, 2002. The effects of the corporate restructuring were:
18
o merger of Gipoia, owned by Ultra S.A., into Ultrapar, increasing
Ultrapar's ownership in Ultragaz to 100% from 77% of the total share
capital. Ultrapar issued approximately 7.8 billion common shares in
connection with this merger.
o Ultrapar's "incorporation" of shares issued by Oxiteno, increasing
Ultrapar's ownership in Oxiteno to 100% from 48% of the total share
capital. The holders of approximately 12 million of Oxiteno's shares
elected to exchange their shares for shares in Ultrapar, triggering the
issue of approximately 5.4 billion common shares and 3.4 billion preferred
shares by Ultrapar. We paid R$ 208.0 million representing approximately 13
million shares to Oxiteno's minority shareholders who exercised their
statutory withdrawal rights.
The table below shows the effects of the corporate restructuring in our share
capital:
Total
capital Number of shares
(in millions --------------------------------
of reais) Common shares Preferred shares Total shares
--------- ------------- ---------------- ------------
As of December 31, 2001 433.9 37,984,012,500 15,015,987,500 53,000,000,000
shares issued for:
merger of Gipoia 38.5 7,850,603,880 -- 7,850,603,880
"incorporation" of Oxiteno's shares 191.6 5,430,005,398 3,410,659,550 8,840,664,948
----- ------------- ------------- -------------
As of December 31, 2002 664.0 51,264,621,778 18,426,647,050 69,691,268,828
===== ============== ============== ==============
The board of directors has approved a share repurchase program under which we
can acquire our own preferred shares at market price and hold them in treasury
for subsequent sale or cancellation. During the second quarter of 2002, we
acquired 20.2 million preferred shares and in April 2003, we acquired an
additional 32 million shares.
Our principal executive office is located at Avenida Brigadeiro Luis Antonio,
1343, 9(0) andar, 01317-910, Sao Paulo, SP, Brazil. Our telephone number is
55-11-3177-6482. Our internet website address is http://www.ultra.com.br. Our
agent for service of process in the United States is C.T. Corporation System,
located at 1633 Broadway, New York, New York 10019.
B. Business Overview
We are one of the leading Brazilian corporate groups with annual sales of more
than R$ 3 billion. We have more than 5,000 employees and operate throughout
practically the entire country. We are the second largest LPG distributor in
Brazil, and the fifteenth largest in the world based on volumes sold. Oxiteno
is the only producer of ethylene oxide and of some of its derivatives in the
Mercosur area. We are also especially active in transportation and storage
services for LPG as well as for chemical and petrochemical products.
Through Ultragaz, which sells LPG throughout Brazil except the Amazon region,
we are the market leader in key states such as Bahia and Sao Paulo with a
market share of 39% and 36%, respectively. In 2002, total sales exceeded 1.3
million tons, representing 19.6% of the entire domestic market. Ultragaz was
responsible for 65% of our consolidated net revenue in 2002.
In 2002, Oxiteno, which produces ethylene oxide, solvents and specialty
chemicals, reported total sales of 434 thousand tons of petrochemicals, which
corresponds to a market share of approximately 70%. The chemical segment
accounted for 32% of our consolidated net revenue in 2002.
Ultracargo, through its subsidiaries, Transultra with a fleet of 659 trucks and
Tequimar with a total storage capacity of 200.581 m3, represented 4% of our
consolidated net revenue in 2002.
19
Our competitive advantages
We believe Ultragaz's competitive advantages include:
o the concentration of several of its markets in the principal centers of
Brazilian population, creating economies of scale in distribution
logistics;
o its strong brand recognition;
o a detailed knowledge of the Brazilian markets, partially based on
Ultragaz's involvement at all levels of LPG distribution to its customers;
and
o its reputation for quality, reliability, safety and efficiency.
We believe Oxiteno's principal competitive advantages include:
o its status as the sole producer of ethylene oxide and its derivatives in
the Mercosur area;
o its large production capacity in excess of Brazilian demand which acts as
a barrier to the entry of new producers;
o its operational flexibility which enables it to optimize its sales mix in
line with market conditions;
o its plants which employ technologically advanced production processes;
o its advanced research and development centers for improving production
processes and product uses; and
o its highly skilled labor force.
We believe that Transultra's and Tequimar's integration between management and
operations leads to important competitive advantages because Ultracargo is the
only company in the market which is able to provide the petrochemical segment
with integrated bulk liquid and liquefied transport and storage services. The
commitment to occupational safety is a further competitive advantage.
20
The following map shows our operating areas:
[GRAPHIC OMITTED]
The following table shows social and economic indicators on the principal
states in which we operate:
--------------------------------------------------------------------------------
State Population Percentage of Per Capita GDP
(in millions) Brazilian GDP (in reais)
--------------------------------------------------------------------------------
Rio Grande do Sul 10.2 7.73 8,341
Parana 9.6 5.99 6,882
Sao Paulo 37.0 33.67 9,995
Rio de Janeiro 14.4 12.52 9,571
Goias 5.0 1.97 4,316
Bahia 13.1 4.38 3,680
Sergipe 1.8 0.54 3,310
Alagoas 2.8 0.64 2,485
Pernambuco 7.9 2.64 3,673
Ceara 7.4 1.89 2,794
--------------------------------------------------------------------------------
Distribution of Liquefied Petroleum Gas
Industry and Regulatory Overview
LPG is a fuel derived as a by-product from the oil and natural gas refining
process. In Brazil, refineries produce approximately 70% of local demand and
the remaining 30% is imported. LPG has the following primary uses in Brazil:
o Bottled segment: used primarily by residential consumers, for cooking
and, increasingly, for water heating;
o Bulk segment: used for cooking and water heating in shopping malls,
hotels, condominiums, restaurants, laundries and hospitals; and for
heating applications, such as heating kilns in the ceramics industry
and welding in the metallurgical industry.
21
The following chart shows the process for LPG distribution:
[GRAPHIC OMITTED]
In 2002, 71% of the LPG consumed in Brazil was used for domestic purposes,
primarily for cooking, and the remaining 29% was used for commercial and
industrial purposes. The use of LPG for domestic heating in Brazil is
immaterial compared with its use in other developed and emerging countries,
primarily because of Brazil's generally warm climate. Because LPG is not used
to a significant extent for domestic heating in Brazil, overall consumption of
LPG per capita is lower in Brazil compared to countries where domestic heating
is a major element of LPG demand. There is also substantially less seasonality
in Brazilian demand. In 2001, the most recent year for which official
statistics are available, LPG accounted for 4.6% of all energy consumed in
Brazil.
22
Prior to 1990, extensive governmental regulation of the LPG industry
essentially limited the use of LPG to domestic cooking. Since 1990, regulations
allow the use of LPG for certain commercial and industrial uses. As a result,
the industrial use of LPG has been increasing significantly. In the industrial
sector, LPG competes with wood, natural gas, fuel oil and electrical energy.
The primary international suppliers of LPG are major oil companies and
independent producers of both natural gas liquids and oil. However, due to
Petrobras' monopoly over the production and importation of petroleum and
petroleum products until the end of 2001, Petrobras is currently the sole
supplier of LPG in Brazil. This scenario might change in the future due to the
economic feasibility of importation of LPG.
Currently, the LPG distribution industry in Brazil consists of
approximately sixteen LPG distribution companies or groups of companies, and is
regulated by the National Agency for Oil, or ANP, which reports to the Ministry
of Mines and Energy. The LPG distribution industry includes purchasing LPG from
Petrobras, filling LPG cylinders and bulk delivery trucks at filling stations,
selling LPG to end users, controlling product quality and providing technical
assistance to LPG consumers. See "- Distribution and Transportation."
LPG produced by Petrobras, which represents approximately 70% of total
demand in Brazil, is transported in pipelines and by trucks from Petrobras'
production and storage facilities to filling stations maintained by LPG
distributors. The balance is imported by Petrobras into Brazil and stored in
large storage facilities maintained by Petrobras. The imported LPG is then
transported from the storage facilities by pipeline and truck to the LPG
distributors' filling stations.
LPG can be delivered to end users either in cylinders or in bulk. The
cylinders are filled in the LPG distributors' filling stations. Distribution to
the bottled segment is carried out through two principal channels:
o home delivery of LPG cylinders; and
o the sale of LPG cylinders in retail stores and at filling stations.
In both cases, the cylinders are either delivered by the LPG distributors
themselves or by independent dealers.
Bulk delivery is the principal delivery method in the industrial and
commercial markets and is increasingly used in the commercial market in place
of delivery in cylinders. In the case of bulk delivery, LPG is pumped directly
into tanker trucks at filling stations, transported to the customer's premises
in the truck and pumped into a bulk storage tank located at the customer's
premises.
As of December 2002, the four largest LPG distributors in Brazil were:
o Agip do Brasil S.A., known as AgipLiquigas, a subsidiary of
AgipPetroli SpA, an Italian conglomerate;
o Ultragaz;
o Nacional Gas Butano Ltda., known as Butano, which is controlled by a
Brazilian family; and
o Supergasbras S.A., known as Supergasbras, which is jointly controlled
by SHV Energy and the founding Brazilian family.
The Role of the Brazilian Government. The Brazilian government
historically regulated the sale and distribution of LPG in Brazil. The period
from 1960 to 1990 was characterized by heavy governmental regulation, including
price controls, regulation of the areas in which each LPG distributor could
operate, regulation of the services offered by LPG distributors and
governmental quotas for the LPG sold by LPG distributors, which effectively
restricted the growth of the larger LPG distributors. In 1990, the government
started a deregulation process with the purpose of establishing a largely
unregulated LPG market. This process included easing the requirements for the
entry into the market of new distribution companies, reducing certain
administrative burdens and removing restrictions on the areas in which
distributors could conduct their business and on sales quotas. There are no
restrictions on foreign ownership of LPG companies.
23
In 2001, distributors were allowed to establish their own retail prices,
which were previously fixed. Until the end of 2001, the LPG refinery price,
which is charged by Petrobras to all LGP distributors, was determined by the
government and was the same for all LPG distributors in all regions of Brazil.
Historically, refinery prices have been subsidized by the government and
therefore have been lower than the annual average international LPG price. In
January 2002, the government abolished subsidies to refinery prices, creating a
new tax system, the CIDE, which equalized the tax charges on the local market
with the exported product in order to open up the market for LPG. Consequently,
from January 2002, Petrobras started to freely price LGP in the domestic market
and adopted the international price plus surcharges as its benchmark. However,
in August 2002, the ANP began intervening in prices fixed by Petrobras for the
bottled segment, fearing the effects of the increases in international LPG
prices. This policy continued through October 2002, when Petrobras was once
again able to set its own prices for LPG. On December 31, 2002 the refinery
price charged by Petrobras was approximately U.S.$222.70 per ton for the
bottled segment and US$271.99 per ton for the bulk segment compared with an
international price of US$282.83 per ton.
The Role of Petrobras. Petrobras, Brazil's national oil company, had a
legal monopoly in the exploration, production, refining, importing and
transporting of crude oil and oil products in Brazil and Brazil's continental
waters since its establishment in 1953. This monopoly was confirmed in Brazil's
federal constitution enacted in 1988. As a result of this monopoly, Petrobras
was historically the sole supplier in Brazil of oil and oil-related products,
including naphtha and LPG.
In November 1995, Petrobras' monopoly was removed from the federal
constitution by a constitutional amendment approved by the Brazilian national
congress. According to this amendment, other state and private companies would
be able to compete with Petrobras in virtually all fields in which Petrobras
operated. This amendment was implemented through Law No. 9,478, dated August 6,
1997, which effectively allowed the Petrobras' monopoly to continue for a
maximum period of three years. Law No. 9,478 prescribed that the termination of
Petrobras' monopoly would be accompanied by the deregulation of prices for oil,
gas and oil products, and created a new regulatory agency, the ANP, to oversee
oil-related activities. However, in practice, Petrobras still remains the sole
LPG supplier in Brazil. This could change in the future since prices charged by
Petrobras in the domestic market are close to those prevailing in the
international market.
The Role of the ANP. The ANP is responsible for the control, supervision
and implementation of the government's oil and gas policies. The ANP regulates
all aspects of the production, distribution and sale of oil and oil products in
Brazil, product quality standards, and minimum storage capacities required to
be maintained by distributors.
In order to operate in Brazil, an LPG distributor must be licensed with
the ANP and must comply with certain minimum operating requirements, including:
o maintaining sufficient storage capacity for LPG;
o maintaining an adequate number of LPG cylinders;
o using cylinders which are stamped with the distributor's own brand;
o having its own filling plants;
o conducting appropriate maintenance on its own LPG filling plants;
o having a minimum paid in capital of at least R$10 million;
o demonstrating financial wherewithal, either by owner's equity,
insurance, or a bank guarantee; and
o complying with Sistema Unico de Cadastramento Unificado de
Fornecedores, or SICAF, the Brazilian unified system of suppliers'
records.
LPG distributors are required to provide the ANP with monthly reports
showing their previous month's sales and the volume of LPG ordered from
Petrobras for the next four months. The ANP limits the volume of LPG which
24
may be ordered by each distributor based on the number of cylinders that the
distributor has, and also its infra-structure for the LPG distribution. Based
on the information provided by the distributors, Petrobras supplies the volume
of LPG ordered, provided its production and imports of LPG are sufficient to
meet the demand.
LPG distribution to the end consumer may be carried out directly by the
LPG distribution companies or by independent dealers. Each LPG distributor must
provide the ANP with information regarding its contracted independent dealers
on a monthly basis. The construction of LPG filling plants and storage
facilities is subject to the prior approval of the ANP, and filling plants and
storage facilities may only begin operations after ANP inspection.
In addition to the ANP regulations, LPG distribution companies are subject
to all federal, state and local government regulation and supervision generally
applicable to companies engaged in business in Brazil, including labor laws,
social security laws, public health, consumer protection and environmental
laws, securities laws and antitrust laws.
The Self-Regulatory Code. In August 1996, most of the Brazilian LPG
distributors, representing more than 90% of the market, cylinder manufacturers,
LPG transportation companies and certain LPG retail stores, under the
supervision of the Brazilian government, entered into a statement of intent
regarding the establishment of a program for "requalifying" LPG cylinders (a
process under which they undergo safety and quality checks) and other safety
procedures, known as the "Self-Regulatory Code" or Codigo de
Auto-Regulamentacao. See "-Swapping Centers and Requalification." Before the
Self-Regulatory Code came into effect, certain LPG distributors, not including
Ultragaz, would fill cylinders stamped with another distributor's brand. This
practice resulted in a low level of investment in new cylinders, giving rise to
concerns regarding the safety of older cylinders. The Self-Regulatory Code
provides, among other things, that:
o each LPG distributor may only fill and sell cylinders that are
stamped with its own trademark;
o each LPG distributor is responsible for the quality and safety
control of its cylinders; and
o each LPG distributor must maintain a sufficient number of cylinders
to service its sales volume.
Under the Ministry of Mines and Energy Normative Ruling No. 334 of
November 1, 1996, or Ruling 334, any party that defaults on its obligations
under the Self-Regulatory Code will be subject to the penalties in law, ranging
from payment of a fine and suspension of supply of LPG to such party to
suspension of such party's LPG distribution operations.
Ruling 334 sets forth the following timetable for the implementation of
the measures adopted under the Self-Regulatory Code:
o the construction of at least 15 swapping centers, starting in
November 1996 (See "- Cylinder Swapping Centers - Requalification of
Cylinders);
o the filling of third-party cylinders to have ceased by October 1997;
o by November 1, 2006, the requalification of 68.8 million cylinders
manufactured up to 1991; and
o by November 1, 2011, the requalification of 12.8 million cylinders
manufactured between 1992 and 1996.
Ultragaz itself is required to requalify 13.8 million cylinders by
November 2006 and an additional 1.3 million cylinders by November 2011. As of
December 31, 2002, Ultragaz had requalified 8.2 million cylinders.
Environmental, Health and Safety Standards. LPG distributors are subject
to Brazilian federal, state and local laws and regulations relating to the
protection of the environment, public health and safety. Primarily the National
Council of the Environment, or Conselho Nacional do Meio Ambiente - CONAMA,
regulates Ultragaz at the federal level.
25
Federal and state environmental laws and regulations require LPG
distributors to obtain operating permits from the state environmental agencies
and from the fire department. In addition, the distributors must satisfy
regulatory authorities that the operation, maintenance and reclaiming of
facilities is in compliance with regulations and not prejudicial to the
environment. Civil, administrative and criminal sanctions, including fines and
the revocation of licenses, may apply to violations of environmental
regulations. Under applicable law, the distributors are strictly liable for
environmental damages. In addition, regulations establish standard procedures
for transporting, delivering and storing LPG and for testing and
requalification of LPG cylinders.
The distributors are also subject to federal, state and local laws and
regulations that prescribe occupational health and safety standards. In
accordance with such laws and regulations, distributors are mandatorily
required to prepare reports on their occupational health and safety records on
a yearly basis to the local office of the Ministry of Labor in each of the
states in which they operate. In addition, they are also subject to all
federal, state and local governmental regulation and supervision generally
applicable to companies doing business in Brazil, including labor laws, social
security laws, and public health and consumer protection laws. See
"-Environmental Matters."
Ultragaz
We distribute LPG through Ultragaz. Founded in 1937, the company was the
first LGP distributor in Brazil and continues to be one of the leading
companies in the Brazilian LPG market.
Ultragaz operates in the bottled and bulk segments in the most highly
populated states in Brazil, including Sao Paulo, Rio de Janeiro and Bahia. The
company sells LPG to the bottled segment through its own retail outlets and
through independent dealers as well as its own truck fleet, which operates on a
door-to-door basis. The bulk segment is serviced through its own truck fleet as
well as its independent dealers.
In 2002, Ultragaz sold 1.30 million tons of LPG, representing 19.6% of the
Brazilian market and 36% of the market in Sao Paulo state. This state has the
largest economy in Brazil, representing approximately 34% of the Brazilian GDP
and has a population of approximately 37 million. Ultragaz estimates that it
sells LPG to approximately 7.5 million homes and 35,715 commercial and
industrial customers in Brazil.
History. Since 1937, when Ultragaz' founder, Ernesto Igel, introduced LPG
for domestic cooking to the Brazilian population, gas stoves have replaced
traditional wood and, to a lesser extent, alcohol, kerosene and coal gas
stoves. When Ultragaz began operations, it had a fleet of three trucks and 166
customers.
Ultragaz has three operating subsidiaries:
o Companhia Ultragaz S.A., or Cia Ultragaz, the company that pioneered our
LPG operations;
o Utingas Armazenadora S.A., or Utingas, which was incorporated in 1967 when
Ultragaz and other LPG distributors joined to construct LPG storage
facilities based in the states of Sao Paulo and Parana. Ultragaz currently
controls 56% of the storage operations. See " - LPG Storage"; and
o Bahiana Distribuidora de Gas Ltda. - Bahiana, which is a wholly-owned
subsidiary of Ultragaz.
Distribution. As of December 2002, Ultragaz operated 16 filling plants
located in its principal operating areas, and currently expects to open a new
filling plant in 2003, in the state of Minas Gerais. Ultragaz's distribution in
the bottled segment includes sales through home delivery service, its retail
stores and independent dealers that make home deliveries and carry out other
retail distribution. In this market, Ultragaz uses 13 kg cylinders, which
conform to the ANP standards and are painted blue, an important element of the
"Ultragaz" brand recognition.
Ultragaz distributes LPG to the commercial market both in large cylinders
and in bulk. Since 1994, Ultragaz has invested in its small bulk facilities,
including bob-tail trucks, which deliver LPG in bulk to commercial and
industrial customers that could not easily receive LPG from the more
traditional large bulk equipment. Ultragaz installs fixed tanks backed by
supply contracts with terms ranging from two to five years.
26
The bottled LPG market in Brazil is a mature market and Ultragaz expects
that over time demand in this market will grow slowly, in line with increases
in the number of LPG consuming households and in population. Ultragaz believes
that, over time, the bulk market offers more attractive growth opportunities,
mainly due to the replacement of other energy sources by LPG for a variety of
applications. When compared to other energy sources, LPG is a clean, portable
and economic energy source.
The following chart shows the annual volume and the compounded average
growth rate (CAGR) of LPG sales in the Brazilian market and of Ultragaz's sales
for the periods indicated.
[OBJECT OMITTED]
In January 2002, LPG refinery prices charged by Petrobras to distributors
began to be set by reference to international LPG prices, which resulted in
domestic prices becoming sensitive to the effects of the real depreciation
against foreign currencies. The depreciation of the real and the increases in
LPG prices worldwide resulting from the war with Iraq led to an increase of
approximately 123% in LPG refinery prices charged by Petrobras to distributors
and resulted in a 5% decrease in domestic consumption. Ultragaz's volume sales
dropped only by 3%, as the decrease in domestic consumption was partially
offset by Ultragaz's increase in market share.
Markets and Marketing
Markets. When Ultragaz began its operations, it served only the southeast
region of Brazil. Currently, Ultragaz is present in all of Brazil's significant
population centers, with the exception of the northern region.
27
The following table shows Ultragaz's LPG sales volumes by region, as well
as certain financial information relating to Ultragaz for the periods
indicated:
Year Ended December 31,
------------------------------ -----------------------------------------------
LPG Sold 2002 2001 2000
-------- ---- ---- ----
(in thousands of tons, except where otherwise
indicated)
Southeast 510.7 487.2 450.5
Northeast 292.8 306.8 292.1
Southern Central Region 499.1 550.9 545.7
Total 1,302.6 1,344.9 1,288.3
------- ------- -------
Net sales (1) 1,942.7 1,381.1 1,125.9
Operating income (1) 143.2 101.2 98.6
(1) In millions of reais.
Ultragaz's operating margins in the bottled market vary from region to
region, depending on its market share and distribution channel in each region.
In 1995, Ultragaz began a program to increase its bulk sales through investment
in its bulk delivery capabilities. Ultragaz's customers in the commercial
sector include shopping malls, hotels, condominiums, restaurants, laundries and
hospitals. Ultragaz's industrial customers principally comprise companies in
the food, metallurgical, steel-making and ceramics industry.
The bulk market represented 41.6% of Ultragaz's net sales in 2002. LPG
delivery costs per ton are lower for bulk delivery, which is the main form of
delivery in the commercial and industrial sectors, as compared to delivery in
cylinders.
Ultragaz's marketing strategy in the bottled market is to increase its
market share by expanding its geographic reach into new regions and by
protecting and enhancing its market share in its existing operating regions by
increasing service quality.
The marketing strategy for the bulk segment is to continue focusing on
product and service innovation and brand building. In addition, Ultragaz
supplies its most important commercial customers by bulk delivery under
long-term contracts, which are generally for a term of approximately two to
five years. This type of contract enhances the stability of the company's sales
since Ultragaz is responsible for the tank installation investment, and the
change in LPG supplier would require the customer to reimburse Ultragaz for
these installation investments.
In addition, Ultragaz has a team of employees responsible for, among other
things, researching the needs of each bulk customer and developing feasible
applications for LPG.
Supply of LPG
Currently, Ultragaz acquires LPG solely from Petrobras. The arrangements
for ordering and purchasing LPG from Petrobras are set forth in a one year
contract entered into in February 2000. Although this contract has expired, its
renewal is being negotiated, and Petrobras has been supplying LPG to Ultragaz
under the same conditions as the expired contract. This contract (i) guarantees
the supply of LPG ordered unless a force majeure event occurs, (ii) requires
Ultragaz to submit rolling estimates of its orders, and (iii) limits the
ability to change orders thereafter. By the 20th day of each month, Ultragaz
must submit its order for the next four months. Ultragaz is entitled to change
the order by 3% for the first month, 5% for the second month and 7% for the
third month. There are no limits with respect to order changes for the fourth
month. Additionally, this contract establishes that, in the case of a shortage
in the supply of LPG, Petrobras must treat all LPG distributors equally.
It is possible that LPG distributors, including Ultragaz could diversify
their supply sources as a result of the end of Petrobras's monopoly, the
equalization of the tax on domestic and imported LPG and the matching of
Petrobras' prices with prevailing prices in the international market.
28
Storage of LPG
Ultragaz's storage capacity is limited. Based on its 2002 average LPG
sales, Ultragaz can store approximately two and a half days' supply of LPG.
Petrobras maintains approximately three and a half days' supply of LPG at its
refineries and other facilities. Accordingly, any interruption in the
production of LPG can result in shortages, such as the one that occurred during
the Petrobras strike in 1995. The limited storage capacity of these LPG
distributors and Petrobras is mitigated to a certain extent by the fact that
LPG inventory is also maintained by end users, particularly in the bottled
sector, where most customers maintain on average two LPG cylinders at home to
ensure continued LPG supply between deliveries. Ultragaz estimates that, on
average, one of these cylinders will be full at any time, representing
approximately one month's supply of LPG for the average household.
Ultragaz's total storage capacity of 15.0 thousand tons includes its
storage capacity at its filling plants of 10.8 thousand tons, and its
proportional share of the storage capacity at Utingas of 4.2 thousand tons.
Ultragaz stores its LPG in large tanks at each of its filling plants
located throughout the regions in which it operates. Primary filling plants
receive LPG directly from Petrobras by pipeline; secondary filling plants are
supplied by truck; and satellite plants primarily hold LPG which is used to
fill bob-tail trucks for small bulk distribution to customers that are not
located near a primary or secondary filling plant in order to optimize the LPG
distribution process. See "-- Property, Plants and Equipment -- Ultragaz."
Utingas. Utingas is an LPG storage company, owned 56% by Ultragaz and 44%
owned by other LPG distributors. Utingas has a total LPG storage capacity of
7.5 thousand tons. Its storage facilities are located in the city of Santo
Andre, in the state of Sao Paulo, representing 6.4 thousand tons of storage
capacity, and in the city of Araucaria, in the state of Parana in the south of
Brazil, representing 1.1 thousand tons of storage capacity. According to
Utingas' by-laws, each of its shareholders is entitled to use Utingas' total
storage capacity in proportion to such shareholder's equity ownership, and at
an agreed basic price. Currently, Ultragaz uses only 2.5 thousand tons of the
4.2 thousand tons of storage capacity that it is entitled to at Utingas
facilities. Any storage capacity which is not used by Utingas' shareholders
pursuant to their basic entitlements, is leased by Utingas at market rates. In
2002, Utingas' net sales, excluding sales to Ultragaz, were R$12.7 million,
representing approximately 1% of Ultragaz's net sales on a consolidated basis.
Future Storage Requirements. Historically, Petrobras' monopoly in the
production and importation of LPG, led LPG distributors not to invest
substantially in storage capacity. Nevertheless, Ultragaz believes that a LPG
distributor that decides to diversify its supply of LPG through importation
will have to increase its storage capacity because the importation of LPG would
only be economically viable if carried out on a large scale. Ultragaz's
management believes that Ultragaz has several alternatives to address the need
for increased storage capacity including joint ventures, joint investments with
other LPG distributors and possible contracts with Petrobras for using existing
storage facilities.
Distribution and Transportation
In the bottled market, Ultragaz uses three main channels of distribution:
o home delivery services;
o sales from its own retail stores; and
o distribution through independent dealers.
In addition, Ultragaz makes bulk distribution deliveries of large volumes
via tanker truck and smaller deliveries using bob-tail trucks.
29
The following table shows Ultragaz's LPG sales volumes to the bottled and
bulk markets:
Year Ended December 31,
-----------------------
Customer Category 2002 2001 2000
----------------------------------- ------- -------- --------
(in thousands of tons)
Bottled segment sales:
Home delivery by Ultragaz 78.4 86.5 92.3
Ultragaz retail stores 4.7 5.6 8.4
Independent dealers(1) 715.2 733.7 693.2
------- ------- -------
Total bottled sales 798.3 825.8 793.9
------- ------- -------
Total bulk sales 504.3 519.1 494.4
------- ------- -------
Total sales 1,302.6 1,344.9 1,288.3
======= ======= =======
(1) Includes home delivery and distribution through independent dealers'
stores.
Ultragaz estimates that it delivers LPG to 7.5 million homes,
approximately 3.5 million of which are serviced through its own distribution
network, including 60 retail stores, and the remaining 4.0 million homes
through 3,000 independent dealers.
Distribution Infrastructure. Ultragaz makes regular home deliveries in
several cities located in the areas where it operates. The principal factor
determining the areas in which Ultragaz operates on a home-delivery basis is
that such an area should offer the necessary economies of scale, a function of
the market's dimension and Ultragaz's market share. Consequently, Ultragaz
makes its own home deliveries in the most important urban centers in which it
operates. In the other regions in which Ultragaz operates, home deliveries of
LPG are made through independent dealers.
Ultragaz's strategy includes leveraging its own distribution
infrastructure, since being close to its customers is a significant factor in
determining its distribution and sales strategies. The services associated with
Ultragaz's home deliveries strongly influence the ranking of the "Ultragaz"
brand name in the bottled market. Deliveries are made by employees wearing
Ultragaz uniforms, and driving vehicles with Ultragaz's logo. Ultragaz seeks to
expand its home delivery services by having its delivery personnel provide
safety recommendations to household customers and by programming deliveries on
the same week-day in each covered area. Ultragaz is recognized by industry
specialists for its sampling experience. Ultragaz, in partnership with consumer
goods companies, distributes samples of soap and shampoo, among other things,
thus providing additional attractions for its customers and adding value to its
services.
Ultragaz has a fleet of 647 trucks for delivering gas cylinders to homes
and commercial establishments. On December 31, 2002, 2,352 of Ultragaz's, 4,156
employees, worked in LGP transportation and distribution. Ultragaz has 60 sales
outlets distributed among geographic regions as follows:
o 31 in the southern central region;
o 17 in the southeastern region; and
o 12 in the northeastern region.
Ultragaz has a sales outlet in every filling station.
Bottled sales capacity derives from the number of cylinders owned by
Ultragaz and the number of cylinders owned by its independent dealers. Ultragaz
estimates that as of December 31, 2002, there were 16.6 million 13 kg Ultragaz
cylinders in the market.
Independent Dealers. Ultragaz's independent dealers network ranges from
distribution companies which operate up to 17 vehicles and carry out extensive
home delivery to individual retail stores which sell small quantities
30
of LPG cylinders. Except for those required by the fire department and the
municipal authorities, no additional licenses are required for the sale of LPG
cylinders. However, each municipality sets forth its own safety regulations
applicable to stores that sell LPG, including a minimum distance from certain
locations, such as schools. As of December 31, 2002, Ultragaz had 1,500
distributors in the southern central region, 800 distributors in the southeast
region, and 700 distributors in the northeast region.. In 2002, approximately
90% of Ultragaz's bottled sales were made through independent dealers.
The agreements entered into between Ultragaz and independent dealers
require the use of the Ultragaz brand and the display of the Ultragaz logo in
the delivery vehicles and in the uniforms worn by delivery personnel.
Proprietary rights in the trademark and logo are retained by Ultragaz, duly
registered with the National Institute of Industrial Property (INPI - Instituto
Nacional de Propriedade Industrial). All contracted dealers are Ultragaz's
exclusive representatives. Under the terms of the respective contracts, each
dealer agrees not to deliver non-Ultragaz LPG cylinders.
In order to strengthen the relationship with its independent dealers
network, Ultragaz has created the project SOMAR - Marketing Solutions Applied
to Independent Dealers, recommending changes to their operating procedures,
helping to improve the efficiency of their operations and encouraging the
adoption of best practices. Ultragaz believes that improving the efficiency of
independent dealers is a key factor to improve the profitability of the
distribution chain of LPG.
Distribution Channels to Bulk Consumers. Ultragaz has three principal
distribution methods for industrial and commercial consumers: large cylinders,
small bulk and large bulk.
Ultragaz uses large cylinders, i.e. 20 kg, 45 kg and 90 kg cylinders, for
delivery to commercial users and also to small industrial users. Large bulk
distribution, classified by Ultragaz as consumption of more than 5tons per
month and comprised almost exclusively of industrial users, is made by tanker
trucks that deliver the LPG directly to the storage tanks located at the
customers' premises. Small bulk distribution, classified by Ultragaz as
consumption of between 0.5 and 5 tons per month and comprised of commercial
users and smaller industrial users, is made by bob-tail trucks, to enable
delivery to be made to commercial users whose tanks are not readily accessible
by traditional bulk delivery equipment. Ultragaz uses the UltraSystem trade
name in connection with its small bulk distribution through bob-tail trucks.
Ultragaz makes bulk sales directly to customers using its own fleet and
transportation provided by third parties, including Transultra.
Ultragaz makes deliveries to its commercial and industrial customers in
cylinders and in bulk. Ultragaz's strategy is to make substantially all of its
deliveries to commercial and industrial users in bulk and, as a result,
Ultragaz is currently investing in its bulk delivery capability.
Bulk delivery may only be effected where the customer maintains an LPG
storage tank. Ultragaz installs a tank at the customer's premises and enters
into a long-term contract with the customer for the supply and purchase of LPG.
The term of Ultragaz's bulk supply contracts ranges from two to five years. The
contracts provide for a fixed price over the term of the contract, subject to
adjustments in response to changes in the refinery prices Petrobras charges to
the distributors. See "- Markets and Marketing."
A key element of Ultragaz's bulk strategy is to convert its most important
commercial and industrial customers from large cylinders to bulk delivery. Bulk
delivery has advantages both for Ultragaz and the customer as compared to the
delivery of LPG in cylinders and it also has a lower cost per ton.
Additionally, long-term contracts ensure a stable supply relationship during
the term of the contract. Because bulk storage provides a larger quantity of
LPG at the customer's premises, and thus a more reliable supply of LPG,
consumption tends to increase when customers move from cylinders to bulk
distribution. The terms of bulk supply contracts generally provide that the
tank is installed at the expense of Ultragaz and that Ultragaz retains
ownership of the tank. The terms of the bulk supply contracts also provide that
the tank provided by Ultragaz may only be filled with LPG delivered by
Ultragaz. Upon its expiration, the contract may either be renegotiated or the
tank removed by Ultragaz. As the installation of the tank represents a
significant investment for Ultragaz, Ultragaz seeks to ensure that it realizes
a return on this investment within the period of the original bulk contract.
See "- Markets and Marketing."
31
Payment Terms. Ultragaz's sales through its retail stores and through home
delivery are made on a cash basis. Ultragaz's sales to independent dealers and
to industrial and commercial users are paid within 10 to 30 days from delivery.
Cylinder Swapping Centers
Pursuant to the Self-Regulatory Code, the LPG distributors have
established sixteen operating swapping centers to facilitate the return of
third-party cylinders to the appropriate distributor. Under the Self-Regulatory
Code, while LPG distributors may pick up any empty LPG cylinders tendered by
customers in exchange for full LPG cylinders, whether or not such empty
cylinders were put in circulation by that distributor, after October 1997, LPG
distributors were not permitted to refill third-party cylinders. Accordingly,
LPG distributors may deliver third-party cylinders to a swapping center where
such cylinders may be exchanged for cylinders placed in circulation by such LPG
distributor. The swapping centers currently charge a fee of R$0.16 per
exchanged LPG cylinder. In areas where only one LPG distributor has a sizable
market share, it is customary to use the facilities of that distributor as an
unofficial swapping center for which there may be an additional cost.
Prior to the establishment of the swapping centers, Ultragaz incurred
significant costs associated with the return of its cylinders, as it did not
follow the widespread industry practice of filling third-party cylinders.
Ultragaz estimates its costs relating to swapping centers and cylinder returns
were approximately R$ 6.2 million, R$4.8 million and R$3.9 million in 2002,
2001 and 2000, respectively. As the swapping centers costs are shared between
LPG distributors, Ultragaz's costs from the return of cylinders were
significantly reduced when the swapping centers were created, but have since
then increased due to Ultragaz's geographic expansion. Ultragaz estimates that
costs associated with swapping centers and the return of cylinders in 2003 will
be approximately R$7 million.
Requalification of Cylinders. The useful life of a cylinder varies
depending on a number of factors, the most important of which are the extent to
which the cylinder has been exposed to corrosion from the atmosphere and
whether the cylinder has been damaged. The Self-Regulatory Code provides that
all cylinders must be requalified after their first 15 years' use, and every 10
years thereafter. Each cylinder is visually inspected for damage and corrosion
to determine if it can be requalified or if it should be discarded as scrap
metal. In the case of cylinders which pass the quality and safety checks,
several procedures are followed before the cylinders are stamped with the year
of requalification and the next year in which they are due for requalification.
Ultragaz currently carries out approximately 85% of its requalification
operations in its own plants.
Competition
Ultragaz's main competitors are:
o Agip do Brasil S.A. known as Agipliquigas, a subsidiary of
AgipPetroli SpA, the Italian oil and gas conglomerate, which has been
operating in the Brazilian LPG distribution sector for more than 40
years;
o Butano, a domestic Brazilian LPG distributor which has been present
in the market for more than 45 years;
o Supergasbras, which was incorporated in 1946, operates mainly in the
south, southeast and mid-west regions and is controlled by SHV
Energy, a major multinational LPG distributor, and Supergasbras'
original founding family and;
o Minasgas S.A., known as Minasgas, which was incorporated in 1955,
operates mainly in the south, southeast and mid-west regions and is
controlled by SHV Energy.
32
The following table sets forth the market share of Ultragaz and its
competitors:
Year Ended December 31,
-----------------------
LPG Distributor 2002 2001 2000
--------------- ---- ---- ----
AgipLiquigas 21.2% 20.7% 21.3%
Ultragaz 19.6% 19.3% 18.4%
Butano 19.4% 19.0% 19.4%
Supergasbras 12.8% 13.2% 13.5%
Minasgas 10.5% 10.4% 9.9%
Others 16.5% 17.4% 17.5%
Total 100.0% 100.0% 100.0%
Source: Sindigas
Prior to 1990, the government specified the areas in which LPG
distributors were permitted to operate and each LPG distributor was allocated a
limit in its LPG sales for each Brazilian geographic region in which it
operated. These limits impacted the growth of larger LPG distributors and
limited competition among LPG distributors. These restrictions were removed as
part of the deregulation process, resulting in a substantial increase in
competition among domestic LPG distributors.
The bottled market for LPG is a mature market with relatively low
consumption growth and thus competition is largely based upon attempts by LPG
distributors to increase market share at the expense of their competitors. LPG
distributors in the bottled market compete primarily on brand awareness and
reliability of delivery and the service provided to customers. Ultragaz
believes that it is competitive in these aspects. As all LPG distributors
currently purchase all of their LPG requirements from Petrobras, and Petrobras
supplies all LPG distributors at the same price, LPG distributors compete on
the basis of efficiencies in distribution and delivery rather than on the cost.
Ultragaz's principal markets, including the cities of Sao Paulo, Salvador and
Curitiba, contain heavy concentrations of residential consumers and therefore
distribution to this market can be carried out with great economies of scale
resulting in lower distribution costs to Ultragaz.
Since May 2001, each LPG distributor, without governmental interference,
has freely determined LPG retail store prices. The retail store price will
depend on factors varying from the level of competition among LPG distributors
in a particular region to brand recognition, value added services provided in
connection to distribution and each distributor's logistics efficiency.
In addition to the competition of other LPG distributors, Ultragaz
competes with companies that offer alternative energy sources to LPG, such as
fuel oil, electricity, wood and natural gas.
While fuel oil is less expensive than LPG, LPG has performance and
environmental advantages over fuel oil in industrial use. When compared to
other energy sources, LPG is a clean, portable and economic alternative.
Additionally, Brazil faces a potential electricity generation problem. In the
second half of 2001, Brazil experienced an electricity shortage that led the
government to implement rationing measures. There could be future shortages of
electricity in Brazil unless its generating capacity is substantially increased
in the near future. Natural gas is currently less expensive than LPG for large
volume industrial consumers, although substantially more expensive than LPG in
the bottled market, since its supply requires significant investments.
33
The following chart provides a comparison between the consumer prices
charged for LPG in Brazil and consumer prices of other energy sources in U.S.
dollars per million of BTU, the British Thermal Unit, as of December 2002:
[OBJECT OMITTED]
(1) The price of natural gas for industrial purposes is based on a monthly
consumption of 300 thousand tons.
Due to an increase in demand of electric energy in Brazil and to an
increase in availability of natural gas through the Brazil-Bolivia pipeline,
the Brazilian government is promoting the construction of thermoelectric power
plants, which use natural gas.
Tax Exemption Rules. Pursuant to legislation which provides tax relief for
industries located in the northeast region of Brazil, Ultragaz benefits from an
income tax exemption on operating income with respect to the cylinder filling
plants at Mataripe, Juazeiro and Suape. These exemptions will expire in 2003,
2004 and 2007, respectively. Tax exemptions amounted to R$ 5.4 million, R$ 1.6
million and R$ 3.0 million in 2002, 2001 and 2000 respectively. Amounts which
are payable as income tax are charged to income and credited to a reserve
account in shareholders' equity. We cannot guarantee that there will be no
amendments to the current tax legislation.
Environmental Matters
Ultragaz is subject to the Brazilian federal, state and local laws and
regulations relating to the protection of the environment. Pursuant to specific
regulation, each of Ultragaz's filling plants is required to obtain operating
permits from the state environmental agencies and from the fire department. See
"- Industry and Regulatory Overview."
Insurance
Ultragaz maintains adequate insurance policies covering a number of risks
to which it believes to be exposed, including damages and/or losses caused by
fire, lightning, explosion of any nature, flooding, aircraft crashes, smoke and
electrical damage, covering the filling plants and satellite stations, and also
the pipelines owned and/or used by Utingas.
Our third party insurance covers each company of the Ultrapar group and
comprises two policies: one policy covers minor events and has a limit of R$ 1
million; the other policy covers possible events of a more serious nature and
has a limit of R$ 150 million. The entire plan covers damages and/or losses
that can eventually be caused to third parties due to accidents related to
Ultragaz's commercial and industrial operations and/or distribution and
commercial products and services.
34
Ultragaz's management and its advisers believe that this insurance
coverage is in line with industry standards in Brazil.
Petrochemicals and Chemicals
Overview of the Sector and Applicable Regulations
The petrochemical industry transforms crude oil by-products or natural gas
into widely used consumer and industrial goods. The Brazilian petrochemical
industry is generally divided between three sectors, depending on the stage of
transformation of the petrochemical raw material. The companies which operate
in these different stages are known as first generation companies, second
generation companies and third generation companies.
First Generation Companies. Brazil's first generation companies, which are
referred to as "crackers", break down or "crack" naphtha, their principal
feedstock, into basic petrochemicals. In Brazil, the crackers purchase their
naphtha, which is a by-product of the oil refining process, from Petrobras,
currently the only Brazilian producer and to a lesser degree, from imports. The
basic petrochemicals produced by the crackers include olefins, primarily
ethylene, propylene and butadiene and aromatics, such as benzene, toluene and
xylenes. Braskem S.A, Companhia Petroquimica do Sul, known as Copesul, and
Petroquimica Uniao, known as PQU, -- Brazil's three crackers -- sell these basic
petrochemicals to second generation companies. The basic petrochemicals, which
are in the form of either gases or liquids, are transported to the second
generation companies through pipelines for further processing.
Second Generation Companies. Second generation companies process the basic
petrochemicals produced by the crackers to obtain intermediate petrochemicals,
such as:
o polyethylene, ethylene oxide, polystyrene and polyvinyl chloride , or
PVC, each produced from ethylene;
o polypropylene, oxo-alcohols and acrylonitrile, each produced from
propylene;
o caprolactam, produced from benzene;
o purified terephtalic acid, or PTA, produced from p-xylene; and
o styrene butadiene rubber, or SBR, and polybutadiene, each produced
from butadiene.
There are approximately 51 second generation companies operating in
Brazil, including Oxiteno. The intermediate petrochemicals are produced in
solid form as plastic pellets or powders and in liquid form and are transported
through roads, railroads or by ship to third generation companies.
Third Generation Companies. Third generation companies, known as
transformers, purchase the intermediate petrochemicals from the second
generation companies and transform them into final products, including:
o plastics produced from polyethylene, polypropylene and PVC;
o acrylic fibers produced from acrylonitrile;
o polyester produced from PTA and ethylene glycol;
o nylon produced from caprolactam; and
o elastomers produced from butadiene.
The third generation companies produce a variety of consumer and
industrial goods, including containers and packaging materials, such as bags,
film and bottles, textiles, detergents and paints as well as automobile parts,
toys and consumer electronic goods. There are over 6,000 third generation
companies operating in Brazil.
Petrochemical Complexes. The production of first and second generation
petrochemicals in Brazil centers around three complexes: the northeast complex,
the Sao Paulo petrochemical complex, and the southern
35
petrochemical complex. Each complex has a single first generation producer or
cracker, and several second generation companies.
The northeast complex, located in the municipality of Camacari in the
state of Bahia, began operations in 1978. It consists of approximately 19
second generation companies, including Oxiteno, situated around Braskem as the
cracker. Braskem currently has an ethylene production capacity of 1.2 million
tons per annum.
The Sao Paulo complex, at Capuava in the state of Sao Paulo, was created
in 1972 and is the oldest petrochemical complex in Brazil. Its cracker, PQU,
supplies first generation petrochemicals to 25 second generation companies
including Oxiteno. PQU has an ethylene production capacity of 500,000 metric
tons per annum.
The southern complex, located in the municipality of Triunfo in the state
of Rio Grande do Sul, is based around the raw materials cracker, Copesul, and
includes 7 second generation companies. Copesul has an ethylene production
capacity of 1.135 million metric tons per annum.
The following map shows the location of Brazil's petrochemical complexes:
[OBJECT OMITTED]
Structure of the Chemical and Petrochemical Sectors. The current structure
of the petrochemical complexes reflects the plan developed by the Brazilian
government during the 1970s, to establish a domestic petrochemical industry to
serve Brazilian markets. First and second generation companies are located
closely to each other to integrate the common use of facilities and to
facilitate raw material delivery. Even after the privatization of the crackers
and second generation companies, production capacity expansions at these
facilities continue to be coordinated to ensure that demand meets the supply of
petrochemicals. The infrastructure that developed around or near the complexes
further fostered the interdependence of first and second generation companies,
as limited facilities were constructed to facilitate the transportation and
storage of feedstock for importation or exportation.
The Brazilian government developed the local petrochemical industry by
promoting the formation of joint ventures among the Brazilian government,
foreign petrochemical companies and private Brazilian investors.
36
Petrobras' majority-owned subsidiary, Petroquisa, participated in each joint
venture as the representative of the Brazilian government; a foreign
petrochemical company provided technology; and a Brazilian private sector
company provided management.
In 1992, the Brazilian government began a privatization program that
significantly reduced its interests in, and influence over, the petrochemical
industry, particularly with respect to first and second generation companies.
This program was designed to increase private investment in the petrochemical
industry and to spur its consolidation and rationalization. As a result of
privatization auctions, the Brazilian government's voting interests in Copesul,
Braskem (formerly known as Copene), and PQU has been reduced, and the second
generation companies' voting interest in the crackers has increased. In
December 31, 2002 the government held 8.1% of Braskem's voting capital, 17.4%
of PQU's voting capital and 15.6% of Copesul's voting capital.
In July 2001, the Odebrecht and Mariani groups acquired control of Copene
with the intent of consolidating in one single company, Braskem, Copene's
activities and those of several second generation petrochemical companies (OPP,
Trikem, Polialden and Nitrocarbono). In 2003, Braskem consolidated OPP and
Nitrocarbono and took over the raw material supply contracts with the other
second generation companies.
Role of Petrobras. Naphtha is the raw material used in Brazil for the
production of basic petrochemicals such as ethylene and propylene. Petrobras is
still the only producer and the most important naphtha supplier in Brazil, even
though its legal monopoly ended in August 2000. See "- Distribution of
Liquefied Petroleum Gas -- Industry and Regulatory Overview" for a discussion of
the termination of the Petrobras monopoly. Due to constraints of its refining
capacity, Petrobras imported approximately 2.6% of the naphtha that it sold in
Brazil in 2002. Braskem and Copesul together directly import about 28% of their
naphtha requirements.
Although the Ministry of Finance and the Ministry of Mines and Energy
formerly regulated the price at which Petrobras sold naphtha, naphtha prices
have been freely negotiated since August 9, 2000. In July 2000, the naphtha
price was 9% above the Amsterdam, Rotterdam and Antwerp Region price, known as
the ARA price, which is the international reference price. Currently, domestic
naphtha prices are between 1% and 2% higher than the ARA price.
Environmental, Health and Safety Standards. Petrochemical companies are
subject to Brazilian federal, state and local laws and regulations governing
the protection of the environment. At the federal level the main regulator is
the Brazilian Institute of the Environment and Renewable Natural Resources, or
Instituto Brasileiro de Meio Ambiente e Recursos Naturais Renovaveis -- IBAMA,
and by CONAMA.
In accordance with environmental laws and regulations, petrochemical
companies are required to obtain licenses for their manufacturing facilities.
Authorities in the state where a plant is located may regulate its operations
by prescribing specific environmental standards in its operating licenses.
Petrochemical companies must satisfy regulatory authorities that the operation,
maintenance, and reclaiming of facilities comply with regulations and do not
cause damage to the environment.
Environmental regulations apply particularly to the discharge, handling
and disposal of gaseous, liquid and solid products and by-products from
manufacturing activities. Rules issued by CONAMA and by state authorities also
prescribe preventive measures relating to environmental pollution and waste
treatment requirements. In addition, the transportation, storage and supply of
products are subject to specific standards designed to prevent spills, leakages
and other accidents.
Historically, environmental regulations have imposed increasingly strict
standards, higher fines, and greater exposure to liability and increased
operating costs and capital expenditures. In addition, civil, administrative
and criminal sanctions, including fines and the revocation of licenses may
apply to violations of environmental regulations. Under applicable law, Oxiteno
is strictly liable for environmental damages.
Petrochemical companies are also subject to federal, state and local laws
and regulations that establish occupational health and safety standards.
According to such laws and regulations, these companies are also required to
report on their occupational, health and safety records on a yearly basis to
the local office of the Ministry of Labor in each of the states in which it
operates. They are also subject to all federal, state and local government
regulation and supervision generally applicable to companies doing business in
Brazil, including labor laws, social security laws, public health, consumer
protection, securities laws and antitrust laws.
37
Oxiteno
We operate in the chemical and petrochemical segment through the second
generation company, Oxiteno, a wholly owned subsidiary of Ultrapar. Oxiteno is
the only Brazilian producer of ethylene oxide, ethylene glycols, ethanolamines,
glycol ethers and methyl-ether-acetates, and also a major producer of specialty
chemicals. Its products are used in a broad range of industrial sectors, such
as polyester, packaging, paints, varnishes and cosmetics. In 2002, Oxiteno sold
434 thousand tons of chemical and petrochemical products.
Products and Markets
Oxiteno's products can be divided into two principal groups: commodity
chemicals which are generally higher-volume products, with standard features
and specialty chemicals which tend to be lower-volume products sold on the
basis of chemical composition and suitability to meet a particular end-use
requirement. Oxiteno's principal commodity chemicals are ethylene oxide,
several derivatives of ethylene oxide, including ethylene glycol,
ethanolamines, glycol ethers and glycol ether acetates, and MEK. Oxiteno's
principal specialty chemicals include a wide variety of products that are used
as surfactants, softeners, dispersants, emulsifiers, detergents and hydraulic
fluids.
38
The following chart outlines the principal raw materials used by Oxiteno
and their intermediate and final products.
[GRAPHIC OMITTED]
39
The production of ethylene by Brazilian crackers being committed to
existing second generation companies, together with the significant investment
needed for the construction of a new cracker, constitute entry barriers to new
local ethylene oxide producers. In addition, the characteristics of ethylene
oxide (highly inflammable at room temperature and atmospheric pressure), make
importing of this product difficult. Ethylene derivatives are regularly
imported by the major international petrochemical companies and by
international and domestic trading companies.
The Brazilian petrochemical industry primarily serves the domestic market,
but also sells products in the international market. While Oxiteno sells most
of its specialty and commodity chemical products in Brazil, it has an installed
capacity in excess of domestic demand and exports the surplus to 42 countries
in Asia, Latin America, Europe and North America. This excess production
capacity is strategic and also acts as a barrier to new ethylene producers. In
2000, 2001 and 2002, Oxiteno derived 30%, 28% and 26%, respectively, of its
gross sales from exports.
The following table sets forth Oxiteno's sales volume for each category of
its products for the periods indicated.
Year Ended December 31,
-----------------------
Category 2002 2001 2000
-------- ---- ---- ----
(in metric tons)
Commodities
Ethylene Oxide 12,293 12,907 14,385
Ethylene Glycols 224,663 248,570 236,696
Etanolamines 18,389 18,180 18,727
Glycol Ethers 25,450 23,637 21,542
Acetates 15,253 17,674 16,393
Metil-Etil-Ketone 31,609 24,544 33,429
------- ------- -------
Total 327,657 345,512 341,172
------- ------- -------
Specialty
Blends 13,655 12,110 11,303
Ethyoxylated Alcohols 11,793 12,866 14,056
Ethyoxylated Alkyphenols 27,652 27,216 21,512
Ethyoxylated Fatty Esters 3,551 3,639 3,271
Polyethyleneglycols 6,666 5,098 4,574
Sulfonates / Sulfates 23,912 23,350 16,922
Others (1) 18,577 15,850 15,310
------- ------- -------
Total 105,806 100,129 86,948
------- ------- -------
------- ------- -------
Total 433,463 445,642 428,120
======= ======= =======
Exports 169,717 188,957 188,916
Domestic Market 263,746 256,684 239,204
(1) Includes Alcohols, Catalysts, EO/PO, Fatty Esters, Other Ethhoxylates,
Other Formulae, Polymerics.
Commodity Products.
The following are Oxiteno's principal commodity products and their
principal uses and markets.
Ethylene oxide. Ethylene oxide is a colorless and highly flammable gas at
room temperature and atmospheric pressure. Ethylene oxide is produced in a
continuous production process by gaseous phase catalytic partial oxidation of
ethylene by oxygen at high temperature and pressure. In 2002, Oxiteno used
approximately 95% of its ethylene oxide production in the production of
derivatives and sold the remaining 5% to other petrochemical companies.
40
Ethylene glycols. The principal ethylene glycol produced by Oxiteno is
mono-ethylene glycol, known as MEG. Oxiteno also produces di- and tri-ethylene
glycol. Mono-ethylene glycol is a clear, non-flammable, non-volatile liquid at
room temperature and atmospheric pressure. Ethylene glycols are produced in a
continuous process from an ethylene oxide solution. In 2002, approximately 61%
of the ethylene glycol produced by Oxiteno was sold to chemical companies for
the manufacture of polyester fibers and polyethylene terephthalate known as
PET, with the remainder sold for use in the production of antifreeze, brake
fluids, solvent and other chemicals.
Ethanolamines. Ethanolamines, comprising mono-, di-, and
tri-ethanolamines, are clear, non-flammable, non-volatile liquids at room
temperature and atmospheric pressure. Ethanolamines are produced in a
continuous process whereby ethylene oxide and ammoniacal solutions are fed to a
multiple-stage tubular reactor. Ethanolamines are largely used in the
manufacture of surfactants and in gas purification for removal of acid gases,
such as carbon dioxide and hydrogen sulfide. Mono-ethanolamine is also used in
the manufacture of ethyleneamines and surfactants. The major markets for
di-ethanolamine are for natural gas stabilization and surfactants and
herbicides production. Tri-ethanolamine is widely used in surfactants.
Glycol ethers. Ethylene oxide-based glycol ethers are clear, flammable and
volatile liquids at room temperature and atmospheric pressure. Glycol ethers
are produced by combining ethylene oxide with an anhydrous alcohol, usually
methyl, ethyl or butyl alcohol. In 2002, substantially all of the glycol ethers
produced by Oxiteno were sold for use as solvents for formulations such as
paints, inks and cleaning fluids, with the remainder sold for use in
non-solvent applications, including use as an anti-icing agent in jet fuel, as
fluids for hydraulic systems, and as chemical intermediates for plasticizers
and other compounds.
Glycol ether acetates. Glycol ether acetates are clear, flammable,
non-volatile liquids at room temperature and atmospheric pressure. Glycol ether
acetates are produced in a continuous process whereby acetic acid and glycol
ether are fed into a reactor operating at mild temperature and pressure.
Ethyl-glycol ether acetate is a versatile solvent for nitrocellulose and
acrylic lacquers, for varnish removers, for wood stains and also as a retarding
agent for thinner preparation. Butyl-glycol ether acetate is a solvent for
polyurethane systems and a coalescent aid in latex paints.
Methyl-ethyl-ketone. MEK, a clear, volatile, flammable liquid at room
temperature and atmospheric pressure, is Oxiteno's principal commodity chemical
not produced from ethylene oxide. MEK is used as a fast evaporation solvent for
thinners, paints, lacquers and adhesives and also as an active solvent for
several resins such as cellulosics, acrylics, polyesters, polyuretanics, PVC,
neoprene and maleic.
Specialty Chemicals. The following table sets forth Oxiteno's principal
specialty chemical products and their principal uses and markets.
Major Markets Specialty Chemicals Uses
------------- ------------------- ----
Detergents Alkylbenzene sulfonic acids, Dispersants, solubilizing agents,
alkylsulfates, alkyl ether sulfates, emulsifiers, foam stabilizers,
ethoxylated alkylphenols, ethoxylated adjuvants, moisteners, detergent bases
fatty alcohols, polyethyleneglycols,
alkanolamides, betaines,
sulphosuccinates, block copolymers EO/PO
Agricultural Chemicals Ethoxylated fatty amines, ethoxylated Emulsifiers, moisteners, dispersants,
alkylphenols, alkyl ether sulfates, humectants
blends, naphthalene sulfonate,
ethoxylated vegetable oil, copolymers
EO/PO
Cosmetics Alkyl sulfates, alkyl ether sulfates, Emollients, densifiers, emulsifiers,
betaines, ethoxylated fatty alcohols, foam stabilizers, adjuvants, moisteners,
polyethyleneglycols, alkanolamides, detergent
ethoxylated sorbitan esters, sorbitan
fatty esters
Foods Sorbitan fatty esters, ethoxylated Emulsifiers, stabilizers, dispersants
sorbitan esters
41
Major Markets Specialty Chemicals Uses
------------- ------------------- ----
Textiles Ethoxylated alkylphenols, ethoxylated Antistatic agents, lubricants,
fatty alcohols, ethoxylated vegetable softeners, emulsifiers, antifoamers,
oils, ethoxylated fatty amines mercerizing additives, humectants, low
foam detergents
Leather Ethoxylated alkylphenols, Depilatory agents, degreasers,
polyethyleneglycols, naphthalenes, dispersants, softeners, synthetic tannins
sulfonates
Oil Field Chemicals Block copolymers EO/PO, condensed Dispersants, surfactants, emulsion
naphthalenes, sulphonates, sorbitan preventers
fatty esters
Domestic Sales. The following table shows Oxiteno's domestic market sales
volumes by market segment for the periods indicated:
Year Ended December 31,
Market sector 2002 2001 2000
------------- ---- ---- ----
(in metric tons)
Polyester 74,149 83,632 77,148
Paints and varnishes 16,594 16,465 14,587
Chemical Industries 23,968 22,994 25,901
Detergents 19,171 21,365 18,908
Hydraulic fluids 21,592 15,188 16,323
Agricultural chemical 12,352 11,920 9,813
Resins 18,168 17,441 15,191
Cosmetics 16,482 15,285 10,087
Leather / Paper 11,592 7,725 6,867
Textiles 5,314 4,822 4,632
Food 2,714 2,765 2,396
Oilfield applications 4,810 5,117 4,724
Distributors 27,984 25,533 26,610
Others (1) 8,856 6,432 6,017
------- ------- -------
Total domestic market 263,746 256,684 239,204
======= ======= =======
(1) Others includes catalysts producers, civil construction companies,
pharmaceutical and veterinary companies.
In the Brazilian market, the polyester market constitutes the most
important market for Oxiteno's products. MEG produced by Oxiteno is sold to
chemical companies that manufacture polyester fiber, which is used to make a
variety of fabrics, and is also sold to producers of PET, which is a polymer
used to make packaging, such as soft drink bottles.
A great portion of Oxiteno's product prices in the Brazilian market are
set by reference to international contract prices in U.S. dollars, as they are
commodity chemicals, but are denominated in reais. The sales are made on a
negotiated basis rather than pursuant to long-term written contracts. In the
case of specialty chemicals which meet the requirements of a particular demand
and which are not subject to ready substitution by imports, Oxiteno's pricing
is more flexible and takes into account the value-added to its customers by the
particular specialty chemical.
Oxiteno's sales force in the domestic market consists of 41 persons,
organized by industry sector. In 2002, over 89% of Oxiteno's sales in the
domestic market were made directly by its salesforce. The remaining sales,
mainly to smaller regional customers, were made through independent dealers.
Oxiteno's principal customers in the domestic market include Rhodia-Ster
Fibras e Resinas Ltda., which principally purchases ethylene glycols, Clariant
S.A., which principally purchases ethylene oxide and ethoxylated products, and
IGL Ind. Ltda, which principally purchases sulfates. In 2002, Oxiteno's ten
largest customers in the
42
domestic market accounted for 42% of domestic market revenues. Oxiteno believes
that by distributing its products to a variety of markets it is able to protect
itself, to a certain extent, from the effects of a decrease in economic
activity in any particular market.
Export Sales. The following table sets forth Oxiteno's sales by volume in
tons for each geographic market served by Oxiteno in the periods indicated.
Year Ended December 31,
------------------------------------------------------
Market 2002 2001 2000
--------------------------------- --------------- ------------------- ----------------
(in metric tons and percentage of the total)
Mercosur (not including Brazil) 33,124 20% 51,043 27% 52,827 28%
Remainder of Latin America 3,909 2% 3,113 2% 2,603 1%
Nafta 11,874 7% 30,177 16% 31,474 17%
Europe 39,984 23% 31,247 16% 22,016 12%
Africa 6,697 4% 5,321 3% 2,218 1%
Far East 72,672 43% 67,714 36% 77,594 41%
Pacific Region 1,317 1% 342 0% 184 0%
Middle East 140 0% 0 0% 0 0%
------- --- ------- --- ------- ---
Total 169,717 100% 188,957 100% 188,916 100%
======= === ======= === ======= ===
Oxiteno exports a wide variety of chemical products including glycols,
MEK, ethoxylated alkylphenols, glycol ether acetates, glycol ethers,
ethanolamines, ethoxylated fatty amines and other ethoxylated products. In the
international market, Oxiteno sells both to industrial customers, including
Voridian Argentina S.R.L, Unilever de Argentina S.A. and Cognis S.A., as well
as trading companies and other third-party distributors. Oxiteno's largest
customer in the international market is a major European trading company for
glycol, which accounted for approximately 18% of international revenues in
2002. In the same period, two other customers each accounted for more than 10%
of Oxiteno's sales in the international market.
In most cases, Oxiteno's sales prices for its commodity chemicals in the
domestic and export markets are based on international contract prices rather
than international spot prices. International contract prices are fixed by
reference to published data regarding the price at which industry participants
have sold the relevant product.
In general, Oxiteno's operating margins on products sold in the
international market are substantially lower than operating margins for similar
products sold in the domestic market. Nevertheless, Oxiteno deems it important
to maintain a presence in international markets, partially because the domestic
market is not large enough to accommodate all of its sales. Oxiteno intends to
shift sales to the domestic market as local demand for its products increases,
but will continue to export and will maintain its presence in the international
market.
Customers. Oxiteno's most important customers for its commodity chemicals
are chemical companies, surface coating producers and polyester producers, and
its customers for specialty chemicals comprise a variety of industrial and
commercial enterprises including brake fluid distributors, agrochemical
producers, manufacturers of food additives and manufacturers of detergents and
cosmetics.
Competition
Oxiteno competes largely with imported products. Since 1990, it has had to
operate in an increasingly competitive environment due to imports from
international and transnational petrochemical industries. As imported products
are mostly commodity chemicals, competition is based principally on price.
However, factors such as product quality, timely delivery, reliability of
supply and technical service and support are also important
43
competitive factors. As a local producer, Oxiteno believes it has a competitive
advantage over imports with regard to some of these factors.
Oxiteno's principal competitors are Shell Brasil Ltda., Exxon Mobil
Quimica Ltda., Dow Brasil S.A., Lyondell Quimica do Brasil Ltda., Cognis Brasil
Ltda., Clariant S.A. and BASF S.A.. Importers incur additional costs when
selling their products in the Brazilian market, due to import tariffs and
additional freight charges.
Oxiteno estimates that its Brazilian market share in 2002 was
approximately 70%. In the case of specialty chemicals, Oxiteno competes
primarily with other Brazilian producers and pricing is a less decisive
competitive factor than with true commodity chemicals, while conformity with
specifications, product performance and reliability of service are
comparatively more important. Access to technology and research and development
are important factors with regard to conformity to specifications and product
performance, especially in the development of new products to meet customers'
needs. As Oxiteno's competitors have greater technology and research and
development resources, Oxiteno's strategy involves ensuring access to
technology through its own research and development activity, licensing and
joint ventures, if appropriate opportunities become available.
Transportation and Storage
As of December 31, 2002, Oxiteno had a total storage capacity of 73.2
thousand cubic meters, of which 42.9 thousand cubic meters were located in its
plants and the remaining was leased from third parties. Oxiteno leases storage
capacity from Tequimar on an arm's length basis and also from unaffiliated
storage companies. See "- Business Overview -- Transportation and Storage --
Tequimar."
Raw materials such as ethylene, oxygen, heavy C4 and ammonia are
transported to Oxiteno's plants by pipeline and other raw materials are
transported by truck.
In 2002, 59% of Oxiteno's products were transported directly to customers
by truck and 2% were transported by truck to a sea terminal for coastal
transportation to other ports in Brazil and further delivery by truck. The
remaining 39%, representing most of Oxiteno's sales in the international
market, were transported by ship.
Raw Materials
Oxiteno's principal raw material is ethylene. In 2002, ethylene was
responsible for 51% of Oxiteno's variable costs of production and approximately
43% of its total cost of goods sold. Among Oxiteno's other raw materials, the
principal include ethyl, butyl and lauryl alcohols, oxygen, acetic acid and
rafinate II.
Ethylene Supply. Ethylene is used for the production of ethylene oxide at
the Camacari plant and the Maua plant. Braskem and PQU supply all of Oxiteno's
ethylene requirements for the Camacari plant and Maua plant, respectively,
thorough pipelines, thus minimizing the costs of delivery of ethylene and
helping to ensure the reliability of supply. "See Item 5 - Operating and
Financial Review and Prospects - Liquidity and Capital Resources - Investments
and Capital Expenditures".
Oxiteno has a long-term contract with Braskem relating to the volume of
ethylene to be supplied to, and purchased by, Oxiteno. This contract will
expire in 2012. Pursuant to its terms, Braskem is required to supply Oxiteno
with up to 197 thousand tons of ethylene per year, and Oxiteno is required to
purchase at least 138 thousand tons per year. The contract does not provide a
price for the ethylene, but provides that the price will be negotiated between
the parties from time to time and will be the same for all buyers of ethylene.
The price is currently established pursuant to a margin sharing agreement
between Braskem and its customers, including Oxiteno. In the case of PQU,
Oxiteno, like other purchasers from PQU, does not have a long term contract
relating to the volume or price of ethylene supplied.
44
The following table sets forth information regarding Oxiteno's usage of
ethylene at its Camacari and Maua plants for the periods indicated.
Year Ended December 31,
Plant 2002 2001 2000 1999 1998
----- ---- ---- ---- ---- ----
(in thousands of tons)
Camacari 165 185 173 183 178
Maua 38 42 40 41 39
Ethylene is difficult and expensive to store and transport, as it must be
kept at a temperature below -200 degrees Fahrenheit or -100 degrees Celsius
during storage and transportation. As a result, ethylene is not imported or
exported in substantial quantities. Accordingly, the naphtha crackers,
including Braskem and PQU, are largely dependent for their sales upon the
second generation petrochemical companies, such as Oxiteno, located in the
respective petrochemical complexes.
Conversely, since imports of ethylene from other producers are not readily
available, Oxiteno depends entirely on Braskem and PQU for the supply of
ethylene to its Camacari and Maua plants and, therefore for its ability to
operate such plants. Oxiteno does not maintain any significant storage of
ethylene and any unexpected interruptions in supply from the crackers would
have an immediate impact on Oxiteno's production. The last unexpected
interruption in the ethylene supply was in 1993, due to a pipeline fire that
affected the naphtha delivery from Petrobras to Braskem, which caused a
shutdown in the naphtha cracking operations, resulting in a 14-day shutdown in
the Camacari plant's operations
During the first half of 2002, there was a programmed stoppage at
Braskem's pyrolysis I unit for expanding installed ethylene capacity. In the
first quarter 2002, Oxiteno's ethylene quota was reduced by 32%. Problems
involving the start-up extended the plant stoppage beyond schedule, restricting
the volume of ethylene supplied in the second quarter of 2002 to 22% of the
second quarter of 2001 volumes. In the second half of 2002 supplies were
normalized.
In 2002, Braskem and PQU had annual ethylene production capacity of 1.2
million tons and 500 thousand tons, respectively. See "- Price of Ethylene"
and "- Industry and Regulatory Overview."
Price of Ethylene. The price of ethylene supplied by Braskem to Oxiteno
for the production of goods to be sold in Brazil is determined in a margin
sharing agreement entered into in March 1997, and is the same for all of
Braskem's ethylene customers. Prior to March 1997, the price of ethylene was
negotiated between Braskem and its ethylene customers on a monthly basis.
Under the margin sharing arrangement, the price paid for ethylene depends
upon the weighted average market price charged by the ethylene customers in the
Brazilian market during the previous month for a basket of goods derived from
ethylene. The weight of each product in the basket depends upon the relative
proportion of the total supply of ethylene used in the production of such
product as compared with the other products in the basket. Certain cost
elements are then deducted from the weighted average price. The remaining
"margin" after the deduction of such cost elements from the average weighted
price is shared between Braskem and the ethylene customers based on the
respective investment of Braskem and such customers. The respective investments
are calculated based on U.S.benchmarks rather than the actual investments of
the parties.
A different margin sharing arrangement is currently in place with respect
to products produced from ethylene for the export market. Under this
arrangement, the price paid for ethylene depends upon the gross margin of each
export transaction of Braskem's customers. Subject to certain limits, the
resulting margin is divided by 45% for Braskem and by 55% to the exporters.
45
The following table shows the price list per metric ton for ethylene used
in the production of products to be sold in Brazil charged by Braskem and PQU
for the years indicated.
Braskem
(formerly known as
Copene) PQU
------------------------- -------------------------
(R$/ton)
2002
----
First Quarter 1,099.67 1,160.00
Second Quarter 1,263.67 1,268.67
Third Quarter 1,360.67 1,389.00
Fourth Quarter 1,716.33 1,671.33
Maximum Price 1,900.00 1,719.00
Minimum Price 1,056.00 1,134.00
Year Average 1,360.08 1,372.25
2001
----
First Quarter 1,138.33 1,247.67
Second Quarter 1,226.33 1,300.33
Third Quarter 1,253.00 1,314.67
Fourth Quarter 1,207.08 1,273.07
Maximum Price 1,360.00 1,397.00
Minimum Price 1,089.00 1,179.00
Year Average 1,206.19 1,283.93
2000
----
First Quarter 1,035.67 1,091.67
Second Quarter 1,068.00 1,137.00
Third Quarter 1,159.67 1,224.33
Fourth Quarter 1,217.00 1,272.67
Maximum Price 1,217.00 1,288.00
Minimum Price 990.00 1,036.00
Year Average 1,120.08 1,181.42
--------------------------------------------------------------------------------
As naphtha accounts for approximately 90% of variable costs of ethylene
production, fluctuations in the price of naphtha strongly influence
fluctuations in the price of ethylene. Because the main determinant of the
price of naphtha is the price of crude oil, the price of naphtha, and thus
ethylene, is subject to fluctuations based on changes in the international oil
price. See "Item 3. Key Information -- Risk Factors -- Risks Relating to
Ultrapar and the Petrochemical and Chemical Industries."
The current price for naphtha paid by Brazil's naphtha crackers is
negotiated between those crackers and Petrobras and is currently determined
using a formula that leads to a domestic naphtha price that is approximately 3%
above the international price (ARA reference). See "--Industry and Regulatory
Overview." Any increases in the price of naphtha, and thus ethylene, could have
a material adverse effect on the business of Oxiteno, particularly as increased
international competition in the petrochemical industry could make it difficult
for Oxiteno to pass on price increases to its customers.
Other Raw Materials. In 2002, other raw materials, principally oxygen,
lauryl alcohol, ethanol, butyl alcohol, acetic acid, rafinate II, lauric oil,
nonene, phenol, primary fatty amine, fusel oil and LAB accounted for
approximately 49% of Oxiteno's variable costs and 41% of its total costs of
sales (cost of goods sold).
Oxiteno generally obtains these other raw materials from a variety of sources,
except for phenol, which Oxiteno purchases principally from a single supplier,
Rhodia Poliamida Especialidades Ltda.
46
Oxiteno uses oxygen in the production of ethylene oxide and purchases
oxygen for the Camacari plant pursuant to a long-term contract with White
Martins and Braskem which will expire in 2010. Oxygen for the Maua plant is
purchased from Oxicap, Oxiteno's joint venture with Air Liquide.
C4, used for the production of MEK at the Triunfo plant, is purchased from
Copesul, the naphtha cracker in the Southern Complex.
Utilities. Steam, electric power and natural gas are the main utilities
required for Oxiteno's production. Part of the electricity and steam used by
Oxiteno is generated internally and part is purchased from electricity
companies and third-party suppliers of steam in the regions where Oxiteno's
plants are located. Natural gas is purchased from local companies.
Tax-Exempt Status
Pursuant to legislation which provides tax relief for industries located
in the northeast region of Brazil, Oxiteno benefits from an income tax
exemption on operating profits from sales of its products at the Camacari plant
through 2006. Tax exemptions amounted to R$ 36.4 million, R$ 22.9 million and
R$ 24.2 million in 2002, 2001 and 2000 respectively. Amounts payable as income
tax are charged to income and credited to a reserve account in shareholders'
equity. After 2006, the income resulting from the Camacari plant operation will
continue to benefit from a partial income tax exemption, resulting in an income
tax rate of 19% until 2008 and 22% until 2013. After 2013, Oxiteno will be
liable for the full tax rate, currently 25%. We cannot guarantee that there
will be no amendments to the current tax legislation.
Maintenance and Quality Control
Oxiteno carries out a program of preventive maintenance at each of its
plants and uses statistical analysis to help predict production problems. The
stoppages due to the maintenance program take place at the same time as the
stoppages for the change of the ethylene oxide catalyst. In the case of the
ethylene oxide and ethylene glycol units at the Maua and Camacari plants, which
have continuous production processes, maintenance is preferably scheduled for
periods when the relevant cracker, which supplies ethylene to the plant, is
scheduled to be shut down for maintenance. Each cracker is typically shut down
for maintenance for a period of approximately 20 days every 36 to 48 months.
The same happens to the Triunfo plant, which receives butene from Copesul. In
the case of the other production units at such plants and the Tremembe plants,
maintenance is performed during scheduled breaks in production. Oxiteno uses
its own employees for specialized maintenance and uses third-party contractors
for routine maintenance. In addition, Oxiteno has a team of employees
responsible for quality control that operates continuously. As of December 31,
2002, Oxiteno had 100 employees engaged in maintenance. "See - Overview of the
Sector and Applicable Regulations".
Health, Safety and Environmental Matters
Oxiteno is subject to the environmental laws and regulations of the states
in which it operates, which specify and detail federal legislation on these
matters. See "-- Industry and Regulatory Overview." Oxiteno continuously
monitors its compliance with federal, state and municipal legislation
applicable to its various places of operation. In accordance with applicable
law, Oxiteno is responsible for losses and damages of an environmental nature.
The local state environmental authorities license each of Oxiteno's
plants. Licenses granted in certain states are valid for a fixed period of time
and then must be renewed. The licenses for the Tremembe and Maua plants were
issued for an unlimited period of time. The terms of the other licenses vary
according to the applicable legislation and to the periodic inspections
performed by environmental authorities.
Waste products from Oxiteno's industrial plants are discharged according
to the legal requirements. Effluents are discharged and treated in Oxiteno's
own treatment centers or by petrochemical complexes where the company has
activities. Solid waste products are preferably reprocessed in cement furnaces.
Where the reprocessing is not recommended, these products are incinerated or
deposited in landfills owned by Oxiteno. Oxiteno periodically controls these
discharge areas, not having any significant environmental liability.
47
Our health and safety indicators are comparable to the international
standards, and are a priority in Oxiteno's activities and in the action plans
for the upcoming years.
In March 2002, Oxiteno obtained a SA 8000 certification, which establishes
the parameters for a Quality Management System focused on Social
Responsibility. This certification covers various matters, including health,
safety, labor relations and compliance with the current legislation.
Additionally, Oxiteno voluntarily complies with other requirements, such
as those related to the responsible care program, issued by ABIQUIM, the
Brazilian Chemical Industries Association, which sets forth international
standards for environmental protection and occupational health as well as
safety measures to be followed by chemical product manufacturers.
Insurance
In line with Ultrapar's policy, Oxiteno maintains various insurance
policies which cover a broad range of risks to which it is exposed.
In addition, Oxiteno maintains insurance policies covering pecuniary
damages. Its insurance policy for "all risks" covers its assets and inventories
against the risks to which they are exposed and also against losses due to
accidents related to these risks.
Our third party insurance covers each company of the Ultrapar group and
comprises two policies: one policy covers minor events and has a limit of R$
1million; the other policy covers possible events of a more serious nature and
has a limit of R$ 150 million.
Oxiteno's management and its advisers believe that this insurance coverage
is in line with chemical and petrochemical industries standards in Brazil
Transportation and Storage
Ultracargo
We conduct our transportation and storage business through Ultracargo, one
of the leading providers of integrated transportation and storage services to
the LPG, petrochemical and chemical industries in Brazil. Among other
solutions, Ultracargo offers, through its subsidiaries Transultra and Tequimar,
integrated multimodal transportation, loading and unloading operations for its
customers and the management of third party fleets. Ultracargo's subsidiary,
Transultra, operates a fleet of tanker trucks and provides transportation
services to the LPG distribution industry and the petrochemical and chemical
industries. The storage services subsidiary Tequimar has a storage capacity of
200,581 m3, accounting for 70% of all tank capacity at the Aratu terminal in
the State of Bahia, which serves South America's largest petrochemical complex.
Tequimar is also present at the ports of Suape, Santos and Maceio, and provides
support facilities in Camacari and Paulinia. See "--Petrochemicals and
Chemicals--Industry and Regulatory Overview."
Ultracargo holds 100% of Transultra's voting capital and 80% of Tequimar's
voting capital. The remaining 20% of Tequimar's voting shares is held by
Ultrapar.
48
The following table sets forth Ultracargo net revenues by region for the
periods indicated:
Year Ended December 31,
2002 2001 2000
------------------------------------------------------------------------------------------
Net Sales % Net Sales % Net Sales %
(in thousands of reais except percentages)
North East 71,757 54% 60,431 57% 52,755 56%
South East 57,210 44% 43,305 41% 40,019 42%
South 2,432 2% 1,592 2% 1,430 2%
----- - ----- - ----- -
Total 131,399 100% 105,328 100% 94,204 100%
======= === ======= === ====== ===
Ultracargo seeks to integrate the transportation and storage businesses by
means of intermodal terminals and by establishing a new client relationship, as
logistics operator. This integration between the management and operation of
Transultra and Tequimar provides significant competitive advantages. Due to
this combination, Ultracargo is the only company in the Brazilian market to
offer integrated transport and bulk liquid and liquefied storage services to
the petrochemical segment.
An example of this integration is the new intermodal terminal built by
Ultracargo in the state of Sao Paulo in response to its strategic decision to
manage bulk solids and to position itself as a logistics operator. The terminal
provides storage for solid, liquid and gaseous products as well as intermodal
transportation. Today, its main activities include the storage of products
originated from Argentina and the Camacari petrochemical complex for future
distribution throughout Brazil.
Ultracargo has also implemented the Integrated Transport System (SIT),
which will result in a greater level of automation and control over transport
operations. This system integrates data from all of its plants and branches
through established dedicated lines, permitting the centralization of the data
and the construction of a technological platform with a competitive edge in
relation to the market.
Transultra
Transultra's principal market for transportation is the chemical and
petrochemical industry, for which transportation is provided by truck between
and among port terminals and first, second and third generation petrochemical
companies operating at the various petrochemical complexes. Transultra has
established long-term relationships with significant companies in the chemical
and petrochemical industries, and provides its services on a negotiated basis
with each individual customers. No written contracts for the rendering of
services are customarily entered into in the transportation industry.
Transultra obtained ISO 9002 certifications for its Capuava operations in 1997
and for its Camacari operations in 1999. In 2001, Transultra was the first
company in the sector to receive the SASSMAQ Certificate, granted by the
ABIQUIM, the Brazilian Chemical Industries Association, to companies that
employ procedures that guarantee operational safety while respecting the
environment and health of their workers.
Transultra, through a fleet of tanker trucks, offers transportation
services for LPG, chemical and petrochemical products in several major
industrial regions in Brazil, as well as in Chile and Argentina. In 2002,
Transultra operated a fleet of approximately 211 tractors and 448 trailers and,
in 2001 and 2002, transported 2,559 and 2,460 thousand tons, respectively.
Transultra estimates that its total share of its targeted chemical markets,
excluding its participation in LPG transportation, is around 18%, while the
remaining 82% of the market is divided among approximately 148 transportation
companies.
In the LPG distribution industry, Transultra provides transportation from
Petrobras' facilities to filling stations operated by LPG distributors,
principally Ultragaz, and also provides a limited amount of transportation
service in the bulk delivery market. Transultra provides 98% of its
transportation service in the LPG industry to Ultragaz. All transactions
between Transultra and Ultragaz or Oxiteno are carried out on an arm's length
basis.
In 1997, Transultra began operating in the market for bulk transport of
solid products, an important segment of the transport business in the domestic
market in which products are transported utilizing special silos and
49
semi-trailers. Transultra believes that there is significant opportunity for
growth in this market. In 2002, Transultra transported approximately 150
thousand tons of solid products and entered into contracts with new customers
which represented approximately a 16% increase in Transultra's 2002 revenues.
Tequimar
Tequimar provides storage facilities to Braskem and most of the second
generation petrochemical companies in the northeast complex, including Oxiteno,
as well as other chemical companies. It also maintains and operates port
terminals for the storage of chemical and petrochemical products at the Aratu
port in the state of Bahia, the Suape port industrial complex in the state of
Pernambuco, the Maceio terminal in the state of Alagoas, the Santos marine
terminal in the state of Sao Paulo, and the intermodal terminal in the city of
Paulinia in the state of Sao Paulo, known as TIP. Tequimar estimates its total
share of the Brazilian liquid storage market at 30%, the largest share in the
Brazilian market. Tequimar currently owns 70% of the storage capacity at the
Aratu port. In 1997, Tequimar obtained the ISO 9002 certification for most of
its storage operations.
In 2002, Ultracargo renewed the rental contracts of its principal
terminals at Aratu and Suape until 2022 and 2030, respectively, with the
objective of expanding its chemical product and derivative operations. The
first expansion program has already been concluded, corresponding to an the
increase of 20,000 cubic meters in storage area at the Aratu terminal. In 2002,
Tequimar also began operating Braskem's raw material terminal, handling more
than 1 million tons in its first year of activity.
Environmental Matters
Ultracargo is subject to Brazilian federal and state laws and regulations
relating to the protection of the environment.
Insurance
Ultracargo maintains insurance policies covering a number of risks, in
particular those relating to the transportation and storage of chemical and
petrochemical products. Transportation activities are protected by policies
covering damages caused by accidents and stolen cargo.
Both Ultracargo's properties and Tequimar's pipelines are insured against
fire, lightning, explosion, flooding, aircraft crash, smoke and electrical
damages.
Ultracargo also maintains insurance policies for civil liabilities. The
storage operations are insured by policies covering damages to products in
storage, including contamination.
Our third party insurance covers each company of the Ultrapar group and
comprises two policies: one policy covers minor events and has a limit of R$
1million; the other policy covers possible events of a more serious nature and
has a limit of R$ 150 million.
Ultracargo's management and its advisers believe that the insurance
maintained covers in all material respects the risks to which Ultracargo is
exposed, and that it is consistent with industry practices in Brazil.
50
A. Organizational Structure
The following chart shows our current organizational structure, including
our principal intermediate holding companies and operating companies.
Percentages represent approximate ownership of voting share capital and total
capital (voting capital/total capital).
[GRAPHIC OMITTED]
We conduct LPG distribution through our subsidiary Ultragaz Participacoes
S.A., of which we own 100% of the total share capital. Ultragaz Participacoes
S.A. operates through its three primary subsidiaries, Companhia Ultragaz S.A.,
Bahiana and Utingas. Companhia Ultragaz and Bahiana operate in the filling and
distribution of LPG. Bahiana operates primarily in the northeast region of
Brazil and Companhia Ultragaz serves the other Brazilian regions. Utingas is an
LPG storage company, with facilities in the states of Sao Paulo and Parana.
We conduct petrochemical and chemical activities through Oxiteno S.A., of
which we own 100% of the total share capital. Oxiteno operates in the
petrochemical and chemical segment directly and through its subsidiary, Oxiteno
Nordeste S.A.. Oxiteno operates two plants located in the state of Sao Paulo,
and Oxiteno Nordeste operates one plant in Camacari, in the state of Bahia, and
a second plant in Triunfo, in the state of Rio Grande do Sul.
Ultracargo conducts our transportation and storage business through its
subsidiaries Transultra and Tequimar, respectively. Transultra provides
transportation services throughout Brazil, as well as in Argentina and Chile.
Tequimar maintains storage facilities at four port terminals located near two
of the main petrochemical complexes in Brazil: Camacari and Sao Paulo.
All of our subsidiaries are organized under the laws of the Federative
Republic of Brazil.
B. Property, Plants and Equipment
Ultragaz
Plant. Ultragaz's LPG distribution network includes 16 filling plants.
Ultragaz also operates LPG storage bases, known as satellite bases for
supplying our trucks. LPG is carried to the filling plants either via gas
pipelines from Petrobras' installations, or by tanker truck. When LPG
transportation is via gas pipeline the bases are known as primary and when
transportation is via tanker truck, the bases are known as secondary. Ultragaz
maintains storage facilities for LPG cylinders and satellite bulk distribution
plants at strategic locations in order to maintain supplies closer to its
51
customer bases and thus to reduce transportation costs. Substantially all of
the LPG transported by truck from Petrobras to Ultragaz's secondary plants is
transported by Transultra's fleet of tanker trucks on an arm's length basis.
LPG is stored in the filling plants in large LPG storage tanks with a capacity
of 60 tons per tank. In the case of LPG to be delivered in bulk, the LPG is
pumped directly from the storage tanks into the bulk tankers. In the case of
LPG to be delivered in cylinders, the LPG is pumped from the storage tanks into
a number of filling heads, which deliver the LPG cylinders.
The following table sets forth the total current storage and total filling
capacity and monthly actual filling volumes during 2002 for each of Ultragaz's
primary and secondary filling stations and satellite stations.
Location Base Type Storage Capacity Filling Capacity Filling average Spare Capacity
(tons) (ton / month) (ton/month) (% capacity)
South East Maua Satellite 540
Capuava Primary 720 13,000 11,658 10%
Santos Primary 960 3,770 2,776 26%
Sao Paulo Satellite 600
Barueri Primary 1,510 4,410 3,840 13%
Sao Jose dos CamposPrimary 360 3,500 2,457 30%
Pouso Alegre Satellite 60
Rio de Janeiro Primary 500 6,600 3,414 48%
Southern -Central Paulinia Primary 1,008 8,657 6,312 27%
Area
Sao Jose do Rio Satellite 180
Preto
Aracatuba Secondary 180 2,458 2,452 0%
Ribeirao Preto Secondary 180 4,000 3,791 5%
Bauru Satellite 60
Goiania Secondary 180 3,200 1,436 55%
Cascavel Satellite 240
Araucaria Primary 240 10,200 5,312 48%
Canoas Primary 600 4,116 1,899 54%
Londrina Satellite 60
Blumenau Satellite 32
Chapeco Satellite 60
Florianopolis Satellite 34
Joinville Satellite 32
Caxias do Sul Satellite 60
Palhoca Satellite 32
North East Mataripe Primary 956 12,331 9,590 22%
Juazeiro Satellite 56
Aracaju Secondary 240 3,770 2,402 36%
Suape Primary 531 5,795 3,659 37%
Ilheus Secondary 336 4,769 2,635 45%
Caucaia Primary 420 4,500 3,254 28%
Piraja Satellite 56
TOTAL 11,023 95,076 66,887 30%
In line with its strategy of geographic expansion, Ultragaz has been
investing in new filling plants in its target markets. Since 1999, six new
filling plants started operations, including Goiania in the state of Goias,
Caucaia in the state of Ceara and Duque de Caxias in the state of Rio de
Janeiro. In 2003, another filling plant will start operations in Betim in the
state of Minas Gerais.
In addition, Ultragaz maintains headquarters in the city of Sao Paulo and
regional offices in the areas in which it operates. Ultragaz also maintains 60
retail stores, including outlets at each of its plants.
Equipment. LPG cylinders are manufactured from steel and are fitted with a
collar at the top of the cylinder and a rim at the base of the cylinder. The
cylinders are fitted with a valve through which the cylinder is filled and
through which the LPG is discharged during use. The 13 kg cylinders, which are
used in the bottled segment, also have a safety plug, which is designed to
52
discharge LPG if the temperature in the cylinder exceeds a certain limit. 13 kg
cylinders are approximately 46 centimeters high, one meter in circumference and
weigh approximately 26.6 kg when full. Ultragaz's cylinders are painted blue.
The company believes that the distinctive blue color has been important in
developing consumer perception of the Ultragaz brand name.
Ultragaz has a number of alternative sources of supply for most types of
cylinders and tanks. Each cylinder manufactured for Ultragaz is stamped with
the Ultragaz logo and the month and year of manufacture by the manufacturer. In
2002, the average market price per cylinder for 13kg cylinders, 20kg cylinders
and 45kg cylinders was approximately R$42.00, R$210.00 and R$235.00,
respectively.
The tanker trucks are used to distribute LPG in both the small bulk and
large bulk markets. In the small bulk market, Ultragaz uses the "UltraSystem"
trade name and delivers LPG using bob-tail trucks, which are fitted with a
longer delivery hose, in order to be able to access tanks of commercial and
smaller industrial users. The bob-tail trucks have a capacity ranging from 6 to
9 tons and can fill tanks with a capacity ranging from 45kg to 125kg. In the
large bulk markets, Ultragaz delivers LPG in larger tanker trucks with an
average capacity of 20 tons, which fill tanks with a capacity ranging from 30
to 60 tons.
Oxiteno
Oxiteno has four plants, including the Camacari plant in the northeast
complex, the Maua plant in the Sao Paulo complex, the Triunfo plant in the
southern complex and the Tremembe plant in the state of Sao Paulo. On average,
Oxiteno spends approximately R$30 million per year in maintenance of its
equipment and facilities.
The following table sets forth the principal product lines and capacity of
Oxiteno's plants.
Maximum Capacity Production
-------------------------- -------------------------
(thousands of metric (thousands of metric
tons per year) tons per year)
Plant Product Lines 2002 2001 2000 2002 2001 2000
----- ------------- ---- ---- ---- ---- ---- ----
Camacari Ethylene Oxide and Derivatives 715 705 690 483 558 506
Ethylene Oxide and Derivatives
Maua and Specialty Chemicals 222 209 189 145 147 147
Tremembe Specialty Chemicals 60 60 58 39 36 29
Triunfo MEK 40 33 33 30 26 33
Maximum capacity at the Camacari and Maua plants is the sum of each
plant's ethylene oxide capacity and the total capacity of its production units
for ethylene oxide derivatives. However, as the aggregate capacity for ethylene
oxide derivatives at these plants demands more ethylene oxide than the plant's
effective ethylene oxide capacity, the plant's actual production of derivatives
is less than the capacity.
However, the excess production capacity of ethylene oxide derivatives,
results in a degree of operating flexibility to the company, which enables it,
to mitigate the effects of reductions in demand for certain products resulting
from downturns in the petrochemical business cycle. During such downturns,
Oxiteno is able, to a certain extent, to switch production to products, which
are less affected by the cyclical downturn, remanaging its ethylene oxide
output between production units for derivative products depending on relative
demand, besides the flexibility in orienting its production capacity.
Oxiteno generally produces its commodity petrochemical products through
continuous production processes and produces specialty chemicals through batch
processes.
Camacari Plant. The Camacari plant, located in the Northeast Complex, was
built by Oxiteno and commenced production in 1978. The Camacari plant produces
ethylene oxide and ethylene oxide derivatives, such as ethylene glycols,
ethanolamines, glycol ethers and ethoxylated derivatives. In addition to the
production units, the Camacari plant has drumming, warehouse, and cogeneration
of electricity and steam and maintenance facilities. As of December 31, 2002,
Oxiteno had 218 employees at the Camacari plant.
53
In late 1994, Oxiteno commenced a major modernization project at the
Camacari plant, involving the addition of 105 thousand tons of ethylene oxide
capacity. The new capacity began producing ethylene oxide in July 1997. Since
the scale of production is one of the most important factors in the costs of
production of ethylene oxide and derivatives, the Camacari expansion has
contributed to a significant reduction of its unit costs. Productivity improved
by 74% from 1996 to 2002. Oxiteno believes that the scale of ethylene oxide
production at its Camacari plant is comparable with some of the world largest
ethylene oxide plants. Oxiteno also believes that the Camacari plant is
currently the largest ethylene oxide plant in Latin America.
The following table sets forth the current production capacity of the
Camacari plant for each of its principal products.
Units Current Capacity
----- -------------------------
(in metric tons per year)
Ethylene Oxide 260,000
Ethylene Glycols 285,000
Ethanolamines 45,000
Glycol Ethers 25,000
Ethoxylated derivatives 100,000
In the table above and in the tables immediately following, the capacity
shown for each derivative of ethylene oxide represents the maximum amount of
such product, which Oxiteno could produce each year based on the capacity of
the relevant production unit. As Oxiteno's capacity for ethylene oxide
derivatives exceeds its ethylene oxide production capacity, Oxiteno cannot
produce the maximum amount of each derivative product in any year and,
accordingly, actual production of ethylene oxide derivatives is less than
capacity.
Maua plant. The Maua plant, located in the Sao Paulo complex, was the
first plant built by Oxiteno and commenced production in 1974. The Maua plant
has process units for ethylene oxide, ethylene glycols, glycol ethers, glycol
ether acetates, natural alcohols and ethoxylated derivatives. In addition to
the production units, the plant has drumming, storage, warehouse and
maintenance facilities and also houses Oxiteno's principal research and
development laboratory. As of December 31, 2002, Oxiteno had 226 employees at
the Maua plant.
The following table sets forth the current production capacity of the Maua
plant for each of its principal products.
Units Capacity
----- ------------------------
(in metric tons per year)
Ethylene Oxide 52,000
Ethylene Glycols 25,000
Glycol Ethers 35,000
Acetates 32,000
C4+C5 Alcohols 10,000
Ethoxylated Derivatives 16,500
Alkylation 17,300
Esterification 3,100
Emulsification 1,300
Hydraulic fluids 30,000
Tremembe Plant. The Tremembe plant, located at Bairro dos Guedes,
Tremembe, in the state of Sao Paulo, has three principal production units, a
sulfonation/sulfation unit and two multipurpose units. The Tremembe plant
commenced production in 1970 and was subsequently acquired by us in 1985. In
addition to the principal production units, other facilities at the plant
include a quality control laboratory, a warehouse and a maintenance shop. As of
December 31, 2002, Oxiteno had 103 employees at the Tremembe plant.
54
The following table shows the current capacity of the principal units at
the Tremembe plant.
Units Capacity
----- -------------------------
(in metric tons per year)
Esterification 5,000
Amidification 5,000
Polymerization 2,500
Specialties 2,000
Sulfonation/Sulfation 30,000
Betaines 10,000
Hydraulic fluids 3,000
Naphthalenes Sulfonates 3,000
Triunfo Plant. The Triunfo plant is located in the southern complex. The
Triunfo plant was built by Oxiteno and started production in October 1989. It
had been inactive for two years when, in 1995, Oxiteno recommenced production
of MEK at this plant. The Triunfo plant has two process units, one for the
production of secondary butyl alcohol, which is used in the production of MEK,
and one for the production of MEK. In addition to these production units, the
Triunfo plant also has warehouse and maintenance facilities. As of December 31,
2002, Oxiteno had 53 employees at the Triunfo plant.
The following table shows the current capacity of the principal units at
the Triunfo plant.
Units Capacity
----- --------------------------
(in metric tons per year)
Methyl-Ethyl-Ketone (MEK) 40,000
Secondary Butyl Alcohol 35,000
ISO 9001 Quality Systems Certifications. In 1995, the management and the
research and development departments of the Maua and Camacari plants were
awarded the ISO 9001 quality system certification. The Tremembe plant obtained
the ISO 9001 certification in 1996; and the Triunfo plant obtained the ISO 9001
certification in 1997. The ISO 9001 certification acknowledges the adequate
maintenance of a management system committed to quality improvement in all of
Oxiteno's departments. In 2001, each department at Oxiteno was awarded the ISO
9001 certification in accordance with the 2000 requirements.
ISO 14001 Environment Certification. In January 2001, the management and
the research and development departments of the Triunfo plant obtained the ISO
14001 certification. In 2002, Triunfo plant's other areas obtained this
certification. The ISO 14001 certification acknowledges the adequate
maintenance of a management system committed to environmental preservation.
SA 8000 Certification. Oxiteno was the first chemical and petrochemical
company in Brazil to receive the SA 8000 certification, which establishes
quality management systems requirements related to social responsibility. The
SA 8000 certificate addresses issues such as health, safety, labor relationship
and compliance with applicable legislation.
QS 9000 Certification. In 1998, Oxiteno obtained the QS 9000 certificate,
which establishes management requirements for the automobile sector, in
connection with its sales of chemical products to this sector. Oxiteno was the
first Brazilian company to receive this certification.
55
Ultracargo
Tequimar
The following table sets forth the principal products stored at, and the
storage capacity of, Tequimar's plants.
Plant Capacity (in m3) Product Lines
-------------------------------------------------------------------------------------------------------------------------
Aratu (BA) 131,450 Glycols, aromatics, acrylates, acrylonitrile, EDC, TDI, normal
paraffins, linear alkyl benzene (LAB), linear alkyl sulphonate-LAS,
methanol, ethers, alcohols
Suape (PE) 34,850 Fuels, VAM, acetic acid, styrene, butadiene
Maceio (AL) 12,800 Alcohol, soybean oil
Santos (SP) 11,000 Vinyl Chloride Monomer
TIP Granel (SP) 1,881 PET
TIP Quimico (SP) 8,600 Para-xylene,LAB, LAS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A Operating Results
You should read this discussion together with our consolidated financial
statements, including the notes thereto, and other financial information
included elsewhere in this annual report. Our consolidated financial statements
have been prepared in accordance with accounting practices adopted in Brazil
and the accompanying notes contain a description of the principal differences
between such practices and U.S. GAAP, and a reconciliation to U.S. GAAP of net
income and shareholders' equity for the three years ended December 31, 2002.
Our consolidated financial statements as of December 31, 2002 and for the year
ended December 31, 2002 were audited by Deloitte Touche Tohmatsu Auditores
Independentes. Our consolidated financial statements as of December 31, 2001
and for the years ended December 31, 2001 and 2000 were audited by other
independent auditors.
Overview
Our three principal businesses are:
o the LPG distribution business, consolidated under Ultragaz;
o the chemical and petrochemical business, consolidated under Oxiteno;
and
o the transportation and storage businesses, consolidated under
Ultracargo.
The following table sets forth the contribution of each of these businesses to
our net sales in the three years ended December 31, 2002. Intercompany
transactions are eliminated upon consolidation at the parent-company level.
Ultragaz represents the sales to the LPG segment and Oxiteno represents sales
to the chemical segment.
Year Ended December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Net Sales % Net Sales % Net Sales %
--------- - --------- - --------- -
(in thousands of reais except percentages)
Ultragaz 1,942.1 64.9% 1,380.9 60.5% 1,125.7 60.0%
Oxiteno 956.1 31.9% 832.1 36.4% 686.1 36.5%
Ultracargo 96.3 3.2% 71.7 3.1% 66.2 3.5%
Total 2,994.5 100.0% 2,284.7 100.0% 1,878.0 100.0%
56
In 2002, our acquisition of ownership interests, excluding acquisition of
treasury shares, consumed cash flows of R$ 212.6 million.
Corporate Restructuring
On December 20, 2002, we completed our corporate restructuring process
which we began on October 15, 2002. The effects of the corporate restructuring
were:
o merger of Gipoia, owned by Ultra S.A., into Ultrapar, increasing
Ultrapar's ownership in Ultragaz to 100% from 77% of the total share
capital. Ultrapar issued approximately 7.8 billion common shares in
connection with this merger.
o Ultrapar's "incorporation" of shares issued by Oxiteno, increasing
Ultrapar's ownership in Oxiteno to 100% from 48% of the total share
capital. The holders of approximately 12 million of Oxiteno's shares
elected to exchange their shares for shares in Ultrapar, triggering the
issue of approximately 5.4 billion common shares and 3.4 billion preferred
shares by Ultrapar. We paid R$ 208 million representing approximately 13
million shares to Oxiteno's minority shareholders who exercised their
withdrawal rights.
The table below shows the effects of the corporate restructuring in our
share capital:
Total capital Number of shares
(in millions ----------------------------------
of reais) Common share Preferred shares Total shares
--------- ------------ ---------------- ------------
As of December 31, 2001 433.9 37,984,012,500 15,015,987,500 53,000,000,000
shares issued for:
merger of Gipoia 38.5 7,850,603,880 - 7,850,603,880
"incorporation" of Oxiteno's shares 191.6 5,430,005,398 3,410,659,550 8,840,664,948
----- ------------- ------------- -------------
As of December 31, 2002 664.0 51,264,621,778 18,426,647,050 69,691,268,828
===== ============== ============== ==============
The charts below show our corporate structure before and after the
restructuring with respect to the companies involved:
[Graphic Omitted]
57
The exchange ratio of Gipoia's quotas and of Oxiteno's shares for shares
in Ultrapar, was determined on the basis of economic and financial appraisals
of both companies prepared by Banco Itau S.A. using the discounted cash flow
method.
Gipoia's and Oxiteno's shareholders' equity was determined by Ernst &
Young Auditores Independentes S/C based on their book value for purposes of
increasing our capital.
In accordance with the merger terms and conditions, we included 100% of
Ultragaz's and Oxiteno's results in our results of operations, beginning July
1, 2002, practically eliminating our minority interest.
Brazilian Economic Background.
Since all of our operating businesses are located in Brazil, we are
significantly impacted by Brazil's economic and social conditions, including,
but not limited to, gross domestic product, or GDP, growth rates, the domestic
rate of inflation and exchange rate fluctuations.
Gross Domestic Product
After the introduction of the Real Plan in 1994, the Brazilian economy
experienced some years of strong economic growth. However, in 1998, economic
growth slowed down, hastened by a sharp devaluation of the real and a GDP
increase of only 0.8% reported in 1999. In 2000, Brazil's GDP grew by 4.4% due
to radical tax policies and a recovery in consumer confidence. In 2001,
Brazil's GDP grew by only 1.5%, largely due to the Brazilian government's
energy rationing program, the terrorist attacks of September 11, and the
Argentine crisis. In 2002, Brazil's GDP grew by only 1.5%, as a result of the
political instability surrounding the presidential elections of October 2002,
which caused foreign exchange rate devaluation, and an increase in interest
rates, and undermined consumer confidence.
Our most sensitive operations to Brazil's GDP growth rates are
transportation and storage, in the case of Ultracargo, and Oxiteno's domestic
operations. Ultragaz's LPG sales to the commercial and industrial sectors are
also affected by the Brazil's GDP growth, but to a lesser extent.
Inflation
Our cash operating expenses are substantially in reais and tend to increase
with Brazilian inflation. The inflation rate, as measured by the Indice Geral
de Precos -- Mercado, or IGP-M, was 1.8% in 1998. The inflation rate increased
to 20.1% in 1999 as a result of the devaluation of the real beginning in
January 1999, and decreased to 10.0% in 2000 and 10.4% in 2001. In 2002, the
inflation rate as measured by the IGP-M increased to 25.3%, reflecting the
foreign exchange rate devaluation of 52.3%, largely due to uncertainties and
risks inherent in the Brazilian presidential succession campaign. During the
period from January 1, 2003 to May 31, 2003, the real had appreciated against
the US dollar by 16%, and there were strong indications of a decline in
inflation as compared to 2002. Future governmental actions, including actions
to adjust the value of the real in relation to the dollar, may increase
inflation.
58
The table below shows the inflation rate for the periods indicated, as
measured by the IGP-M as well as the depreciation of the real against the U.S.
dollar.
Year Ended December 31,
-----------------------
Index 2002 2001 2000
----- ---- ---- ----
General Price Index--IGP-M 25% 10% 10%
Devaluation of the real against the U.S. dollar 52% 19% 9%
Currency Fluctuations
The principal foreign exchange risk we face arises from our U.S. dollar
denominated operating expenses. A substantial portion of our debt obligations
is denominated in U.S. dollars and is currently managed against currency
devaluations. In addition, a significant portion of our operating expenses is
denominated in, or indexed to, the U.S. dollar. Most of our revenues are
denominated in reais, although sales prices of products of the chemicals
segment are linked to international market prices established in U.S. dollars.
As a result, we are exposed to currency exchange risks that may adversely
affect our business, financial condition and results of operations.
We manage the foreign exchange risk associated with the scheduled payments
under the terms of our U.S. dollar indebtedness by investing in U.S.
dollar-denominated mutual funds and foreign currency/interest swap contracts,
under which we pay variable interest in reais based on the interbank
certificate of deposit rate, or CDI, and receive fixed interest in U.S.
currency. As of December 31, 2002, our total debt was R$583.4 million, of which
R$361.4 million was denominated in foreign currency, including pre-export
finance contracts and import payables. Our total cash position was R$637.9
million, of which R$546.3 million was composed of financial investments indexed
to U.S. dollars, managed against fluctuations of exchange rates and foreign
currency receivables. See "Item 11. Quantitative and Qualitative Disclosures
about Market Risk - Foreign Exchange Risk" and Note 12 and 16 to our
consolidated financial statements.
Government Policies
Brazilian economic, fiscal, monetary and social policies and factors have
affected us in the past and will affect us in the future. See "Item 3. Key
Information--Risk Factors--Risks relating to Brazil" for a description of some
of these policies and factors that can affect our results.
Discussion of Critical Accounting Policies
The presentation of our financial condition and results of operation often
requires our management to make judgments regarding the effects of matters that
are inherently uncertain on the carrying value of our assets and liabilities.
Actual results may differ from those estimated under different variables,
assumptions or conditions. In order to provide an understanding about how
management forms its judgments about future events, including the variables and
assumptions underlying the estimates, and the sensitivity of those judgments to
different variables and conditions, we have identified the following five of
our accounting policies that can be considered "critical":
o revenue recognition and accounts receivable;
o costs and inventory valuation;
o impairment of assets;
o deferred taxes; and
o contingent liabilities
o Revenue Recognition and Accounts Receivable
59
Revenue is recognized when title and risk of loss have been transferred to
the customer and collection of the resulting receivables is reasonably assured.
Revenue from product sales is recognized at time of delivery and acceptance by
customer or shipment. Sales of services are recognized at time of performance.
In the LPG segment, 11% of our sales are cash sales. Our remaining sales in the
LPG segment as well as our domestic sales in the chemicals segment and our
sales in the transportation and storage businesses are credit sales, with a
collection period of up to 23 days on average for Ultragaz and 34 days on
average for Oxiteno and Ultracargo- see note 23V(b) to our consolidated
financial statements for additional information about our credit policies.
Revenue from our exports in the chemical segment is recognized when
products are shipped to the customer. The average collection period for exports
is 54 days after shipping.
The allowance for doubtful accounts is recorded in an amount we consider
sufficient to cover any probable losses on realization of our accounts
receivable from our customers, as well as other receivables, and is included as
selling expenses; no adjustment is made to net sales revenue. In order to
establish the allowance for doubtful accounts, our management constantly
evaluates the amount and characteristics of our accounts receivable. When
significant delays occur and the likelihood of receiving these payments
decreases, a provision is made. In case receivables in arrears are guaranteed
or there are reasonable grounds to believe they will be paid, no provision is
made. In December 2002, we recorded an additional provision at Ultragaz in the
amount of R$ 8.3 million, in response to a market situation of sharply
increased prices and reduced volumes, which led us to implement stricter
monitoring of our customers' financial situations.
o Costs and inventory valuation
Inventories are comprised of finished goods, raw materials, cylinders for
resale and materials for consumption. Inventories are stated at the lower of
cost or market. For periods presented in the consolidated financial statements
included herein, inventories were recorded at average cost.
o "Impairment" of assets
As required under the accounting practices adopted in Brazil and under
U.S. GAAP, we perform cash flow studies to determine if the accounting value of
our assets, namely our fixed assets, is compatible with the profitability
resulting from their use. If the profitability is lower than the accounting
value, the asset will be subject to a provision for impairment. As noted in
Note 23V(c) to our consolidated financial statements, this has not occurred to
date, and there are no provisions for impairment recorded in our consolidated
financial statements.
o Deferred Taxes
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax basis of assets
and liabilities. We regularly review the deferred tax assets for recoverability
and establish a valuation allowance, as required, based on historical taxable
income, projected future taxable income, and the expected timing of the
reversals of existing temporary differences. In the event we or one of our
subsidiaries operate at a loss or are unable to generate sufficient future
taxable income, or if there is a material change in the actual effective tax
rates or time period within which the underlying temporary differences become
taxable or deductible, we evaluate the need to establish a valuation allowance
against all or a significant portion of our deferred tax assets, resulting in
an increase in our effective tax rate. See Note 20 to our consolidated
financial statements for additional information on taxes.
60
o Contingent liabilities
We are currently involved in certain legal and administrative proceedings
that arise from our normal course of business, as described in Notes 14 and 16
to our consolidated financial statements and in "Item 8. Financial Information
- Consolidated Statements and Other Information - Legal Proceedings" of this
annual report. We believe that the extent to which these contingencies are
recognized in our consolidated financial statements is adequate. It is our
policy to record accrued liabilities in regard to contingencies that could have
a material adverse impact on the result of our operations or our financial
condition, to the extent not covered by insurance, and that are likely to occur
in the opinion of our legal advisers.
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales. Our net sales increased by 31%, to R$2,994.5 million in 2002
from R$2,284.7 million in 2001.
Ultragaz's net sales increased by 41%, to R$ 1,942.7 million in 2002 from
R$ 1,381.1 million in 2001, reflecting an increase in LPG costs (and resulting
higher sales prices) during the year. In January 2002, LPG refinery prices
charged by Petrobras to distributors began to be set by reference to
international LPG prices, which resulted in domestic prices becoming sensitive
to the effects of the real depreciation against foreign currencies. The
depreciation of the real and the increases in LPG prices worldwide resulting
from the war with Iraq led to an increase of approximately 123% in LPG refinery
prices charged by Petrobras to distributors and resulted in a 5% decrease in
domestic consumption. The resulting increase in sales prices was partially
offset by a reduction in volume sales by 3% to 1.30 million tons in 2002 from
1.34 tons in 2001.
Oxiteno's net sales increased by 15%, to R$ 956.1 million in 2002 from R$
832.2 million in 2001. The depreciation of the real made Oxiteno's products
more competitive in the international and the domestic markets, which
contributed to the sales increase. During 2002, Oxiteno's sales volume
decreased by 3%, largely due to ethylene supply restrictions from Braskem,
following a long maintenance stoppage during the first half of 2002. In this
scenario, Oxiteno sold a higher margin product mix, increasing its sales in
Brazil.
Ultracargo's net sales increased by 25%, to R$ 131.4 million in 2002 from
R$ 105.3 million in 2001, mainly reflecting greater sales volumes at Transultra
due to further expansion of its customer base.
Cost of Goods Sold and Gross Profit. Our cost of goods sold increased by
32%, to R$2,247.1 million in 2002 from R$1.698,3 million in 2001.
Ultragaz's cost of goods sold increased by 43%, to R$1,585.1 million in
2002 from R$1,105.2 million in 2001, principally due to increases on the
refinery prices charged by Petrobras to distributors following the deregulation
of domestic LPG prices in January 2002. Since then, Petrobras has adopted the
international price plus the cost of importing the product as a benchmark.
Oxiteno's cost of goods sold increased by 9%, to R$614.8 million in 2002
from R$563.8 million in 2001. This increase was largely due to increased
ethylene prices, which are very sensitive to foreign exchange rate devaluation
as well as higher international naphtha prices.
Ultracargo's cost of goods sold increased by 31%, to R$ 82.8 million in
2002 from R$ 63.0 million in 2001. This increase reflected the higher prices of
Tequimar's raw materials and the increase in diesel fuel.
Our gross profit increased by 27%, to R$747.4 million in 2002 from R$586.4
million in 2001. Both Ultragaz and Oxiteno contributed to this increase. At
Ultragaz, gross profit increased by 30%, to R$357.6 million in 2002 from R$
275.9 million in 2001. At Oxiteno, gross profit increased by 27%, to R$341.3
million in 2002 from R$ 268.4 million in 2001.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 20%, to R$382.3 million in 2002 from
R$317.7 million in 2001.
61
At Ultragaz, depreciation expenses increased by 24%, to R$76.7 million in
2002 from R$61.9 million in 2001, due to an increase in fixed and deferred
assets in line with the investments amounting to R$ 130.6 million in 2002.
Selling expenses increased by 16% to R$ 76.6 million in 2002 from R$66.1
million in 2001, due to sales promotions and marketing campaigns and the
creation of provisions for doubtful accounts in the amount of R$ 8.3 million in
December 2002. General and administrative expenses increased by 31%, to R$ 64.5
million in 2002 from R$ 49.4 million in 2001, due to increases in salaries
following changes in collective labor agreements and consultancy fees arising
from the implementation of integrated systems.
At Oxiteno, selling, general and administrative expenses increased by 15%,
to R$142.4 million in 2002 from R$123.7 million in 2001, due to increased
general and administrative expenses from R$66.9 million in 2001 to R$85.2
million in 2002, which resulted primarily from higher expenses associated with
our profit sharing program, collective wage agreements and expenses related to
consultancy and legal services provided in connection with the corporate
restructuring which took place in 2002.
Net Financial Income (Expense). We registered net financial income of
R$28.5 million in 2002 compared with a net financial expense of R$31.1 million
in 2001, principally due to our policy of hedging foreign exchange liabilities.
Our consolidated cash position at December 31, 2002 was R$ 637.9 million, of
which R$ 546.3 million were in U.S. dollar-indexed financial investments. Our
total debt at December 31, 2002 was R$ 583.4 million, of which R$ 361.4 million
was denominated in foreign currency. Notwithstanding the disbursement of R$
208.0 million to Oxiteno's dissenting shareholders who decided to sell their
shares during the corporate restructuring, our net cash position at December
31, 2002 was R$ 54.5 million.
Non-operating Income (Expense). Our net non-operating expenses increased
by 159% to R$44.1 million in 2002 from R$ 17.0 million in 2001 due to the
provisioning of R$ 40.5 million for our investment in Nordeste Quimica S.A. -
Norquisa, a company engaged in the chemical and petrochemical businesses. We
hold a 8.7% ownership interest in Norquisa, and this provision reflects an
adjustment to our estimate of the market value of our share in Norquisa's
assets.
Equity in earnings of affiliates. This account registered a loss of R$1.7
million in 2002 compared to a gain of R$1.9 million in 2001 as a result of a
loss of R$ 1.0 million in the 2002 results of operations of our affiliate
Fabrica Carioca de Catalisadores S.A. - FCC, in which we held a 20% ownership
interest, which we sold in November 2002.
Minority Interest. Minority interest decreased by 25%, to R$54.5 million
in 2002 from R$73.0 million in 2001. With the conclusion of the corporate
restructuring in 2002, Oxiteno and Ultragaz become our wholly-owned
subsidiaries. In accordance with the merger terms and conditions, we included
100% of Ultragaz's and Oxiteno's results in our results of operations beginning
July 1, 2002, practically eliminating our minority interest.
Net Income. Our net income increased by 68%, to R$222.3 million in 2002 from
R$132.2 million in 2001.
EBITDA(1). Our EBITDA increased by 31%, to R$487.3 million in 2002 from
R$372.5 million in 2001. Ultragaz's EBITDA increased by 35%, to R$219.8 million
in 2002 from R$163.0 million in 2001. Oxiteno's EBITDA increased by 32%, to
R$232.6 million in 2002 from R$176.8 million in 2001.
(1) EBITDA is a measure widely used to approximate operating income.
Management uses EBITDA as one measure of assessing our ability to generate
cash from our operations along with other measures such as cash flows from
operating activities. EBITDA is equal to operating profit plus
depreciation and amortization expenses. EBITDA is not a measure of
financial performance under U.S. GAAP or accounting practices adopted in
Brazil. EBITDA should not be considered in isolation, or as an alternative
to net income as a measure of operating performance or to cash flows from
operations as a measure of liquidity.
62
Ultrapar
Reconciliation of operating (expenses) income
Year ended December 31,
2002 2001
---- ----
(in millions of reais)
Operating (expenses) income 365.5 278.9
Minus: non-cash operating income included in "other operating income, net" - (8.8)
Depreciation and amortization 121.8 102.4
EBITDA 487.3 372.5
===== =====
Ultragaz
Reconciliation of operating (expenses) income
Year ended December 31,
2002 2001
---- ----
(in millions of reais)
Operating (expenses) income 143.2 101.1
Minus: non-cash operating income included in "other operating income, - -
net"
Depreciation and amortization 76.6 61.9
EBITDA 219.8 163.0
===== =====
Oxiteno
Reconciliation of operating (expenses) income
Year ended December 31,
2002 2001
---- ----
(in millions of reais)
Operating (expenses) income 203.4 149.7
Minus: non-cash operating income included in consolidation (4.8) (4.1)
Depreciation and amortization 34.0 31.2
EBITDA 232.6 176.8
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales. Our net sales increased by 22%, to R$2,284.7 million in 2001
from R$1,878.0 million in 2000, due to: (i) an increase in Ultragaz's net sales
by 23%, to R$1,381.1 million in 2001 from R$1,125.9 million in 2000 and (ii) an
increase in Oxiteno's net sales by 21%, to R$ 832.2 million in 2001 from
R$686.2 million in 2000. The increase in Ultragaz's net sales was due in part
to sales volume growth by 4.4% in 2001, while the overall Brazilian LPG market
decreased by 0.5%, mainly due to an increase in use of natural gas derived from
the Brazil-Bolivia pipeline. The increase in Ultragaz's net sales was also a
consequence of the increase by 18% in the R$ per ton net sales, due to
increases in the refinery prices charged by Petrobras. At Oxiteno, sales volume
increased by 4% compared to 2000. At Ultracargo, net revenue increased by 12%
in 2001, reaching R$105.3 million.
Cost of Goods Sold and Gross Profit. Our cost of goods sold increased by
21%, to R$1,698.3 million in 2001 from R$1,399.6 million in 2000, mainly due to
an increase of 25% in cost of goods sold at Ultragaz, to R$1,105.2 million in
2001 from R$886.6 million in 2000, basically due to the adjustment of LPG
prices charged by Petrobras in the domestic market to prices charged in the
international market. At Oxiteno, cost of goods sold increased by 16%, to
R$563.8 million in 2001 from R$484.6 million in 2000. This increase was mainly
due to the impact of the devaluation of the exchange rate on the price of raw
materials, which is linked to the U.S. dollar variation.
Our gross profit increased by 23%, to R$586.4 million in 2001 from R$478.4
million in 2000. Both Ultragaz and Oxiteno contributed to this increase. At
Ultragaz, gross profit in 2001 was R$275.9 million, representing an increase of
63
15% compared to 2000. At Oxiteno, gross profit reached R$268.4 million in 2001,
representing an increase of 33% compared to 2000.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses increased by 19%, to R$317.7 million in 2001 from
R$266.2 million in 2000, mainly due to the increase of expenses at Ultragaz.
At Ultragaz, depreciation expenses increased to R$61.9 million in 2001
from R$42.3 million in 2000, due to an increase in fixed assets as a result of
an increase in investments. Other expenses increased to R$115.5 million in 2001
from R$102.9 million in 2000, mainly due to expenses related to marketing
campaigns and sales promotions as a result of pre-sales activities and the
opening of new filling plants.
At Oxiteno, selling, general and administrative expenses increased by 14%,
to R$123.7 million in 2001 from R$108.0 million in 2000. This increase was
mainly due to an increase in selling expenses, to R$53.9 million in 2001 from
R$43.2 million in 2000, as a result of the bad debt provision of R$6.1 million,
related to the worsening of the Argentina crisis, and to an increase of
international freight costs, impacted by the devaluation of the real against
the U.S. dollar.
Net Financial Income (Expense). We recorded a net financial expense of
R$31.1 million in 2001, compared to net financial income of R$43.4 million in
2000, mainly due to the impact of the currency devaluation on our U.S.
dollar-linked liabilities. At December 31, 2001, our total cash position was
R$656.0 million, of which R$294.6 million was held in U.S. dollar indexed
assets. The distribution of extraordinary dividends in September 2001, in the
amount of R$200.1 million, decreased our revenues from investments in
marketable securities in the fourth quarter of 2001. Total debt at December 31,
2001 was R$414.7 million, and the amount of liabilities in foreign currency was
R$205.2 million.
Non-operating Income (Expense). Our net non-operating expenses increased
by 3% to R$17.0 million in 2001, from R$16.5 million in 2000.
Equity in earnings of affiliates. This account registered a gain of R$1.9
million in 2001 compared to a gain of R$9.6 million in 2000. This reduction is
primarily due to a decrease in Norquisa's results of operations in 2001. Our
subsidiary Oxiteno has a 8.7% ownership interest in Norquisa's total capital.
Minority Interest. Minority interest decreased to R$73.0 million in 2001,
from R$74.2 million in 2000, principally due to a reduction of income before
taxes at Ultragaz.
Net Income. Our net income increased to R$132.2 million in 2001 from
R$128.5 million in 2000, primarily due to Oxiteno's results.
EBITDA(1). Our EBITDA increased by 22% to R$372.5 million in 2001 from
R$304.3 million in 2000. Ultragaz's EBITDA increased by 16%, to R$163.0 million
in 2001 from R$140.9 million in 2000. Oxiteno's EBITDA increased by 34%, to
R$176.8 million in 2001 from R$132.4 million in 2000.
(1) EBITDA is a measure widely used to approximate operating income.
Management uses EBITDA as one measure of assessing our ability to generate
cash from our operations along with other measures such as cash flows from
operating activities. EBITDA is equal to operating profit plus
depreciation and amortization expenses. EBITDA is not a measure of
financial performance under U.S. GAAP or accounting practices adopted in
Brazil. EBITDA should not be considered in isolation, or as an alternative
to net income as a measure of operating performance or to cash flows from
operations as a measure of liquidity.
64
Ultrapar
Reconciliation of operating (expenses) income
Year ended December 31,
2001 2000
---- ----
(in millions of reais)
Operating (expenses) income 278.9 213.5
Minus: non-cash operating income included in "other operating income, net" (8.8) -
Depreciation and amortization 102.4 90.8
EBITDA 372.5 304.3
Ultragaz
Reconciliation of operating (expenses) income
Year ended December 31,
2001 2000
---- ----
(in millions of reais)
Operating (expenses) income 101.1 98.6
Minus: non-cash operating income included in "other operating income, - -
net"
Depreciation and amortization 61.9 42.3
EBITDA 163.0 140.9
Oxiteno
Reconciliation of operating (expenses) income
Year ended December 31,
2001 2000
---- ----
(in millions of reais)
Operating (expenses) income 149.7 97.0
Minus: non-cash operating income included in consolidation (4.1) (3.7)
Depreciation and amortization 31.2 39.1
EBITDA 176.8 132.4
B. Liquidity and Capital Resources
Our principal sources of liquidity arise from cash generated from short
and long-term operations and loans. We believe that these sources will continue
to be sufficient to satisfy our current funding requirements, which include,
but are not limited to, working capital, capital expenditures, amortization of
debt and payment of dividends.
From time to time, we examine the opportunities for acquisitions and
investments with a view to investing, should a suitable opportunity arise. We
would consider different types of investments, either direct or through
subsidiaries, joint ventures, or affiliated companies. We would finance such
investments using cash generated from our operations, through funding raised in
the capital markets, through capital injections or through a combination of
these methods.
Sources of Funds
Our cash flow from operations was R$468.8 million, R$339.7 million and
R$302.7 million in 2002, 2001 and 2000 respectively. Cash flow from borrowings
amounted to R$97.3 million, R$54.4 million and R$66.9 million in 2002, 2001 and
2000, respectively. We believe we have sufficient working capital for our
present requirements.
Uses of Funds
Acquisitions of property, plant and equipment consumed cash of R$168.8
million, R$145.7 million and R$143.5 million in 2002, 2001 and 2000,
respectively. Payment of dividends and interest on shareholders' equity
65
consumed cash flow of R$60.9 million, R$244.3 million and R$52.7 million in
2002, 2001 and 2000, respectively. Repayment of debt consumed cash flow of
R$98.2 million, R$85.3 million and R$70.4 million in 2002, 2001 and 2000,
respectively.
The acquisition of ownership interests, excluding acquisition of treasury
shares, consumed cash flows of R$ 212.6 million, R$ 13.8 million and R$ 1.5
million in 2002, 2001, and 2000, respectively. For more information on our
investments and capital expenditures see "Investments and Capital
Expenditures".
Debt
As of December 31, 2002, our consolidated long-term debt (including the
short-term portion of our long-term debt) was as follows:
Principal amount outstanding and
accrued interest until December
Debt Interest Payable 31, 2002
(in millions of reais)
U.S. dollar-denominated loans:
IFC US$ + 9.4% 17.7
Eximbank and others US$ + 1.8% to 6% 3.8
Syndicated loan US$ + 7.2% 212.5
Trade Related(1) US$ + 3% to 16.3% 114.9
Real-denominated loans:
Banco Nacional de Desenvolvimento Economico e Social- UMBNDES 10.6% to 12.5% 28.9
BNDES (2)
TJLP 1.5% to 6% 187.5
IGP-M plus 6.5% 18.1
Total 583.4
(1) Include advances on foreign exchange contracts, loans from Banco Nacional
de Desenvolvimento Economico e Social - BNDES, the Brazilian Development Bank
and export payments, net of related operations.
(2) The TJLP is a nominal interest rate established on a quarterly basis. In
2002, the TJLP amounted to 9.87% per year. The UMBNDES is based on the average
cost of the BNDES's currency basket. The currency basket is a bundle of BNDES
debt obligations in foreign currencies
Our consolidated debt as of December 31, 2002 matures in accordance with the
following schedule
Amount
Year ending December 31, (in million of reais)
--------------------------------------------------------------
2003 219.8
2004 273.3
2005 43.1
2006 32.5
2007 12.9
and thereafter 1.8
-----
583.4
=====
As of December 31, 2002, R$26.8 million of our consolidated debt was
secured by property, plant and equipment, R$18.2 million was secured by shares
of affiliated companies and R$42.2 million was secured by guarantees provided
by minority shareholders. As of December 31, 2002, we guaranteed a portion of
our subsidiaries' indebtedness in the amount of R$ 359.6 million.
Our indirect subsidiary Companhia Ultragaz issued US$ 60 million 9% notes
which were due in 2005 and had a put/call option exercisable in 2002. We and
our subsidiary Ultragaz jointly, severally and unconditionally guaranteed these
notes and are thus subject to covenants which restrict, among other things, our
ability to incur indebtedness, constitute liens, make dividend payments and
other distributions and conduct sale-leaseback transactions, mergers and asset
sales.
66
These notes were purchased in June 2002 by our indirect subsidiary, LPG
International Inc., with funds obtained from a syndicated loan which matures in
August 2004.
Oxiteno and its subsidiary Oxiteno Nordeste S.A. are also subject to
covenants contained in a loan agreement entered into with the International
Finance Corporation, which restrict their ability to incur indebtedness,
constitute liens, make dividend payments and other distributions, and conduct
consolidations, mergers and asset sales.
None of these covenants have restricted our ability to conduct our
ordinary course of business as of the date of this annual report.
Currently, our U.S. dollar-denominated liabilities are protected from
local currency depreciation through financial instruments. As of December 31,
2002, we had R$546.3 million in dollar-denominated debt and R$361.4 million in
dollar-denominated assets. See Note 16 to our consolidated financial
statements.
Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
Our off-balance-sheet arrangements and aggregate contractual obligations
for the next years are as follows:
Payment Due by Period
----------------------------------------------------------------------------
(in millions of reais)
Up to 3 Between 3 Between 1 Between 3 Beyond 5
Contractual Obligations Total months and 12 months and 3 years and 5 years years
----------------------- ----- ------ ------------- ----------- ----------- -----
Short-Term and Long Term Debt 583.4 60.3 159.5 316.4 45.4 1.8
Unconditional Purchase Obligations 1 1,128.0 28.2 84.6 225.6 225.6 564.0
Other Unconditional Obligations2 94.9 1.1 3.4 9.1 9.1 72.2
Off-balance sheet financing
arrangements 3 7.1 7.1
Total Contractual Cash Obligations 1,813.4 96.7 247.5 551.1 280.1 638.0
---------------------------------- ------- ---- ----- ----- ----- -----
(1) The unconditional purchase obligation refers to a take or pay contract
that we have entered into with Braskem, which requires us to purchase an
annual volume of 138 thousand tons of ethylene until 2012. If we fail to
meet this obligation, we are required to pay a fine based on 40% of the
annual volume of ethylene multiplied by the price for the ethylene. This
contract does not define the price for the ethylene, so the amount in
reais is based on the ethylene price as of December 31, 2002.
(2) Our subsidiary Terminal Quimico de Aratu S.A - Industria e Comercio has
entered into contracts in connection with its harbor facilities in Aratu
and Suape. The Aratu contract requires moving at least 1 million tons of
products each year through 2022. The Suape contract requires moving at
least 250 thousand tons of products each year through 2027. If annual
movement in tons is lower than the contract requirements, Terminal
Quimico de Aratu is required to pay the difference between the actual
movement and the minimum contractual movement using the harbor duty
rates in effect at the date established for payment. As of December 31,
2002, such rates were R$ 3.67 and R$ 3.44 for Aratu and Suape,
respectively. Since entering into these contracts, Terminal Quimico de
Aratu has complied with the minimum movement of products required by the
contracts.
(3) Our off-balance sheet financing arrangements are related to the
guarantees we issued to financial institutions in connection with
amounts owed to those institutions by certain of our customers under
vendor financing programs. The terms of the guarantees are the same as
the terms of the related financing arrangements, which can be as short
as 60 days or as long as 90 days. There are no recourse provisions or
collateral that would enable us to recover any amounts paid to the
financial institutions under these guarantees. In the event of payment
of such guarantees to those financial institutions, we may recover the
amount of such payment directly from our customers under the vendor
transactions. At December 31, 2002, maximum potential future payments
related to these guarantees amounted to R$ 7.1 million and we had not
recorded any liability related to these guarantees.
47
Investments and Capital Expenditures
Investments
On May 23, 2001, we acquired the 35% voting interest of Transultra that we
did not already own, from Petrobras Distribuidora S.A. We made this acquisition
through our wholly owned subsidiary, Ultracargo, in an auction held at Bovespa.
We paid the minimum price at the auction, which was R$21 million. Of that
amount we paid, 5% in cash, and the remaining 95% set with government
securities, which we had previously acquired at a discount of 62.7% for this
purpose.
In March 2002, Oxiteno made a tender offer for the acquisition of the
shares of its subsidiary Oxiteno Nordeste. The tender offer closed on April 16,
2002, when Oxiteno bought 93,871 shares of Oxiteno Nordeste, representing
approximately 73.3% of the shares held by minority shareholders. Oxiteno
increased its share ownership from 97% to 98.9% for approximately R$4.4
million.
In November 2002, we sold our 20% stake in our indirect subsidiary Fabrica
Carioca de Catalisadores S.A. -FCC for R$ 30.7 million.
Capital Expenditures. The following table shows our capital expenditures
for property, plant and equipment in the three years ended December 31, 2002,
as well as the projections for 2003.
Projections for the
years ended
Year Ended December 31, December 31,
------------------------- --------------------
2000 2001 2002 2003
----- ------ ------ -------------------
(in millions of reais)
Ultragaz 120.4 148.2 130.6 103.1
Oxiteno 49.9 42.9 55.8 71.8
Ultracargo 11.6 11.9 36.2 27.0
Others 0.5 0.1 0.2 1.0
----- ----- ----- -----
Total 182.4 203.1 222.8 202.9
===== ===== ===== =====
At Oxiteno, capital expenditures in 2002 were directed to expand
production capacity and quality and environmental control systems, and to
replace old equipment. For 2003 capital expenditures will consist principally
of the increase in production capacity, as well as the development of new
products and the implementation of the Oracle system.
At Ultragaz, investments in 2002 included the expansion of its operations
to the small bulk segment, the building of new filling plants, the acquisition
of new cylinders and the implementation of the Oracle system. In 2003, Ultragaz
intends to continue this investment strategy.
In 2002, Ultracargo upgraded and expanded its operating capacity and
renewed the lease of the Aratu site with Cia. Docas do Estado da Bahia - CODEBA
for 20 years. This lease is renewable for another 20 year-period. In 2003,
Ultracargo expects to invest in the expansion of its units.
U.S. GAAP Reconciliation
Our net income under the accounting practices adopted in Brazil for the
years ended December 31, 2002, 2001 and 2000 was R$222.3 million, R$132.2
million and R$128.5 million, respectively. Under U.S. GAAP, we have reported
net income of R$143.9 million, R$123.0 million and R$123.8 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
68
Our shareholders' equity under the accounting practices adopted in Brazil
as of December 31, 2002 and 2001, was R$1,191.1 and R$799.9 million,
respectively. Under U.S. GAAP, we would have reported shareholders' equity of
R$1,076.5 million and R$748.5 million as of December 31, 2002 and 2001,
respectively.
The reconciliation of our net income and shareholders' equity to U.S.
GAAP, includes the effects of the difference of inflation using the IGP-DI and
the UFIR indexes. The principal differences other than nflation accounting
between the accounting practices adopted in Brazil and U.S. GAAP that affect
our net income and shareholders' equity, relate to the treatment of the
following items:
o capitalized interest;
o fixed assets revaluation reversal;
o reversal of deferred charges;
o restatement of property, plant and equipment to adjust for the
effects of inflation between January 1, 1996 and December 31, 1997,
and its respective depreciation, not required by the accounting
practices adopted in Brazil;
o differences in equity accounting;
o securities available for sale;
o purchase value adjustments relating to business combinations
(including the 2002 corporate restructuring);
o accounting for IPO expenses;
o mark-to-market of financial instruments; and
o deferred tax effects on the foregoing adjustments.
See Note 23 to our consolidated financial statements for a description of
these differences as they relate to us and a reconciliation to U.S. GAAP of net
income and total shareholders' equity.
C. Research and Development, Patents and Licenses, etc.
Ultragaz' research and development activities focus primarily in two
areas. Firstly, Ultragaz has developed products such as Ultracort for
alternative cutting fuel, and is developing the use of LPG for agribusiness
purposes, including for grain drying and for the thermal control of noxious
weeds. Secondly, Ultragaz is exploring certain uses for LPG, such as gas power
generators, LPG vaporizers, indoor space heating and gas refrigerators.
Oxiteno conducts extensive research and development activities,
principally related to the application of specialty chemicals and production
process improvements. Oxiteno's principal research, development and engineering
facility is located at the Maua plant. As of December 31, 2002, 108 Oxiteno
employees were engaged in research, development and engineering activities.
Oxiteno's expenditures on research and development in 2002, 2001 and 2000 were
R$10.9 million, R$10.2 million and R$9.5 million, respectively. Oxiteno
purchases and licenses technology from time to time, particularly for the
development of specialty chemical products.
D. Trend Information
See "- Operating Results" above.
69
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Our Management
The following table sets forth the names and positions of our directors
and executive officers.
Years with
the
Name Position Company Age
---------------------------------------- --------------------------------- ---------- ---
Board of Directors
Paulo Guilherme Aguiar Cunha Chairman 35 63
Lucio de Castro Andrade Filho Vice Chairman 25 58
Ana Maria Levy Villela Igel Director 4 61
Renato Ochman Director 3 43
Nildemar Secches Director 1 54
Paulo Vieira Belotti Director 4 71
Olavo Egydio Monteiro de Carvalho Director - 62
Executive Officers
Paulo Guilherme Aguiar Cunha Chief Executive Officer 35 63
Lucio de Castro Andrade Filho Vice-President 25 58
Fabio Schvartsman Chief Financial Officer, Ultrapar 18 49
Jose Carlos Guimaraes de Almeida Chief Operating Officer, Ultragaz 42 68
Pedro Wongtschowski Chief Operating Officer, Oxiteno 25 57
Paulo Guilherme Aguiar Cunha. Mr. Cunha is our chief executive officer and
chairman of our board of directors. Mr. Cunha joined Ultrapar in 1967 and was
appointed vice-president in 1973 and chief executive officer in 1981. Mr. Cunha
has also been a member of the National Monetary Council, BNDESPAR, a subsidiary
of BNDES, president of the Brazilian Association of Technical Standards - ABNT,
and President of IBP, the Brazilian Petroleum Institute. Mr. Cunha is the
vice-president of ABIQUIM, the Brazilian Chemical Industry Association, a board
member of the Superior Council of Economy and of the Consultative Council for
Industry of FIESP, the state of Sao Paulo Industry Association and ex-President
of IEDI - Research Institution for the Industrial Development. He is also a
member of the board of directors of Monteiro Aranha. Mr. Cunha is also a member
of the board of IBMEC Business School and of the board of IPT - Technological
Research Institution. Mr. Cunha received a degree in industrial mechanical
engineering from Catholic University in Rio de Janeiro in 1962. Mr. Cunha also
was a Professor of Engineering at the Catholic University and at the Federal
University of Rio de Janeiro from 1963 to 1966.
Ana Maria Levy Villela Igel. Ms. Villela Igel joined us as a member of the
board of directors in October 1998. She is also a member of the board of
directors of Ultra S.A. and Igel Participacoes, or Igel. She has served as a
secretary in the finance department at the United Nations and as a counselor
for CIEE-Centro de Integracao Empresa Escola , an organization which assists
students in transitioning to the professional environment, and as a counselor
and member of the executive committee of Alumni Association - Bi-National
Cultural Center. She is also involved in several organizations that promote
social welfare activities for children and the elderly throughout Brazil.
Renato Ochman. Mr. Ochman joined us in April 2001 as a member of the board
of directors. Mr. Ochman is a partner in the law firm Ochman Advogados
Associados S/C and General Secretary of the Chamber of Commerce and Industry of
Brazil-Israel. Mr. Ochman is a member of the Youth's Committee of the United
Nations - Brazil and is also a member of the audit committee of the Association
for Assistance to Handicapped Infants. Previously, Mr. Ochman taught commercial
law at the Fundacao Getulio Vargas and acted as legal counsel for the Brazilian
Association of Supermarkets. Mr. Ochman has obtained a law degree from the
Catholic University of Rio Grande do Sul and a commercial law masters degree
and post-graduate degree from the Catholic University of Sao Paulo.
70
Nildemar Secches. Mr. Secches joined us in April 2002 as a member of the
board of directors. Mr. Secches is the chief executive officer of Empresas
Perdigao since 1995, chief executive officer of ABEF -- Brazilian Association
of Chicken Producers and Exporters and vice-president of ABIPECS -- Brazilian
Association of Pork Producers and Exporters Industries. Mr. Secches is also a
member of the board of WEG S.A. From 1972 to 1990, Mr. Secches worked for Banco
Nacional de Desenvolvimento Economico e Social - BNDES, serving as an executive
officer from 1987 to 1990. From 1990 to 1994, Mr. Secches served as chief
executive officer of Grupo Iochpe-Maxion. Mr. Secches received a degree in
mechanical engineering from the University of Sao Paulo, a master's degree in
finance from Pontificia Universidade Catolica of Rio de Janeiro and a doctoral
degree in economics from the University of Campinas (state of Sao Paulo).
Paulo Vieira Belotti. Mr. Belotti joined us in October 1998 as a member of
our board of directors. Mr. Belotti has also served as chief executive officer
of several companies including Petrobras Distribuidora S.A., Petrobras
Mineracao S.A., Petrobras Quimica S.A., Petrobras Comercio Internacional S.A.,
Petrobras Fertilizantes S.A. and Norcell S.A. He has also served as a member of
the board of directors of Nordon Industria Metalurgica S.A. Mr. Belotti
received a degree in civil engineering from the National School of Engineering
at the University of Brazil, a bachelor's degree in mathematics from the
University of Guanabara and a degree in nuclear engineering from Oak Ridge
School of Technology in Tennessee.
Olavo Egydio Monteiro de Carvalho. Mr. Monteiro de Carvalho joined our
company in December 2002 as a member of the board of directors. He is chairman
of the board of directors of Monteiro Aranha S.A. and a member on the board of
Klabin S.A.. He is also a member of the Brazil-United States Business Council,
member of the Brazil-Japan Conceptual Group and member of the board of Ad-Rio -
Agencia de Desenvolvimento Economico do Estado do Rio de Janeiro (the Rio de
Janeiro State Development Agency). He holds a mechanical engineering degree
from Technische Hochschule in Munich.
Lucio de Castro Andrade Filho. Mr. Andrade Filho is the vice chairman of
our board of directors and vice president executive officer. He joined Ultrapar
in 1977 and has also been a member of the board of directors of Oxiteno and
Oxiteno Nordeste since 1993. Mr. Andrade Filho has held a number of positions
at Ultrapar in both the LPG and the chemical and petrochemical businesses. Mr.
Andrade Filho is also the chief executive officer of GLP -- Qualidade
Compartilhada, an LPG industry association and a member of the board of
directors of the Brazilian Petroleum Institute or Instituto Brasileiro de
Petroleo - IBP. Mr. Andrade Filho received degrees in civil engineering and in
administration from Mackenzie University in Sao Paulo in 1968 and 1972,
respectively.
Jose Carlos Guimaraes de Almeida. Mr. Almeida joined Ultrapar in 1960 and
has served as an executive officer since 1985 and as a member of the board of
directors of Ultragaz since 1982. Mr. Almeida is the chief operating officer of
Ultrapar's LPG distribution business. Prior to joining us, Mr. Almeida was the
Chief Executive Officer of Ultralar Aparelhos e Servicos S.A., general
superintendent and member of the consultative council of Ultracred Credito,
Financia mento e Investimentos S.A., treasury officer of Unidade Interamericana
de Publicidade, and director general of Vedebrasil II Participacoes S.A., the
holding company in Brazil of Vendex International. Mr. Almeida received a
degree in civil engineering in 1962 from Pontificia Universidade Catolica of
Rio de Janeiro and a master's degree in economic engineering.
Fabio Schvartsman. Mr. Schvartsman joined Ultrapar in 1985 and has held a
number of positions, including planning officer, planning and control officer
and financial superintendent officer. Mr. Schvartsman has served as our
executive officer since 1990. Prior to joining us, Mr. Schvartsman worked in
the finance area at Duratex S.A. Mr. Schvartsman is our chief financial officer
and our investor relations officer. Mr. Schvartsman received a degree in
production engineering from Escola Politecnica da Universidade de Sao Paulo and
a master's degree in business administration from the Business School of Sao
Paulo/Getulio Vargas Foundation in 1979.
Pedro Wongtschowski. Mr. Wongtschowski has served as executive officer
since 1985. Mr. Wongtschowski was employed at our former chemical fertilizer
company from 1970 until 1972 and rejoined Ultrapar in 1977. Mr. Wongtschowski
is also the Chairman of the Board of the Brazilian Association for Chemical
Engineering, Vice-President of the board of directors of ABIQUIM, Brazilian
Chemical Industries Association, and Vice-President of Latin American
Petrochemical and Chemical Associations - APLA. Mr. Wongtschowski is the chief
operating officer of our chemical and petrochemical businesses. Mr.
Wongtschowski received a degree in chemical engineering, master's degree in
chemical engineering and a doctoral degree in chemical engineering from the
Escola
71
Politecnica da Universidade de Sao Paulo. Mr. Wongtschowski is the author of
the book "Industria Quimica - Riscos e Oportunidades" (Chemical Industry -
Risks and Opportunities), published in 1999.
B. Compensation
For the year ended December 31, 2002, the aggregate compensation of all
our directors and executive officers was approximately R$4.7 million. Except
for the provisions related to Ultraprev - Associacao de Previdencia
Complementar, known as Ultraprev, which manages our pension plan, we have not
set aside or accrued any additional amounts for pension, retirement or similar
benefits for our directors and executive officers. See "- Employees."
On April 27, 2001, our shareholders approved a stock option plan for our
management and senior employees, and for the management and senior employees of
our subsidiaries. This plan will be managed by an implementation committee,
comprised of at least three members elected by the board of directors. The
committee will be responsible for selecting the beneficiaries of this plan and
determining the dates on which options for our shares may be exercised. As of
December 31, 2002, no options had been granted under this plan
C. Board Practices
We are managed by our board of directors (i.e., Conselho de Administracao)
and by our executive officers (i.e., Diretoria).
Board of Directors. Prior to December 20, 2002, our board of directors was
limited to six members. Pursuant to our amended by-laws, our board of directors
must consist of a minimum of four and a maximum of seven members. Our board of
directors generally meets quarterly or whenever called together by its chairman
or by any two directors. Each board of directors meeting requires a quorum of a
minimum of three members, including the chairman or the vice-chairman. The
board of directors is responsible for our general policies, for electing our
executive officers and supervising their management, and for deliberating on
capital increases up to the authorized capital, distributions of dividends and
interest on shareholders' equity, investments in other companies, our
dissolution or incorporation and the appointment of independent auditors.
Pursuant to Brazilian law, each member of the board of directors must hold at
least one of our common or preferred shares and is elected by the holders of
our common shares at the Assembleia Geral, or the general shareholders'
meeting.
Members of the board of directors are elected by the common shareholders
for a period of one year and may be reelected. According to Law 10,303/2001,
dated October 31, 2001, minority shareholders that together hold common shares
representing at least 15% of the voting capital, are entitled to appoint one
board member. Minority holders of our voting shares and preferred shareholders
that do not represent the minimum percentage required for the right to elect a
member of the board of directors in the manner described above may jointly
elect a single member to the board. In this case such shareholders should
jointly represent a minimum of 10% of the corporate capital. Until the general
shareholders' meeting of 2005, preferred shareholders have the right to elect a
board member from a short list of three names drawn up by the controlling
shareholder. As from the general shareholders' meeting of 2006, the election of
this member will be unrestricted. In 2002, in order to give minority
shareholders a more important role in our corporate governance, we granted them
the right to elect a member to our board of directors. Mr. Nildemar Secches was
elected to the board in April 2002, as the representative of the minority
shareholders. Mr. Secches was reelected in 2003.
For minority holders of voting shares and preferred shareholders to each
or, alternatively, to jointly elect a member of the board of directors, they
must prove uninterrupted title to a shareholding interest in our shares for a
period of at least three months immediately prior to the holding of the general
shareholders' meeting in order to exercise such rights.
Law 10,303/2001 granted members of the board of directors elected by
minority holders of voting shares and/or preferred shareholders, veto powers
over the appointment and dismissal of our independent auditors, as long as such
veto is duly justified.
72
Executive Officers. Our executive officers include our chief executive
officer and a minimum of three and a maximum of six other members. Each of our
current executive officers has been appointed by the board of directors for a
one-year term, which began on April 29, 2003 and may remain in office until the
appointment of their substitute. Sitting members can be reelected for
additional one-year terms.
Fiscal Council. Under the Brazilian corporate law and our by-laws, we are
not required to, and currently do not, maintain a permanent fiscal council. We
would, however, be required to establish a fiscal council upon the request of
shareholders who hold 2% of the common shares or 1% of the preferred shares,
pursuant to CVM Instruction 324 of January 19, 2000. The primary responsibility
of the fiscal council, which, if established, would act independently from our
management and external auditors, would be to review our consolidated financial
statements and report on them to our shareholders.
D. Employees
As of December 31, 2002, we had 5,822 employees.
The following table sets forth our number of employees per line of
business at the dates indicated.
2002 2001 2000
---- ---- ----
Ultragaz 4,156 4,022 4,014
Oxiteno 912 902 911
Ultracargo 743 627 596
Others(1) 11 41 38
Ultrapar 5,822 5,592 5,559
(1) includes headquarters maintenance personnel hired by our wholly-owned
subsidiary, Imaven Imoveis e Agropecuaria Ltda.
Ultragaz's employees are covered by a collective agreement with the union
representing the employees in the LPG industry. According to Brazilian
legislation, Oxiteno's employees are represented by labor unions, and are
currently covered by five collective agreements, which are renewed annually.
Tequimar's employees are covered by a collective agreement entered into
between their trade union and Tequimar, and Transultra's employees are covered
by a collective agreement entered into between their trade union and
Transultra.
On February 15, 2001, our board of directors approved the adoption of a
defined contribution pension plan to be sponsored by Ultrapar and each of its
subsidiaries. Participating employees have been contributing to this plan,
managed by Ultraprev - Associacao de Previdencia Complementar, known as
Ultraprev, since August 2001. Under the terms of the plan, every year each
participating employee chooses his or her basic contribution to the plan. Each
sponsoring company provides a matching contribution in an amount equivalent to
each basic contribution, up to a limit of 11% of the employee's reference
salary, according to the rules of the plan. As participating employees retire,
they may choose to receive either (i) a monthly sum ranging between 0.5% and
1.0% of their respective contribution in Ultraprev or (ii) a fixed monthly
amount which will exhaust their respective contribution over a period of 5 to
25 years. The sponsoring company does not guarantee the amounts or the duration
of the benefits received by each employee that retires. The total number of
participating employees as of December 2002 was 4,948. To date, there are no
retired employees under the plan.
In general, we consider our employee relations to be good.
73
E. Share Ownership
The table below sets forth the number of our common shares beneficially
owned by each of our directors and executive officers as of May 31, 2003:
Number of Percentage of
Name Common Shares total shares
------------------------------------- ------------- ------------
Board of Directors
Paulo Guilherme Aguiar Cunha 7,277,565,802 10.4%
Lucio de Castro Andrade Filho 1,989,122,885 2.9%
Ana Maria Levy Villela Igel 6,013,814,490 8.6%
Olavo Egydio Monteiro de Carvalho 488,818,292 0.7%
Renato Ochman 15,000 --
Nildemar Secches 15,000 --
Paulo Vieira Belotti 15,000 --
Executive Officers(1)
Fabio Schvartsman 846,280,107 1.2%
Jose Carlos Guimaraes de Almeida 994,553,684 1.4%
Pedro Wongtschowski 846,280,107 1.2%
(1) Mr. Cunha's and Mr. Andrade Filho's total share ownership is included
above under the "Board of Directors".
Our board members and executive officers beneficially own our common
shares primarily through their participation in holding companies that control
us. See "Item 7. Major Shareholders and Related Party Transactions -- Major
Shareholders." All of our common shares carry the same voting rights. Our
preferred shares are non-voting, except in limited circumstances. Each ADS
represents 1,000 preferred shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth certain information regarding the
beneficial ownership of our common shares as of May 31, 2003, after the
corporate restructuring, and as of December 31, 2001, before the corporate
restructuring:
May 31, 2003 December 31, 2001
------------ -----------------
Number of Percentage of Number of Percentage of
common outstanding common outstanding
Shareholder shares owned common shares shares owned common shares
--------------------------------------- ------------ ------------- ------------ -------------
(in thousands) (in thousands)
Gipoia Participacoes S/C Ltda - - 15,055,755 39.6
Ultra S.A. Participacoes 34,193,119 66.7 11,334,481 29.8
Daisy Igel
Parth Investments Company 9,311,730 18.2 9,311,730 24.5
Ultra-- DI Participacoes S.A. 490,095 1.0 490,095 1.3
MASA Participacoes Petroquimicas Ltda 5,212,637 10.2 - -
Others 2.057,041 3.9 1,791,952 4.8
Total 51,264,622 100.0 37,984,013 100.0
---------- ----- ---------- -----
Due to the corporate restructuring we issued 13.3 billion common shares.
For more information on the corporate restructuring, please see "Item 4.
Information on the Company - History and Development of the Company".
As of December 31, 2002, approximately 4.1 billion preferred shares were
held by international investors in the form of ADSs.
74
MASA Participacoes Petroquimicas Ltda. held approximately 7.1 million of
Oxiteno's common shares and exchanged them for approximately 5.2 billion of our
common shares in the corporate restructuring.
Until September 1998, we were controlled by Pery Igel, the son of Ernesto
Igel, founder of Ultragaz and our group. In 1984, Pery Igel put in place a
succession plan for the transfer of our control from him to our executive
officers. This succession plan allowed for a smooth transition of control
following Mr. Igel's death in September 1998. Daisy Igel, Pery Igel's sister,
controls Parth Investments Company and Ultra -- DI Participacoes S.A., which
holds 19.2% of our common share capital.
Ownership and Capital Structure of Ultra S.A.
Ultra S.A. owns approximately 67% of our voting shares. The voting stock
of Ultra S.A. is currently owned as follows:
o approximately 49.5% by Igel Participacoes S.A., known as Igel;
o 49.5% by Avare Participacoes S.A., known as Avare;
o 0.2% by Ana Maria Levy Villela Igel; and
o 0.8% by Paulo Guilherme Aguiar Cunha, our chief executive officer and
chairman of our board of directors.
Igel is a holding company, which holds the interests of certain members of
the family of Pery Igel, the son of our founder.
Avare is a holding company, which is 69% owned and controlled by certain
members of our senior management. The remaining shares in Avare are owned by
the family of Helio Beltrao and by Pery Igel's heirs. Helio Beltrao is one of
our former executive officers and directors. Pery Igel transferred a 69%
ownership interest in Avare to our management under the condition that each
member of our management team remains in his or her functions until December
31, 2004.
In addition to his participation in Avare as a management shareholder, Mr.
Cunha holds 0.8% of our voting stock through his ownership of 519,209 shares in
Ultra S.A., which were transferred to him by Mr. Pery Igel pursuant to an
arrangement under Brazilian law similar in certain respects to a trust. Under
this arrangement, Mr. Cunha was given temporary ownership of these shares
subject to Mr. Pery Igel's right to vote the shares, until December 16, 2004,
provided that he remains a member of our management team until such date and
complies with certain other conditions. Upon Mr. Igel's death, these shares'
voting rights were transferred to Mr. Cunha. Ownership of these shares passes
to Mr. Igel's children on December 16, 2004 unless any of the children
predeceases Mr. Cunha, in which event a proportionate amount of such shares
become the absolute property of Mr. Cunha. If Mr. Cunha passes away before the
transfer of the shares, such shares will be property of Mr. Igel's children.
Shareholders' Agreement of Ultra S.A.
On May 22, 1997, Ultra S.A.'s shareholders entered into the "2004
Shareholders' Agreement", which sets forth that (i) the holding companies Igel
and Avare will be extinguished on December 16, 2004, and each of their
respective shareholders will directly receive, as capital reimbursement for the
liquidation of both companies, shares of Ultra S.A. and (ii) after December 16,
2004, all the shareholders of Ultra S.A. shall give each other the right of
first refusal in the acquisition of Ultra S.A. shares and the corresponding
subscription rights relating thereto, except with respect to the transfer of
shares to a shareholder's spouse or direct descendant or ascendant.
75
The term of the 2004 Shareholders' Agreement is five years from the date
on which the current shareholders of Avare and Igel directly receive shares of
Ultra S.A., which is expected to take place on December 16, 2004, as described
above.
B. Related Party Transactions
None of the members of our board of directors or executives or their close
family members have any direct participation in any transactions involving the
company or relevant to our businesses.
We and our subsidiaries and affiliated companies enter into intercompany
loans on a regular basis. In certain cases, group companies maintain offsetting
credits and debits on matching terms. In the case of intercompany loans
involving Utingas, loans are made on an arm's length basis. In the case of
intercompany loans among Ultrapar and some of its subsidiaries and affiliates,
loans may be extended on financial terms so as to maximize consolidated profits
at the Ultrapar level. See Note 19 to our consolidated financial statements for
a detailed breakdown of intercompany loans as of December 31, 2002.
Transultra provides transportation services to Ultragaz and Oxiteno on
arm's length terms. Similarly, Tequimar leases storage capacity for chemicals
and petrochemicals to Oxiteno on arm's length terms. In 2002, payments from
Utragaz and Oxiteno to Transultra in connection with these services totaled
R$25.2 million and R$5 million, respectively. In 2002, payments from Oxiteno to
Tequimar in connection with the leased storage capacity totaled R$4.5 million.
Utingas' by-laws allow each of its shareholders to use a proportion of
Utingas' total storage capacity equal to such shareholders' proportionate
ownership of Utingas. Accordingly, Ultragaz is entitled to use 4.2 thousand
tons of LPG storage capacity at Utingas' facilities, which reflects Ultragaz's
56% ownership in Utingas. Ultragaz currently uses approximately 2.5 thousand
tons of such capacity. The amount of payments made by Ultragaz to Utingas in
2002 with respect to the use of storage capacity at Utingas' facilities totaled
R$3.5 million.
Oxiteno purchases all of its ethylene requirements from Braskem and PQU on
an arm's length basis. Payments from Oxiteno to PQU totaled R$63.6 million in
2002. Payments from Oxiteno to Braskem totaled R$265.6 million in 2002.
Our subsidiaries lease office space from Imaven Imoveis e Agropecuaria
Ltda, or Imaven, our wholly-owned subsidiary, on an arm's length basis in the
building in Sao Paulo in which our head offices are located. The total amount
of rent payments under these leases is R$6.7 million in 2002.
We guarantee a portion of our subsidiaries' indebtedness in the amount of
R$ 359.6 as of December 31, 2002.
C. Interests of Expert and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
For our consolidated financial statements and notes thereto see Item 18,
"Financial Statements".
Dividend and Distribution Policy
Under the accounting practices adopted in Brazil, shareholders are
generally entitled to receive an annual mandatory distribution set forth in
each company's by-laws, which may not be lower than 25% of the distributable
amount, as defined below. If a company's by-laws are silent, the percentage is
deemed to be 50% of the distributable amount. Our by-laws provide for a
mandatory distribution equal to 50% of the distributable amount. In addition,
under the accounting practices adopted in Brazil and our by-laws, the amount we
distribute in respect of each preferred share must be equal to 110% of the
amount we distribute in respect of each of our common shares.
76
"Distributable amount" means a company's net income as determined in accordance
with the accounting practices adopted in Brazil, as reduced by (i) accumulated
losses for prior years, and (ii) amounts allocated to the legal reserve and
other reserves established in accordance with accounting practices adopted in
Brazil, and as increased by the reversal of any reserve established in a prior
year. A company is permitted to allocate to a reserve all income from equity
gains in subsidiaries that are not distributed to the company in the form of
cash dividends. When such gains are distributed to the company in the form of
cash dividends, the company is required to reverse the reserve. See "Item 3.
Key Information -- Risk Factors -- Risks Relating to the Preferred Shares and
ADSs." In addition to the mandatory distribution, the board of directors may
recommend to the shareholders the payment of interim distributions from other
funds that are legally available for such purposes. Any payment of an interim
distribution may be set off against the amount of the mandatory distribution
for that fiscal year.
In addition to dividends, Brazilian companies may distribute "interest on
shareholders' equity", which payments may be treated by a company as an expense
for income tax purposes. Payments of interest on shareholders' equity may be
made at the discretion of our board of directors, subject to the approval of
the holders of our common shares. Payments of interest on shareholders' equity,
net of withholding tax, may be used to satisfy a company's mandatory
distribution obligation. The rate of such interest may not exceed the Taxa de
Juros de Longo Prazo , or TJLP, the long-term interest rate published by BNDES
-- Banco Nacional de Desenvolvimento Economico e Social, the Brazilian
development bank, for the applicable period, and its payment is conditioned
upon the existence of profits, calculated prior to the deduction of the
interest being paid, or of retained earnings, in an amount equivalent or
superior to twice the interest being paid.
Under the accounting practices adopted in Brazil, a company may suspend
the mandatory distribution either in the form of dividends or payments of
interest on shareholders' equity if its board of directors determines prior to
the general shareholders' meeting that payment of the mandatory distribution
for the preceding fiscal year would be inadvisable in light of the company's
financial condition. The holders of common shares must ratify such
determination at the general shareholders' meeting, which must be reported to
the CVM within five days of the relevant general shareholders' meeting. Under
Brazilian law, mandatory distributions that are suspended and not offset
against losses in future years must be paid as soon as the financial condition
of the company permits.
In 2002, we distributed dividends amounting to R$ 65 million. We cannot
guarantee that we will be able to distribute the same amount of dividends in
the future.
Legal Proceedings
Ultragaz, together with other LPG distributors, is a defendant in a suit
brought by Servgas Distribuidora de Gas S.A., known as Servgas, an LPG bottling
and distribution company, seeking to change the rule that prohibits LPG
distributors from filling LPG cylinders stamped with the brand of another
distributor. In March 1996, the court ruled against Servgas. Servgas appealed
from this decision and the court ruled once again against Servgas. If Servgas
does not appeal again, this case will be decided in our favor.
In December 1996, Companhia Ultragaz and Bahiana filed a suit against the
former Departamento Nacional de Combustiveis - DNC, which has been replaced by
the Agencia Nacional do Petroleo - ANP, and Petrobras claiming reimbursement of
approximately R$7.4 million from the Freight Price Unification System Fund, or
Frete de Unificacao de Precos -- FUP, also known as the Fund, in relation to
LPG shipments by the plaintiffs in 1992 and 1993. The Fund, which is controlled
by the ANP, was created to maintain uniform LPG prices throughout Brazil by
reimbursing LPG distributors for freight costs incurred in shipping LPG in
Brazil. This price maintenance system was terminated in 1994. The former DNC
suspended certain payments from the Fund in 1993 due to alleged wrongful claims
for reimbursement by LPG distributors. A preliminary order in favor of the
plaintiffs was made in December 1996, pursuant to which the plaintiffs received
R$8.1 million from the Fund, including monetary correction. The former DNC and
Petrobras have filed an appeal and the parties are currently awaiting the
outcome of this appeal. If the preliminary order is overturned by a higher
court, the plaintiffs would be required to repay such R$8.1 million to the
Fund. Based on the advice of its counsel, Ultragaz believes that it is unlikely
that the preliminary order will be overturned.
Ultragaz is a defendant in approximately 565 legal suits arising from its
normal business activities, including approximately 400 labor claims. Although
the amount of any liability that could arise with respect to these actions
77
cannot be accurately determined, Ultragaz believes that such actions, if
decided adversely to Ultragaz, would not, individually or in the aggregate,
have a material adverse effect on the financial condition of Ultragaz.
In particular, Ultragaz is the defendant in 70 wrongful death suits in
which the plaintiffs are claiming damages for the loss of economic benefit and
for pain and suffering arising from fires or gas explosions caused by LPG
cylinders or accidents caused by Ultragaz trucks. With the exception of one
such case in which the plaintiff is claiming approximately R$600,000, the
amount claimed in any individual suit ranges from R$10,000 to R$150,000. Such
amounts are generally covered by Ultragaz's third-party insurance policies,
subject to the terms of such policies. Civil suits are generally followed by
criminal investigation procedures, which can result in criminal liability for
Ultragaz employees if such employees have been criminally negligent. For those
suits involving death or permanent disabilities, the value of the claim is
established by the courts and is based on the average salary and age of the
victim. In addition, Ultragaz is involved in approximately six labor claims
brought by former employees claiming damages and, in some cases, reinstatement
of employment, in respect of injuries incurred in delivering LPG cylinders.
Ultragaz is a defendant in legal suits relating to damages caused by an
explosion in 1996 in a shopping mall in the city of Osasco. The largest single
claim involving Ultragaz is an insurance subrogation claim for approximately
R$9 million brought against Ultragaz, the builder of the shopping mall, the
management of the shopping mall and the engineer responsible for the building's
project. In addition, individual suits filed by victims of the explosion claim
damages from Ultragaz for the loss of economic benefit and for pain and
suffering in an aggregate amount of approximately R$26 million. Subsequently, a
public prosecutor commenced an action, in which Ultragaz was not named as a
defendant, for the benefit of all victims using a procedural mechanism similar
to a class action. Ultragaz believes that it has produced evidence that
defective gas pipes in the shopping mall caused the accident and that
Ultragaz's on-site LPG storage facilities did not contribute to the explosion.
Ultragaz believes that the class action brought by the public prosecutor deters
individual suits directed at Ultragaz. Ultragaz also believes that its
insurance coverage for damages up to R$50 million is sufficient to cover the
aggregate amount of all claims filed.
Oxiteno is the defendant in approximately 78 labor proceedings and 22
civil and tax proceedings arising in the normal course of its business. In
common with other Brazilian companies, Oxiteno is currently disputing the
constitutional validity of some taxes. In addition, Oxiteno is disputing the
amounts it is required to pay in connection with certain sales taxes. The
aggregate amount of outstanding tax claims against Oxiteno is approximately
R$4.5 million.
Ultragaz, Oxiteno and several of our other subsidiaries filed individual
suits against the Brazilian tax authorities contesting the increase in certain
taxes introduced by Law 9,718 of November 28, 1998, which increased the COFINS
tax rate by 1% and introduced taxes on gross financial income of 3.00% (COFINS)
and 0.65% (PIS). Furthermore, Law 9,718 introduced a mechanism under which
Ultragaz's contributions of PIS and COFINS on sales would be withheld by
Petrobras, thereby effectively increasing overall taxation for Ultragaz. Our
subsidiaries were granted preliminary injunctions which allowed them to
continue to pay these contributions according to regulations applicable prior
to Law 9,718. At the same time, until December 31, 2001, we had made provisions
to contemplate these tax increases. In November 2002, based on our legal
advisors' opinion, we opted to pay these provisioned amounts, except for the
provision of the 3.65% tax on gross financial income. Amounts which were not
paid to tax authorities remain provisioned in the financial statements, and
totalled R$23.7 million on December 31, 2002, of which R$11.5 million relate to
Ultragaz and R$3.8 million relate to Oxiteno. In the event we lose these
lawsuits, we would have to pay these provisioned amounts to the tax
authorities, but this would not affect our statement of operations.
Our indirect subsidiary Tequimar obtained a favorable ruling on its suit
contesting the payment of social contribution on net income introduced by Law
7,689/88. While the decision was final, the federal government filed an action
to overturn it. Until December 31, 2001, this subsidiary company made a
provision for a liability relating to an unpaid social contribution charge
amounting to R$10.4 million. However, based on our legal advisors' opinion, on
July 31, 2002, we opted to pay this contribution, in doing so, applying the
benefits accruing from Provisional Measure 38 of May 14, 2002 and Joint
Administrative Regulation SRF/PGFN 900 of July 19, 2002.
The Petrochemical Industry Labor Union, which represents the employees of
the indirect subsidiary Oxiteno Nordeste, filed class action suits against
Oxiteno Nordeste in 1991 demanding compliance with the adjustments established
in collective labor agreements or other specific indexes, in lieu of the salary
policies effectively
78
practiced. Based on the opinion of its legal advisors, who analyzed the final
ruling of the Federal Supreme Court, known as STF, on the class action suit in
which the labor union is a plaintiff, as well as the status of the specific
suit against Oxiteno Nordeste, our management does not believe that it is
necessary to record a provision as of December 31, 2002.
B. Significant Changes
Not applicable.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
On October 6, 1999, we concluded an initial public offering of our
preferred shares, which commenced trading on the Bovespa and on the New York
Stock Exchange, in the form of ADSs. Our preferred shares were issued at
R$26.45 per thousand shares, corresponding to U.S.$13.50 per ADS, with each ADS
representing 1,000 preferred shares.
The following table sets forth trading information for our ADSs, as
reported by the New York Stock Exchange, and for our preferred shares, as
reported by Bovespa, for the periods indicated.
Price per ADS in U.S. Price per 1,000 Preferred Shares
------------------------------------ ----------------------------------------
dollars in reais
Year ended High Low High Low
--------------------------------------- ------------------ ----------------- ---------------------- -----------------
December 31, 2000 13.56 8.00 25.00 15.00
December 31, 2001 10.75 4.95 21.65 14.00
December 31, 2002 9.55 5.00 26.40 18.10
Quarter ended
---------------------------------------
March 31, 2001 10.75 8.56 21.20 17.00
June 30, 2001 8.90 6.55 19.50 16.50
September 30, 2001 8.24 5.10 21.65 14.00
December 31, 2001 7.99 4.95 18.80 14.00
March 31, 2002 9.32 7.65 22.00 18.10
June 30, 2002 9.55 6.80 23.50 19.50
September 30, 2002 7.75 5.25 22.55 19.00
December 31, 2002 7.20 5.00 26.40 20.30
March 31, 2003 7.45 6.41 24.90 21.95
Month ended
---------------------------------------
December 31, 2002 7.20 6.40 26.40 23.79
January 31, 2003 7.45 6.53 24.90 21.95
February 28, 2003 6.90 6.41 24.49 22.99
March 31, 2003 6.90 6.59 23.50 22.40
April 30, 2003 8.28 6.94 25.10 23.00
May 31, 2003 8.35 7.38 24.15 22.50
B. Plan of Distribution
Not applicable.
C. Markets
Our preferred shares are listed on the Sao Paulo Stock Exchange under the
ticker symbol "UGPA4" and the ADSs are listed on the New York Stock Exchange
under the symbol "UGP."
D. Selling Shareholders
Not applicable.
79
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and By-laws
We are registered with the commercial registry of the state of Sao Paulo
under the registration number 35.300.109.724. Pursuant to chapter I, article 3
of our by-laws, our main corporate purpose is the investment of our capital in
the trade, industry and agriculture and in companies providing services, upon
the subscription for or acquisition of shares or quotas in companies.
There are no provisions in our by-laws with respect to (i) a director's
power to vote on proposals in which the director is materially interested, (ii)
a director's power to vote compensation to him or herself in the absence of an
independent quorum, (iii) borrowing powers exercisable by the directors, (iv)
age limits for retirement of directors, (v) required shareholding for director
qualification, (vi) anti-takeover mechanisms or other procedures designed to
delay, defer or prevent changes in our control, (vii) disclosure of share
ownership.
More detailed information with respect to our shares, shareholder rights,
and limitations on share ownership, is incorporated herein by reference to our
Registration Statement on Form F-1, Registration Number 33-10818, declared
effective by the Securities and Exchange Commission on October 6, 1999.
C. Material Contracts
Shareholders' Agreement
On March 22, 2000, our controlling shareholders entered into a
shareholders' agreement designed to ensure the equal treatment of all
non-controlling shareholders in the event of any change in control. Pursuant to
the agreement, any transfer of our control, either directly or indirectly, may
only be executed in conjunction with a public tender offer by the acquiring
entity to purchase the shares of all minority shareholders in the same
proportion and under the same price and payment terms as those offered to the
controlling shareholders. The agreement provides that there will be no discount
or price differentiation between the shares in the public tender offer and
those being sold by the controlling shareholders. The offer must be made on
both the Sao Paulo Stock Exchange and the New York Stock Exchange.
We did not enter into any material contract in 2002.
D. Exchange Controls
There are no restriction on ownership of our preferred shares by
individual or legal entities domiciled outside Brazil. However, the right to
convert dividend payments and proceeds from the sale of our shares into foreign
currency and to remit such amounts outside Brazil is subject to restrictions
under foreign investment legislation which generally requires, among other
things, that the relevant investment be registered with the Central Bank and
the CVM.
Foreign investors may register their investment under Law No. 4,131 of
September 3, 1962 or Resolution No. 2,689 of January 26, 2000 of the National
Monetary Council. Registration under Resolution No. 2,689 affords
80
favorable tax treatment to foreign investors who are not residents in a tax
haven jurisdiction (i.e. country that does not impose income tax or where the
maximum income tax rate is lower than 20%), as defined by Brazilian tax laws.
Under Resolution 2,689, foreign investors may invest in almost all
financial assets and engage in almost all transactions available in the
Brazilian financial and capital markets, provided that certain requirements are
fulfilled. In accordance with Resolution 2,689, the definition of foreign
investor includes individuals, legal entities, mutual funds and other
collective investment entities, domiciled or headquartered abroad.
Under Resolution 2,689, a foreign investor must:
o appoint at least one representative in Brazil, with powers to perform
actions relating to its investment,
o appoint an authorized custodian in Brazil for its investment,
o register as a foreign investor with the CVM, and
o register its foreign investment with the Central Bank.
Additionally, the investor operating under the provisions of Resolution
2,689 must be registered with the Brazilian internal revenue service pursuant
to the latter's Regulatory Instruction 200. This registration process is
undertaken by the investor's legal representative in Brazil.
Securities and other financial assets held by foreign investors pursuant
to Resolution No. 2,689 must be registered or maintained in deposit accounts or
under the custody of an entity duly licensed by the Central Bank or the CVM. In
addition, securities trading is restricted to transactions carried out in the
stock exchanges or through organized over-the-counter markets licensed by the
CVM, except for transfers resulting from a corporate reorganization, or
occurring upon the death of an investor by operation of law or will.
Resolution No. 1,927 of the National Monetary Council, which is the
restated and amended Annex V to Resolution No. 1,289, the Annex V Regulations,
provides for the issuance of depositary receipts in foreign markets in respect
of shares of Brazilian issuers. Accordingly, the proceeds from the sale of ADSs
by holders of American depositary receipts outside Brazil are free of Brazilian
foreign investment controls and holders of ADSs who are not resident in a tax
haven jurisdiction will be entitled to favorable tax treatment.
The right to convert dividend payments and proceeds from the sale of our
shares into foreign currency and to remit such amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investment be registered with
the Central Bank. Restrictions on the remittance of foreign capital abroad
could hinder or prevent the custodian for the preferred shares represented by
ADSs, or holders who have exchanged ADSs for preferred shares, from converting
dividends, distributions or the proceeds from any sale of preferred shares, as
the case may be, into U.S. dollars and remitting such U.S. dollars abroad.
Delays in, or refusal to grant any required government approval for conversions
of Brazilian currency payments and remittances abroad of the preferred shares
underlying the ADSs could adversely affect holders of ADSs.
We have obtained a certificate of registration in the name of Bank of New
York, the depositary. The custodian on behalf of the depositary maintains this
certificate. Pursuant to this certificate, the custodian and the depositary are
able to convert dividends and other distributions with respect to the preferred
shares represented by ADSs into foreign currency and to remit the proceeds
outside Brazil. If a holder exchanges ADSs for preferred shares, such holder
may continue to rely on the depositary's certificate of capital registration
for only five business days after such exchange. After that, such holder must
seek to register its investment directly with the Central Bank. Thereafter,
unless the holder has registered its investment with the Central Bank, such
holder may not convert into foreign currency and remit outside Brazil the
proceeds from the disposition of, or distributions with respect to, such
preferred class A shares. Such holder generally will be subject to less
favorable Brazilian tax treatment than a holder of ADSs.
There are two principal foreign exchange markets in Brazil:
81
o the commercial rate exchange market, and
o the floating rate exchange market.
Most trade and financial foreign-exchange transactions, including
transactions relating to the purchase or sale of shares or the payment of
dividends or interest with respect to shares, are carried out on the commercial
market. Only a Brazilian bank authorized to buy and sell currency in the
commercial market may effect purchases of foreign currencies in that market. In
both markets, rates are freely negotiated, but may be strongly influenced by
Central Bank intervention. See "Item 3. Key Information--Selected Financial
Data--Exchange Rates."
Under Brazilian law, whenever there is a serious imbalance in Brazil's
balance of payments or reasons to foresee a serious imbalance, the Brazilian
government may impose temporary restriction on the remittance to foreign
investors of the proceeds of their investment in Brazil, and on the conversion
of Brazilian currency into foreign currencies. Such restrictions may hinder or
prevent the custodian or holders who have exchanged ADSs for underlying
preferred shares from converting distributions or the proceeds from any sale of
such shares, as the case may be, into U.S. dollars and remitting such U.S.
dollars abroad.
E. Taxation
Brazil
The following discussion summarizes the tax consequences in Brazil as
these apply to the acquisition, ownership and disposition of preferred shares
or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian
taxation and, in the case of a holder of preferred shares, which has registered
its investment in the preferred shares with the Central Bank as a U.S. dollar
investment, in each case, a non-Brazilian holder. It is based on Brazilian law
as currently in effect. Any change in the law may modify the consequences
described below. The following discussion summarizes the material tax
consequences applicable under current Brazilian legislation to non-Brazilian
holders of preferred shares or ADSs; it does not specifically address all of
the Brazilian tax considerations applicable to any particular non-Brazilian
holder, and each non-Brazilian holder should consult his or her own tax adviser
concerning the Brazilian tax consequences of an investment in preferred shares
or ADSs. It is emphasized that the tax consequences described below do not take
into account tax treaties entered into by Brazil and other countries. However,
it is important to underline that Brazil does not have a double taxation
agreement with the United States.
Taxation of Dividends
Dividends on shares and other dividends paid by Brazilian corporations in
property to the depositary in respect of the preferred shares, or to a
non-Brazilian holder of the preferred shares, are not subject to withholding
income tax in Brazil. Dividends relating to profits generated prior to January
1, 1996 are subject to withholding income tax at varying rates, depending on
the year the profits were generated (15% in 1994 and 1995).
Payments on Shareholders' Equity
Law 9,249, dated December 26, 1995 permits Brazilian companies to make
distributions to shareholders of interest attributed to shareholders' equity.
These distributions may be paid in cash. This interest is calculated in
accordance with the daily pro rata variation of the Brazilian government's
long-term interest rate, or TJLP, as determined by the Brazilian Central Bank
from time to time, and cannot exceed the greater of:
o 50% of net income, after the deduction of social contribution on net
income and before the deduction of income tax provision and already
considering the deduction of the own interest amount attributable to
shareholders, related to the period in respect of which the payment
is made; or
o 50% of the sum of retained profits and profit reserves as of the date
of the beginning of the period in respect of which the payment is
made.
Any payment of interest to shareholders, including holders of ADSs in
respect of preferred shares, is subject to withholding income tax at the rate
of 15% or 25% in the case of a shareholder domiciled in a country, which is
82
considered a tax haven under the Brazilian legislation. These payments may be
qualified, at their net value, as part of any mandatory dividend.
To the extent that payments of interest on shareholders' equity are
qualified as part of a mandatory dividend, the corporation is required to
distribute an additional amount to ensure that the net amount received by
shareholders, after payment of the applicable withholding income tax, is at
least equal to the mandatory dividend.
Distributions to non-Brazilians of interest attributed to shareholders'
equity in respect of preferred shares, including the preferred shares
underlying the ADSs, may be converted into U.S. dollars and remitted outside
Brazil, subject to applicable exchange control.
Taxation of Gains and Income
Initially, it is important to highlight that in accordance with Brazilian
law gains and income are treated differently for income tax purposes. The
remuneration derived from any investment, which is not originated from the
transfer of the ownership of such investment, by any nature qualifies as
income. Differently, for tax purposes, the positive difference between the
acquisition cost of the investment and the respective price derived from the
transfer of the ownership by any nature, such as in a sale, redemption,
liquidating distribution, etc., qualifies as a gain.
Gains generated outside Brazil by a non-Brazilian resident on the sale of
preferred shares or ADSs to another non-Brazilian resident are not subject to
Brazilian income tax.
For purposes of Brazilian taxation, there are three types of non-Brazilian
holders of ADSs or preferred shares:
o market investors, which represent those non-Brazilian residents who
register with the Central Bank and the CVM to invest in Brazil, in
accordance with Resolution 2,689, or those investors holding ADSs;
o ordinary non-Brazilian holders, which include any and all
non-residents in Brazil who invest in the country through any other
means; and
o investors that reside in a tax haven, i.e., a country that does not
impose income tax, or where the income tax rate is lower than 20%,
regardless of registration under Resolution 2,689.
The comments contained below are applicable to all non-Brazilian holders,
including market investors, except where otherwise noted.
The favorable tax treatment currently afforded to holders of ADSs and to
market investors that do not reside in tax havens is also applicable to all
non-Brazilian holders of preferred shares that have:
o appointed a representative in Brazil with powers to take actions
relating to their investment;
o appointed an authorized custodian in Brazil for their investments;
o registered as a foreign investor with the CVM; and
o registered their investment with the Central Bank.
Under Resolution 2,689, assets held by foreign investors must be
maintained under the custody of, or in deposit accounts with, financial
institutions duly authorized by the Central Bank and the CVM. In addition,
securities' trading is restricted to transactions carried out on a Brazilian
stock exchange by certain qualified non-Brazilian holders.
The difference between the amount previously registered, or the
acquisition cost, as the case may be, and the average price of the preferred
share is considered a capital gain subject to income tax at rate of 15%, except
in the case of market investors who are not residents in a tax haven
jurisdiction, in which case the income tax rate will be 25%. The average price
shall be calculated as follows:
83
o the average price per preferred share on Brazilian stock exchange on
which the greater number of such shares were sold on the day of
deposit; or
o if no preferred shares were sold on that day, the average price on
the Brazilian stock exchange on which the greatest number of
preferred shares were sold during the 15 preceding trading sessions.
The withdrawal itself of preferred shares in exchange for the ADSs is not
subject to any Brazilian income tax. On the receipt of the underlying preferred
shares, the non-Brazilian holder will be entitled to register the U.S. dollar
value of the shares with the Central Bank.
Ordinary non-Brazilian holders, those not registered under Resolution
2,689, are also not subject to tax in Brazil on gains derived from sales of
preferred shares and ADSs that occur outside of Brazil to persons who do not
reside in Brazil. The proceeds of a redemption of, or liquidating distribution
with respect to the ADSs, under the same conditions, are not subject to
Brazilian taxes.
With reference to proceeds of a redemption of, or a liquidating
distribution with respect to preferred shares having as the paying source a
Brazilian resident, the difference between the amount effectively received by
the shareholder and the amount of foreign currency registered with the Central
Bank translated into reais at the commercial market rate on the date of the
redemption or liquidating distribution, will be treated as a capital gain
derived from sale or exchange of shares not carried out on a Brazilian stock
exchange market, afterwards being subject to income tax at the rate of 15%.
Ordinary non-Brazilian holders are subject to withholding income tax at
the rate of 15% on gains derived from sales or exchanges of the preferred
shares in Brazil outside of the stock exchange market.
Differently, ordinary non-Brazilian holders are subject to the income tax
at a rate of 20% on gains derived from the sale or exchange of preferred shares
that occur on a Brazilian stock exchange, and on gains derived from investments
made through funds and the sale of stocks negotiated in the cash stock exchange
market.
In case the sale is made by a non-Brazilian holder that is not resident in
a tax haven jurisdiction within five business days of the withdrawal of the
preferred shares in exchange ADSs, and the proceeds are remitted abroad within
the same five-day period, any capital gains derived from the sale will be
exempt from the Brazilian withholding income tax.
Equally, if the beneficiary is an investor qualified under Resolution
2,689, any capital gains derived from the sale will be exempt from the
Brazilian withholding income tax.
The gain obtained as a result of a transaction on a Brazilian stock
exchange market is the difference between the amount in reais realized on the
sale or exchange and the acquisition cost measured in reais, without any
correction for inflation. The acquisition cost of shares registered as an
investment with the Central Bank is calculated on the basis of the foreign
currency amount registered with the Central Bank translated into reais at the
commercial market rate on the date of the sale or exchange.
The income paid to market investors and/or to those investors holding ADSs
will be subject to the withholding income tax at the rate of 10%, in case of
remuneration from investments clubs and funds, swap transactions and
transactions made in the future market outside the stock exchange market with
any asset. Differently, the income derived from transactions of any other
nature will be subject to the withholding income tax at the rate of 15%.
Beneficiaries Residing or Domiciled in Tax Havens or Low Tax Jurisdictions
Law 9,779, dated January 19, 1999 states that, with the exception of
limited circumstances, any income or gains derived from transactions carried
out by a beneficiary that resides or is domiciled in a country considered to be
a tax haven are subject to the Brazilian withholding income tax at the rate of
25%. Accordingly, if the distribution of interest attributed to shareholders'
equity is made to a beneficiary residing or domiciled in a tax haven, the
income tax will apply at the rate of 25% instead of 15%.
84
Dividends paid to beneficiaries that reside or are domiciled in a tax
haven are not subject to the Brazilian withholding income tax.
As already mentioned, non-Brazilian holders of ADSs or preferred shares
which are resident in tax havens are also excluded from the tax treatment
granted to holders of ADSs and market investors as of January 1, 2000,
afterwards being subject to the same tax treatment applicable to ordinary
non-Brazilian holders.
Taxation of Foreign Exchange Transactions
A financial transaction tax is imposed on the conversion of reais into
foreign currency and on the conversion of foreign currency into reais. Although
the current applicable rate for almost all foreign currency exchange
transactions is zero, the ministry of finance may increase the rate at its sole
discretion at any time, this merely requiring the issue of a Ministerial
Administrative Rule. In this case the Brazilian legislation allows for such an
increase to be made up to a maximum ceiling of 25%. However, any increase in
the prevailing rate will only apply to future transactions. In case of notes
with put and/or call clause with respect to anticipation of its maturity, in
which such right is exercised before a 90 day period counted from the issuance
of the note, the rate will be of 5% instead of 0%.
Taxation of Bonds and Securities Transactions
Transactions involving bonds and securities, even if the transaction is
made in the Brazilian stock exchange market, may be subject to the Tax on
Financial Transactions - "IOF." The rate of IOF with respect to transactions
involving preferred shares and ADSs is currently zero, although it may increase
up to 1.5% per day of the terms of the securities, but only with respect to
future preferred shares and ADSs transactions.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of preferred shares or ADSs, except for
gift and inheritance taxes imposed by some Brazilian states on gifts or
bequests by individuals or entities not domiciled or domiciled in Brazil to
individuals or entities domiciled or residing within such states. There are no
Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of preferred shares or ADSs.
Transactions carried out by the depositary or by holders of preferred
shares, which involve the transfer of Brazilian currency from an account
maintained with any Brazilian financial institution are subject to the CPMF tax
at the rate of 0.38%. Under Amendment No. 37 to the Brazilian constitution,
dated June 12, 2002, the 0.38% CPMF tax rate will be applicable until December
31, 2004.
The CPMF is withheld from the transferred amounts and collected in favor
of the Brazilian IRS by the financial institution that carries out the relevant
financial transaction. When the non-Brazilian holder transfers the proceeds
derived from sale of preferred shares by a currency exchange transaction, the
CPMF tax is imposed on the amount in reais to be remitted abroad.
Registered Capital
The amount of an investment in preferred shares held by a non-Brazilian
holder that qualifies under Resolution 2,689 and obtains registration with the
CVM, or by the depositary representing such holder, is eligible for
registration with the Central Bank. The amount so registered is referred to as
registered capital. Such registration allows the remittance outside Brazil of
foreign currency, converted at the commercial market rate, acquired with the
proceeds of distributions on, and amounts realized with respect to dispositions
of, such preferred shares. The registered capital for each preferred share
purchased in Brazil and deposited within the depositary will be equal to its
purchase price in U.S. dollars. The registered capital for a preferred share
that is withdrawn upon surrender of an ADS will be the U.S. dollar equivalent
of (i) the average price of a preferred share on the Brazilian stock exchange
on which the greatest number of such shares was sold on the day of withdrawal,
or (ii) if no preferred shares were sold on that day, the average price on the
Brazilian stock exchange on which the greatest number of preferred shares were
sold in the fifteen trading sessions immediately preceding such withdrawal. The
U.S. dollar value of the preferred shares is determined on the basis of the
average commercial market rates quoted by the Central Bank on
85
the day of withdrawal or, if the average price of preferred shares is
determined under clause (ii) of the preceding sentence, the average of such
average quoted rates on the fifteen dates used to determine the average price
of the preferred shares.
A non-Brazilian holder of preferred shares may experience delays in
affecting registration with the Central Bank, which may delay remittances
abroad. Such a delay may adversely affect the amount in U.S. dollars received
by the non-Brazilian holder.
United States
The following is a discussion of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs, but it does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to acquire preferred shares or
ADSs, and does not address state, local or other tax laws. The discussion
applies only to holders that hold preferred shares or ADSs as capital assets
for tax purposes, and does not address special classes of holders, such as
dealers and traders in securities or foreign currencies, financial
institutions, insurance companies, tax exempt entities, persons owning,
directly, indirectly or constructively, 10% or more of our voting shares,
persons holding preferred shares or ADSs as part of a hedging or conversion
transaction or straddle, persons entering into a "constructive sale" with
respect to preferred shares or ADSs, persons whose functional currency for U.S.
federal income tax purposes is not the U.S. dollar, persons liable for
alternative minimum tax, partnerships or other entities classified as
partnerships for U.S. federal income tax purposes, or persons who have ceased
to be United States citizens or to be taxed as resident aliens.
You are advised to consult your own tax advisers concerning the overall
tax consequences to you, including the consequences under foreign, state and
local laws, of the acquisition, ownership and disposition of preferred shares
or ADSs.
This discussion is based on the tax laws of the United States, including
the Internal Revenue Code of 1986, as amended, administrative pronouncements,
judicial decisions and final, temporary and proposed Treasury Regulations, all
as currently in effect and changes to any of which may affect the tax
consequences described herein, possibly with retroactive effect. In addition,
this discussion is based in part on representations of the depositary and
assumes that each obligation provided for in or otherwise contemplated by the
Deposit Agreement and any other related document will be performed in
accordance with their terms.
This discussion applies to you only if you are a "U.S. Holder." For
purposes of this discussion, a "U.S. Holder" is a beneficial owner of preferred
shares or ADSs that is for U.S. federal income tax purposes (i) a citizen or
resident of the United States of America, (ii) a corporation, or other entity
taxable as a corporation, organized under the laws of the United States of
America or any political subdivision thereof, or (iii) an estate or trust the
income of which is subject to United States federal income taxation regardless
of its source.
U.S. Holders of ADSs will be treated for U.S. federal income tax purposes
as owners of the preferred shares underlying the ADSs. Accordingly, except as
noted, the U.S. federal income tax consequences discussed below apply equally
to U.S. Holders of ADSs and preferred shares, and references to preferred
shares should also be treated as references to ADSs. Exchanges of preferred
shares for ADSs and ADSs for preferred shares will not be subject to U.S.
federal income tax.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. Holders of ADSs. Accordingly, the analysis of the
creditability of Brazilian taxes described below could be affected by future
actions that may be taken by the U.S. Treasury.
Taxation of Dividends. Distributions paid with respect to preferred shares
will be includable in the income of a U.S. Holder as ordinary dividend income
to the extent paid out of current or accumulated earnings and profits of
Ultrapar, as determined for U.S. federal income tax purposes. Under recently
enacted legislation, dividends received by noncorporate U.S. Holders on
preferred shares or ADSs may be subject to U.S. federal income tax at lower
rates than other types of ordinary income if certain conditions are met. U.S.
Holders should consult their own tax advisors regarding the implications of
this new legislation in their particular circumstances. For purposes of these
rules, the amount of any distribution of property other than cash will be the
fair market value of such property
86
on the date of distribution. In addition, the taxable amount of any
distribution will include the amount of Brazilian tax withheld on the amount
distributed, and the amount of a distribution paid in reais will be measured by
reference to the exchange rate for converting reais into U.S. dollars in effect
on the date the distribution is received by the custodian, in the case of ADSs,
or the U.S. Holder, in the case of preferred shares directly held by a U.S.
Holder. Dividends paid by us generally will constitute foreign source "passive"
income for U.S. foreign tax credit purposes and will not be eligible for the
dividends received deduction. Subject to certain limitations, Brazilian
withholding tax, if any, paid in connection with any distribution with respect
to preferred shares may be claimed as a credit against the U.S. federal income
tax liability of a U.S. Holder if such U.S. Holder elects for that year to
credit all foreign income taxes; otherwise, such Brazilian withholding tax may
be taken as a deduction. U.S. Holders should consult their own tax advisors
concerning the availability and utilization of the foreign tax credit.
Taxation of Capital Gains. Subject to the discussion below under the
heading "Passive Foreign Investment Companies", gain or loss realized by a U.S.
Holder upon the sale, exchange or other disposition of a preferred share will
be subject to United States federal income tax as U.S. source capital gain or
loss in an amount equal to the difference between the amount realized on the
disposition of the preferred share and the U.S. Holder's tax basis in the
preferred share. The gain or loss will be long term capital gain or loss if the
U.S. Holder's holding period in the preferred share exceeds one year. U.S.
Holders should consult their tax advisors regarding the United States federal
tax treatment of capital gains, which may be taxed at lower rates than ordinary
income for individuals, and losses, the deductibility of which is subject to
limitations.
Passive Foreign Investment Companies. Special U.S. tax rules apply to U.S.
Holders that own shares in a passive foreign investment company, known as a
PFIC. In general, we will be classified as a PFIC in a particular taxable year
if either:
o 75% or more of our gross income consists of passive income, such as
dividends, interest, rents and royalties; or
o 50% or more of our assets, by value, determined on the basis of a
quarterly average, consists of assets that produce, or are held for
the production of, passive income.
Based on a review of our income and assets, we believe that we were not a
PFIC for U.S. federal income tax purposes in 2002. However, since PFIC status
depends upon the composition of a company's income and assets and the market
value of its assets (including, among others, less than 25 percent equity
investments) from time to time, there can be no assurance that we will not be
considered a PFIC for any taxable year.
If we are treated as a PFIC in any taxable year during which a U.S. Holder
owns preferred shares, gain recognized by such U.S. Holder on the sale or other
disposition of the preferred shares will be allocated ratably over the U.S.
Holder's holding period for the preferred shares. The amounts allocated to the
taxable year of the sale or other exchange and to any year before we become a
PFIC will be taxable as ordinary income. The amount allocated to each other
taxable year will be subject to tax at the highest rate in effect for that year
for individuals or corporations, as appropriate, and an interest charge will be
imposed on the amount allocated to such taxable year. Further, any distribution
in respect of the preferred shares in excess of 125 percent of the average of
the annual distributions on preferred shares received by the U.S. Holder during
the preceding three years or the U.S. Holder's holding period, whichever is
shorter, will be subject to taxation as described above. Certain elections may
be available (including a mark-to-market election) to U.S. persons that may
mitigate the adverse consequences resulting from PFIC status.
United States Backup Withholding and Information Reporting
Payment of dividends and other proceeds in connection with the preferred
shares made within the United States or through certain U.S.-related financial
intermediaries generally are subject to information reporting and to backup
withholding, unless the U.S. Holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number on a properly completed Form W-9
or a substituted form and certifies that no loss of exemption from back-up
withholding has occurred. The amount of any backup withholding will be
creditable against the U.S. Holder's federal income tax liability and may
entitle the U.S. Holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.
87
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Statements contained in this annual report as to the contents of any
contract or other document referred to are not necessarily complete, and each
of these statements is qualified in all respects by reference to the full text
of such contract or other document filed as an exhibit hereto. A copy of the
complete annual report including the exhibits and schedules filed herewith may
be inspected without charge at the public reference facilities maintained by
the SEC at Room 1024,450, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices located at 233 Broadway, New York, N.Y., 10279
and North Western Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 - 2511. Copies of such materials may be obtained by mail from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. Such reports and other information may also be
inspected at the offices of the New York Stock Exchange, 11 Wall Street, New
York, New York 10005, on which ADS are listed. In addition the SEC maintains a
website that contains information filed electronically with the SEC, which can
be accessed over the Internet at http://www.sec.gov.
We are subject to the information and periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, and, in accordance therewith,
file periodic reports and other information with the SEC. However, as a foreign
private issuer, we are exempt from the rules under the Exchange Act relating to
the furnishing and content of proxy statements and relating to short-swing
profits reporting and liability.
We furnish to The Bank of New York, as depositary, copies of all reports
we are required to file with the SEC under the Exchange Act, including our
annual reports in English, containing a brief description of our operations and
our audited annual consolidated financial statements which are prepared in
accordance with accounting practices adopted in Brazil and include a
reconciliation to U.S. GAAP. In addition, we are required under the Deposit
Agreement to furnish the depositary with copies of English translations to the
extent required under the rules of the SEC of all notices of meetings of
holders of preferred shares and other reports and communications that are
generally made available to holders of preferred shares. Under certain
circumstances, the depositary will arrange for the mailing, at our expense, of
these notices, other reports and communications to all ADS holders.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, primarily related to variable
interest rates and foreign exchange rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange rates and interest rates. We do not enter into derivative
financial instruments for speculative purposes. Our market risks are mitigated
by our high level of financial investments.
See Notes 3(k), 16 and 23 (V)(e) and (f) to our consolidated financial
statements for a discussion of the accounting policies for derivative
instruments and information with respect to those financial instruments.
88
Interest Rate Risk
Substantially all of our debt obligations in reais are subject to variable
rates of interest based on either the TJLP or the IGP-M inflation index. Our
foreign currency borrowings, however, are subject to fixed rates of interest.
As of December 31, 2002, we did not have any derivative contracts outstanding
which could limit exposure to variations in the TJLP or the IGP-M, primarily
because such instruments are not available in the Brazilian market at
reasonable prices. Nevertheless, our exposure to interest rate risk is
partially limited by our Brazilian currency variable interest investments,
which generally earn the overnight interest rates paid on interbank
certificates of deposit. In addition to the exposure with respect to existing
borrowings, we would be exposed to interest rate volatility with respect to any
future debt issuance.
The table below provides information about our debt obligations in U.S.
dollars and in reais that are subject to variable rates of interest. The table
summarizes information on instruments and transactions that are sensitive to
foreign currency exchange rates and interest rates:
Principal by year of maturity
--------------------------------------------------------
(in millions of reais as of December 31, 2002):
Average Outstanding
(1) Debt Interest Rate Fair Value Debt R$ 2003 2004 2005 2006 2007 Thereafter
--------------------------- ------------- ---------- ----------- ---- ---- ---- ---- ---- ----------
U.S. dollar
borrowings 7.2% 329.2 348.9 136.9 212.0 - - - -
Borrowings indexed to the
UMBNDES 11.8% 28.7 28.9 5.4 8.3 6.5 5.8 2.9 -
Borrowings indexed to the
TJLP 3.1% 187.3 187.5 74.7 50.0 33.1 23.2 6.5 -
Borrowings indexed to the
IGP-M 6.5% 18.2 18.1 2.8 3.0 3.5 3.5 3.5 1.8
---- ----- ----- ----- ----- ---- ---- ---- ---
Subtotal 563.4 583.4 219.8 273.3 43.1 32.5 12.9 1.8
==== ===== ===== ===== ===== ==== ==== ==== ===
Foreign Exchange Risk
The real continues to heavily fluctuate against the U.S. dollars. See
"Item 3. Key Information--Selected Financial Data--Exchange Rates."
A substantial portion of our debt obligations is denominated in U.S.
dollars. In addition, a significant portion of our operating expenses,
including certain raw materials, are denominated in, or indexed to U.S. dollar.
Most of our revenues are denominated in reais, although sales prices of
products of the chemicals segment are linked to international market prices
established in U.S. dollars. As a result, we are exposed to currency exchange
risks that may adversely affect our business, financial condition and results
of operations, as well as our ability to meet our debt service obligations.
We manage the foreign exchange risks associated with the scheduled
payments related to our liabilities by investing in U.S. dollar-denominated
mutual funds and in foreign currency/interest swap contracts, under which we
pay variable interest in reais based on the interbank certificate of deposit
rate, or CDI, and receive fixed interest in U.S. currency.
89
The table below summarizes the floating rate relative to the U.S. dollar
swap position at December 31, 2002:
Swap Maturity
---------------------------------------------------------- ---------------------------------------------
2003 2004 2005
---- ---- ----
Floating rate U.S. dollar coupon (in million of reais) (*) 168.8 12.8 177.6
Average receiving rate US$ + 26.8% US$ + 8.1% US$ + 7.7%
Average payment rate (**) 99.6% CDI 100.0% CDI 100.0% CDI
* Notional amount converted according to the commercial selling rate
reported by Banco Central do Brasil (Ptax) at December 31, 2002
** CDI - Interbank CD
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within ninety days prior to the filing of this report, under management's
supervision and with its participation, including our chief executive officer
and chief financial officer, we performed an evaluation of our disclosure
controls and procedures. Based on this evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures are effective for the purpose of collecting, analyzing and
disclosing the information that we are required to disclose in the reports we
file under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms. Our management necessarily applied its
judgement in assessing the costs and benefits of such controls and procedures,
which by their nature provide the only reasonable assurance regarding our
control objectives.
There have been no significant changes in our internal controls or other
factors that could significantly affect internal controls subsequent to the
date of their evaluation.
ITEM 16. [Reserved]
90
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
We file the following consolidated financial statements, together with the
reports of independent accountants, as part of this annual report:
Index to Consolidated Financial Statements F-1
Report of the Deloitte Touche Tohmatsu Auditores Independentes dated
January 24, 2003 as of and for the year ended December 31, 2002 F-2
Report of PricewaterhouseCoopers dated January 31, 2002 as of and
for the two years ended December 31, 2001 F-3
Consolidated Balance Sheets at December 31, 2002 and 2001 F-4
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-6
Consolidated Statement of Changes in Stockholders' equity
for the Years Ended December 31, 2002, 2001 and 2000 F-8
Consolidated Statement of Changes in Financial Position
for the Years Ended December 31, 2002, 2001 and 2000 F-9
Notes to the Consolidated Financial Statements F-10
ITEM 19. EXHIBITS
We file the following documents as part of this annual report:
1.1 Ultrapar by-laws, as revised on December 20, 2002 (English
translation)
2.1 Ultra S.A.'s shareholders' agreement *
8.1 List of subsidiaries of Ultrapar
10.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
10.2 Documents relating to our 2002 corporate restructuring**
* Incorporated by reference to our annual report on Form 20-F for the fiscal
year ended December 31, 2001 (file No. 001-14950) filed with the SEC on May 29,
2002.
** Incorporated by reference to our current reports on Form 6-K filed with SEC
on October 15, 2002, November 1, 2002 and December 6, 2002 (file No. 001-14950)
91
GLOSSARY
Acetates Chemical substances derived from acetic acid,
which are used as solvents in the production of
paints and coatings.
Acetic Acid One of the largest produced organic acids
and is used in the production of acetates.
Acrylates Derivatives from acrylic acid, that are used in
the plastic industry.
Acrylonitrile Derivative compounds from propylene having a
nitrile group.
Alcohol Flammable liquid obtained by fermentation of
sugary substances, or by synthetics operations.
Alcohol Sulfates Fatty alcohol-derived sulfates, with surfactant
characteristics, mainly used in the production
of detergents.
Alkanolamides Substances produced by reaction of fatty acids
with alcanolamines, mainly used as emulsifiers
in cosmetic preparation.
Alkyl Benzene Substance with an aromatic ring and an aliphatic
chain.
Aromatics A major group of organic chemical compounds with
a ring shaped carbon chain. Aromatics are
derived chiefly from petroleum and coal tar, and
used to make a broad range of downstream
chemical products.
Butadiene By-product of the cracking process; used
primarily as a feedstock for synthetic rubber,
elastomers and fibers.
Butyl Alcohol An alcohol used primarily in the production of
solvents and plasticizers.
Commodity Chemicals A term applied to chemical substances, which are
sold on a generic basis and, unlike specialty
chemicals, are not generally manufactured to
meet specific end-use performance
characteristics.
Condensed Naphthalene Polymer mainly used as a super-fluidizer and
curing agent for cement preparation.
Crackers First generation companies that thermally
breakdown or "crack" ethane, naphtha and gas oil
into basic petrochemicals, such as ethylene and
propylene.
Dispersants Class of chemicals whose main property is to
maintain the stability of a mixture by
preventing particles from settling out of the
mixture.
EDC Ethylene Dichloride, raw material of VCM.
Elastomer Broad category of "rubber" polymers which may be
natural or synthetic, such as natural rubber,
nitrile rubber and styrene-butadiene rubbers.
Emulsifiers A class of chemical generally used to promote
the dispersion of materials throughout a
solution or mixture.
92
Ethanolamines Ethanolamines, comprising mono-, di-, and
tri-ethanolamines, are clear, non-flammable,
liquids at atmospheric pressure and room
temperature conditions, and are produced from
ethylene oxide and ammonium.
Ethers Organic compound with one oxygen atom interpoled
between two carbon atoms.
Ethoxylated Alcohol Produced by reaction of ethylene oxide with
alcohols. Ethoxylated alcohols are used mainly
as surfactants.
Ethoxylated Alkylphenols Ethoxylated alkylphenols range from clear
liquids to colored solids and is produced by the
reaction of ethylene oxide with alkylphenol.
Ethoxylated Fatty Alcohols Substances produced by reaction of ethylene
oxide with fatty alcohols and are used mainly as
a raw material for detergent production.
Ethoxylated Fatty Amines Substances produced by reaction of ethylene
oxide with fatty amines and are used mainly as
emulsifiers for agrochemicals.
Ethoxylated Fatty Esters/ Substances produced by reaction of ethylene
Ethoxylated Vegetable Oil oxide with hydroxylated fatty esters and are
used mainly as emulsifiers in the cosmetic
industry.
Ethoxylated Sorbitan Esters Substances produced by reaction of ethylene
oxide with sorbitan esters and are mainly used
as food emulsifiers, especially for bakery
products.
Ethyl Alcohol A flammable liquid known as ethanol. It is used
as automotive fuel, alone or in mixture with
gasoline, as solvent in personal care products,
such as aftershave lotion and mouthwashes.
Ethylene A chemical substance, mainly derived from
thermal cracking of ethane, gas oil and naphtha,
and used to make polyethylene and many organic
chemical intermediates, such as ethylene oxide,
vinyl chloride, styrene and acetaldehyde.
Ethylene Glycols Includes mono-, di-, tri- and other ethylene
glycols. Mono-ethylene glycol or MEG is a clear,
non-flammable, non-volatile liquid at room
temperature and atmospheric pressure. Ethylene
glycols are produced from ethylene oxide.
Ethylene Oxide Ethylene oxide is a colorless and highly
flammable gas at room temperature and
atmospheric pressure and is produced by
catalytic partial oxidation of ethylene by
oxygen, at high temperature and pressure.
First Generation Company A petrochemical cracker.
Fuels Any substance that involves energy in a chemical
reaction.
Glycol Ether Acetate Flammable liquids at room temperature and
atmospheric pressure produced by reaction with
acetic acid and glycol ether.
Glycols Alcohols containing two hydroxyl groups.
Glycol Ethers Substances produced by reaction of ethylene
oxide and an alcohol, or methyl, ethyl and butyl
alcohol.
Hydraulic Fluids Mixture of high molecular weight glycols and
glycol ethers used as cooling medium and
mechanical action transmitters in automotive
braking systems.
93
Lauryl Alcohol Substance of twelve-carbon fatty alcohol raw
material for ethoxylated fatty alcohol, alcohol
sulfate and ethoxylated alcohol sulfate
production, which are intermediates for
detergent production.
Linear Alkyl Benzene (LAB) Straight chain alkyl benzene used as surfactant
intermediate.
Linear Alkyl Sulphonate (LAS) Straight chain alkyl benzene sulfate used as
surfactant intermediate.
Lubricants Broad class of chemicals which are generally
used to provide a film between the moving parts
of machines and engines.
Methyl Ethyl Ketone (MEK) A clear, volatile, flammables liquid at room
temperature and atmospheric pressure and is
mainly used as a solvent.
Metric Ton Equal to 1,000 kilograms (2,204.62 pounds).
Naphtha A by-product of crude oil refining which is used
by crackers as feedstock.
Nitrile Organic compound containing CN group.
Normal Paraffins Class of aliphatic hydrocarbons with a single
carbon chain.
Olefin Hydrocarbons with double bonds with the general
chemical formula CnH2n. Olefins, along with
aromatics, are produced mainly in crackers and
are regarded as the "building blocks" of the
petrochemical industry.
Paraxylene Organic compound with two methyl radicals in
p-position.
PET Polyethylene terephthalate, a polymer produced
by polycondensation of ethylene glycol with
either Dimethyl Terephthalate, or therephtalic
acid. Used to produce fibers, resins and
packaging such as carbonated soft drink bottles
(PET bottle grade).
Phosphate Esters Phosphoric acid derived esters, used primarily
as "detergent builders" in powder detergent
production.
Polyethylene Intermediate petrochemical produced by second
generation companies from ethylene; used in many
plastic applications.
Polyethylene Glycols Ethylene oxide derived polymers used in many
applications, including as fillers, lubricants
and viscosity builders.
Polystyrene Intermediate petrochemical produced by second
generation companies from styrene.
Polyvinyl Chloride Intermediate petrochemical produced by companies
from basic petrochemicals.
Propylene A chemical substance, mainly derived as a co-
product with ethylene through the cracking
process of gas oil or naphtha, often used to
make polypropylene, which is a common plastic.
Rafinate II A by-product of naphtha cracking mainly composed
of butane and used in the production of MEK.
94
Sec-Butanol A secondary four-carbon atom alcohol obtained by
the hydration of butenes, contained in raffinate
II. Sec-butanol is the raw material for
methyl-ethyl-ketone production.
Second Generation Company A producer of intermediate chemical products
based largely on raw materials purchased from
upstream, first generation companies, also known
as crackers.
Softeners A class of surfactant products mainly used as
co-agents in the textile industry and domestic
laundries.
Solvents Chemical compounds, usually in liquid form,
capable of dissolving another substance; often
used as a medium in which other chemical
reactions may take place.
Sorbitan Esters Substances produced by the reaction of sorbitan
with fatty acids used as a raw material for
ethoxylated sorbitan esters.
Soybean Oil Oil from soy beans
Styrene Aromatic compound with ethylene group. Monomer
of polystyrene.
Specialty Chemicals Chemicals which are usually produced in smaller
quantities than commodity chemicals and which
performances are more relevant than the
specification.
Stabilizers Chemicals which are used to prevent chemical
degradation of a product or chemical compound.
Sulfonates/Sulfates Class of sulfur trioxide modified surfactants,
used as a raw material for detergent production.
Surfactants Generally defines a group of chemicals which,
when dissolved in a solvent, modify the liquid
properties at a liquid/liquid or liquid/solid
interface, including increased solubilization,
foaming, frothing, emulsification, dispersing or
wetting; a major end-use market for surfactants
is the detergent market.
TDI Toluene diisocyanate used as raw material of
polyurethane.
Third Generation Company A producer that transforms intermediate products
into end products such as films, piping and
containers.
Tons Metric tons.
VAM Vinyl acetate monomer. Monomer of PVA -
polyvinyl acetate.
VCM Vinyl chloride monomer.
95
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ULTRAPAR PARTICIPACOES S.A.
By: /s/ Fabio Schvartsman
-----------------------------
Name: Fabio Schvartsman
Title: Chief Financial Officer
Date: June 6, 2003
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paulo Guilherme Aguiar Cunha, certify that:
1. I have reviewed this annual report on Form 20-F of Ultrapar Participacoes
S.A. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual
report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons fulfilling
the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in the
Registrant's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ Paulo Guilherme Aguiar Cunha
------------------------------------
Name: Paulo Guilherme Aguiar Cunha
Title: Chief Executive Officer
Date: June 6, 2003
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fabio Schvartsman, certify that:
1. I have reviewed this annual report on Form 20-F of Ultrapar Participacoes
S.A. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual
report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons fulfilling
the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in the
Registrant's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
By: /s/ Fabio Schvartsman
-------------------------
Name: Fabio Schvartsman
Title: Chief Financial Officer
Date: June 6, 2003
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Index to the Consolidated Financial Statements...............................F-1
Report of the Deloitte Touche Tohmatsu Auditores Independentes
dated January 24, 2003 as of and for the year ended December 31, 2002........F-2
Report of PricewaterhouseCoopers dated January 31, 2002 as of and
for the two years ended December 31, 2001....................................F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001.................F-5
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000.............................................F-6
Consolidated Statements of Cash Flows the years ended
December 31, 2002, 2001 and 2000.............................................F-7
Statements of Changes in Stockholders' equity for the years ended
December 31, 2002, 2001 and 2000.............................................F-9
Consolidated Statements of Changes in Financial Position
for the years ended December 31, 2002, 2001 and 2000........................F-10
Notes to Consolidated Financial Statements..................................F-11
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ultrapar Participacoes S.A.
Sao Paulo - SP - Brazil
1. We have audited the accompanying consolidated balance sheet of Ultrapar
Participacoes S.A. and subsidiaries (Ultrapar) as of December 31, 2002,
and the related consolidated statements of income, changes in
stockholders' equity, and changes in financial position for the year then
ended, all expressed in Brazilian reais. These financial statements are
the responsibility of Ultrapar's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
consolidated balance sheet of Ultrapar as of December 31, 2001, and the
related consolidated statements of income, changes in stockholders'
equity, and changes in financial position for each of the two years in the
period ended December 31, 2001 were audited by other auditors whose
report, dated January 31, 2002, expressed an unqualified opinion on those
statements.
2. We conducted our audit in accordance with auditing standards generally
accepted in Brazil and the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
3. In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ultrapar as of December
31, 2002 and the results of its operations and changes in its
stockholders' equity and financial position for the year then ended in
conformity with accounting practices adopted in Brazil.
4. Accounting practices adopted in Brazil vary in certain significant
respects from accounting principles generally accepted in the United
States of America (U.S. GAAP). The application of the latter would have
affected the determination of net income for each of the three years in
the period ended December 31, 2002 and the determination of stockholders'
equity and financial position at December 31, 2002 and 2001 to the extent
summarized in Note 23.
January 24, 2003
/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Auditores Independentes
F-2
PRICEWATERHOUSECOOPERS [GRAPHIC]
Report of Independent Public Accountants
To the Board of Directors and Stockholders
Ultrapar Participacoes S.A.
1 We have audited the accompanying consolidated balance sheets of Ultrapar
Participacoes S.A. (a Brazilian corporation) and subsidiaries as of
December 31, 2001, and the related consolidated statements of operations,
of changes in stockholders' equity and of changes in financial position for
each of the two years in the period ended December 31, 2001, expressed in
Brazilian reais, in conformity with accounting practices adopted in Brazil.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
2 We conducted our audits in accordance with auditing standards generally
accepted in Brazil and the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
3 In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Ultrapar Participacoes S.A. and subsidiaries as of December 31, 2001 and
the results of their operations, the changes in stockholders' equity and
the changes in their financial position for each of the two years in the
period ended December 31, 2001 in conformity with accounting practices
adopted in Brazil.
F-3
PRICEWATERHOUSECOOPERS [GRAPHIC]
Ultrapar Participacoes S.A.
4 Accounting practices adopted in Brazil vary in certain significant respects
from accounting principles generally accepted in the United States of
America (US GAAP). A description of the significant differences between
accounting practices adopted in Brazil and US GAAP and the approximate
effects of those differences on net income and stockholders' equity are set
forth in Note 23 of the notes to the consolidated financial statements.
Sao Paulo, Brazil
January 31, 2002
/s/ PricewaterhouseCoopers
PricewaterhouseCoopers
Auditores Independentes
F-4
ULTRAPAR PARTICIPACOES S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
(In millions of Brazilians reais - R$ )
------------------------------------------------------------------------------------------------------------------------------------
ASSETS 2002 2001 LIABILITIES 2002 2001
------ --------- -------- ----------- ---------- -----------
CURRENT ASSETS CURRENT LIABILITIES
Cash and cash equivalents 637.9 656.0 Financings 219.8 124.5
Trade accounts receivable 271.6 149.2 Suppliers 104.4 88.4
Inventories 106.3 94.5 Salaries and related charges 64.4 50.2
Recoverable taxes 115.1 121.2 Taxes 9.9 5.8
Other 52.8 20.9 Dividends payable 49.0 33.6
Prepaid expenses 3.2 3.4 Income and social contribution taxes 1.9 2.0
--------- -------
1,186.9 1,045.2 Other 18.8 19.4
--------- -------- --------- ---------
468.2 323.9
--------- ---------
NONCURRENT ASSETS
Related companies 2.6 1.7 LONG-TERM LIABILITIES
Deferred income and social contribution taxes 33.3 27.3 Financings 363.6 290.2
Escrow deposits 7.0 6.7 Related companies 10.2 11.0
Other 4.5 6.3 Deferred income and social
--------- -------- contribution taxes 34.8 24.0
47.4 42.0 Other taxes and contibutions
--------- -------- - contingent liability 28.1 62.4
Other 0.9 0.8
--------- ---------
437.6 388.4
PERMANENT ASSETS --------- ---------
Investments: 31.0 439.8
Associated companies 6.9 63.0 MINORITY INTEREST --------- ---------
Other 26.1 25.8
Property, plant and equipment 779.5 707.9 STOCKHOLDERS' EQUITY
Deferred charges 81.1 68.1 Capital 664.0 433.9
--------- -------- Revaluation reserve 26.0 25.9
893.6 864.8 Profits reserves 501.1 340.1
--------- ---------
1,191.1 799.9
--------- ---------
--------- -------- TOTAL 2,127.9 1,952.0
TOTAL 2,127.9 1,952.0 ========= =========
========= ========
The notes are an integral part of the financial statements.
F-5
ULTRAPAR PARTICIPACOES S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In millions of Brazilians reais - R$, except for per share data)
-------------------------------------------------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
GROSS SALES AND SERVICES 3,795.3 2,862.5 2,301.2
Taxes on sales and services, rebates, discounts and returns (800.8) (577.8) (423.2)
---------- ---------- ----------
NET SALES AND SERVICES 2,994.5 2,284.7 1,878.0
Cost of sales and services (2,247.1) (1,698.3) (1,399.6)
---------- ---------- ----------
GROSS PROFIT 747.4 586.4 478.4
---------- ---------- ----------
OPERATING (EXPENSES) INCOME
Selling (130.2) (120.0) (95.8)
General and administrative (165.6) (127.8) (120.1)
Management compensation (4.7) (3.7) (3.5)
Depreciation and amortization (81.8) (66.2) (46.8)
Other operating income, net 0.4 10.2 1.3
---------- ---------- ----------
(381.9) (307.5) (264.9)
---------- ---------- ----------
OPERATING INCOME BEFORE FINANCIAL ITEMS 365.5 278.9 213.5
Financial income 238.0 120.7 140.0
Financial expenses (209.5) (151.8) (96.6)
Nonoperating expenses, net (44.1) (17.0) (16.5)
---------- ---------- ----------
(15.6) (48.1) 26.9
---------- ---------- ----------
INCOME BEFORE INCOME AND SOCIAL
CONTRIBUTION TAXES, EQUITY IN EARNINGS
(LOSSES) OF ASSOCIATED COMPANIES AND MINOROTY INTEREST 349.9 230.8 240.4
---------- ---------------------
INCOME AND SOCIAL CONTRIBUTION TAXES
Current (110.1) (58.4) (81.7)
Deferred (4.8) 3.9 4.7
Benefit of tax holidays 43.5 27.0 29.7
---------- ---------- ----------
(71.4) (27.5) (47.3)
---------- ---------- ----------
INCOME BEFORE EQUITY IN EARNINGS OF
ASSOCIATED COMPANIES AND MINORITY INTEREST 278.5 203.3 193.1
Equity in earnings (losses) of associated companies (1.7) 1.9 9.6
Minority interest (54.5) (73.0) (74.2)
---------- ---------- ----------
NET INCOME 222.3 132.2 128.5
========== ========== ==========
NET EARNINGS PER THOUSAND SHARES
(BASED ON ANNUAL WEIGHTED AVERAGE OF SHARES OUTSTANDING ) - R$ 3.62 2.49 2.43
========== ========== ==========
The notes are an integral part of the financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In millions of Brazilians reais - R$)
----------------------------------------------------------------------------------------------------------------------
2002 2001 2000
--------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 222.3 132.2 128.5
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 121.8 102.4 90.8
Amortization of goodwill and negative goodwill on investments (0.4) (8.7) 0.2
Loss on sale of property, plant and equipment 25.4 21.9 29.1
Foreign exchange and indexation losses on liabilities 118.5 74.1 31.0
Allowance (reversal of provision) for losses on permanent assets 40.6 (5.3) (5.2)
Equity in earnings (losses) of associated companies 1.7 (1.9) (9.6)
Proposed dividends and interest on capital (gross) 0.4 1.3 -
Deferred income and social contribution taxes 4.8 (3.9) (4.7)
Other long-term taxes 8.6 10.6 25.5
Loss (gain) on change in ownership percentage (3.6) - 2.9
Minority interest 54.5 73.0 74.2
Other - 0.1 (0.2)
Decrease (increase) in operating assets:
Trade accounts receivable (122.4) (10.0) (20.2)
Recoverable taxes 6.1 (39.0) (39.3)
Other receivables (31.9) (2.3) (3.7)
Inventories (11.8) (8.0) (7.3)
Prepaid expenses 0.2 (1.3) (1.1)
Increase (decrease) in operating liabilities:
Suppliers 16.0 1.6 13.8
Accrued interest 0.4 (0.8) (2.6)
Salaries and related charges 14.2 5.5 6.5
Taxes 4.1 (2.8) 1.4
Income and social contribution taxes (0.1) (2.6) (4.9)
Other (0.6) 3.6 (2.4)
--------- ---------- ---------
Net cash provided by operating activities 468.8 339.7 302.7
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to investments - - (0.8)
Additions to property, plant and equipment (168.8) (145.7) (143.5)
Additions to deferred charges (51.3) (57.4) (32.6)
Acquisition of minority interests (212.6) (13.8) (1.5)
Acquisition of treasury shares (0.3) - -
Proceeds from sales of property, plant and equipment 4.5 9.3 5.1
Other 1.3 0.9 2.8
--------- ---------- ---------
Net cash used in investing activities (427.2) (206.7) (170.5)
--------- ---------- ---------
F-7
2002 2001 2000
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt, net 55.8 (51.5) (70.7)
Long-term loans:
Issuances 97.3 54.4 66.9
Repayments (98.2) (85.3) (70.4)
Loans from associated companies:
Issuances 14.5 3.9 2.9
Repayments (16.8) (5.2) (4.5)
Dividends paid (60.9) (244.3) (52.7)
Other (51.4) (11.2) 1.9
--------- ---------- ---------
Net cash used in financing activities (59.7) (339.2) (126.6)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (18.1) (206.2) 5.6
Cash and cash equivalents at the beginning of the year 656.0 862.2 856.6
Cash and cash equivalents at the end of the year 637.9 656.0 862.2
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized 46.6 38.3 38.8
Taxes on income 52.3 20.6 44.7
Noncash investing and financing activities:
Direct supplier financing of acquisition of property, plant and equipment 2.7 - 5.5
Capital contribution with investments in subsidiaries - Gipoia
Participacoes Ltda. 38.5 - -
Acquisition of minority interest with issuance of shares - Oxiteno S.A. -
Industria e Comercio 191.6 - -
F-8
ULTRAPAR PARTICIPACOES S.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In millions of Brazilians reais - R$, except for per share data)
------------------------------------------------------------------------------------------------------------------------------------
Revaluation
reserve of Profit reserves
subsidiary and ----------------------------
associated Retention Unrealized Retained Treasury
Capital companies Legal of profits profits earnings shares Total
-------- --------------- ------ --------- ------------------- -------- -----
BALANCES AT DECEMBER 31, 1999 433.9 53.5 4.4 - 220.5 107.3 - 819.6
Realization of revaluation reserve - (6.2) - - - 6.2 - -
Income and social contribution taxes on realization
of revaluation reserves of subsidiaries - 0.8 - - - (1.1) - (0.3)
Reversal of revaluation reserves of subsidiaries - (19.0) - - - - - (19.0)
Net income - - - - - 128.5 - 128.5
Appropriation of net income:
Legal reserve - - 6.4 - - (6.4) - -
Reserve for unrealized profits - - - - 83.5 (83.5) - -
Interim dividends (R$ 0.30 and R$ 0.33 per thousand
common and preferred shares, respectively) - - - - - (16.5) - (16.5)
Interest on capital (R$ 0.27 and R$ 0.30 per thousand
common and preferred shares, respectively) - - - - - (14.6) - (14.6)
-------- ------------- ------- --------- --------- --------------- ---------
BALANCES AT DECEMBER 31, 2000 433.9 29.1 10.8 - 304.0 119.9 - 897.70
Realization of revaluation reserve - (3.4) - - - 3.3 - (0.1)
Income and social contribution taxes on realization
of revaluation reserves of subsidiaries - 0.2 - - - (0.5) - (0.3)
Realization of profit reserve - - - - (304.0) 304.0 - -
Supplementary dividends (R$ 0.32 and R$ 0.35 per
thousand common and preferred shares, respectively) - - - - - (17.6) - (17.6)
Net income - - - - - 132.2 - 132.2
Appropriation of net income:
Legal reserve - - 6.6 - - (6.6) - -
Dividends for the year (R$ 3.32 and R$ 3.65 per
thousand common and preferred shares, respectively) - - - - - (181.0) - (181.0)
Interest on capital (R$ 0.57 and R$ 0.63 per thousand
common and preferred shares, respectively) - - - - - (31.0) - (31.0)
Retention of profits reserve - - - 322.7 - (322.7) - -
------- ------------- ------- --------- --------- --------- ----- ---------
BALANCES AT DECEMBER 31, 2001 433.9 25.9 17.4 322.7 - - - 799.9
Capital increase due to merger 230.1 - - - - - - 230.1
Acquisition of treasury shares - - - - - - (0.3) (0.3)
Revaluation due to merger - 5.1 - - - - - 5.1
Realization of revaluation reserve - (5.1) - - - 4.4 - (0.7)
Income and social contribution taxes on
realization of revaluation reserves of subsidiaries - 0.1 - - - (0.4) - (0.3)
Net income - - - - - 222.3 - 222.3
Appropriation of net income:
Legal reserve - - 11.1 - - (11.1) - -
Interim dividends (R$ 0.37 and R$ 0.40 per thousand
common and preferred shares, respectively) - - - - - (20.0) - (20.0)
Proposed dividends payable (R$ 0.63 and R$ 0.69 per
thousand common and preferred shares, respectively) - - - - - (45.0) - (45.0)
Reserve for unrealized profits - - - - 40.6 (40.6) - -
Retention of profits reserve - - - 109.6 - (109.6) - -
------- ------------- ------- --------- --------- --------- ----- ---------
BALANCES AT DECEMBER 31, 2002 664.0 26.0 28.5 432.3 40.6 - (0.3) 1,191.1
======= ============= ======= ========= ========= ========= ===== =========
The notes are an integral part of the financial statements.
F-9
ULTRAPAR PARTICIPACOES S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In millions of Brazilians reais - R$)
---------------------------------------------------------------------------------------------------
2002 2001 2000
--------- --------- ---------
SOURCES OF FUNDS
Operations:
Net income 222.3 132.2 128.5
Items not affecting working capital:
Equity in earnings (losses) of associated companies 1.7 (1.9) (9.6)
Depreciation and amortization 121.8 102.4 90.8
Long-term interest and monetary variations 98.3 34.4 22.5
Deferred income and social contribution taxes 4.8 (3.9) (4.7)
Minority interest 54.5 73.0 74.2
Net book value of permanent assets written off 29.9 31.2 29.4
Other long-term taxes 8.6 10.6 25.5
Gain on change in ownership percentage (3.6) - 2.9
Amortization of negative goodwill on investments (0.4) (8.7) 0.2
Allowance (reversal of provision) for losses on permanent assets 40.6 (5.3) (5.2)
-------- --------- ---------
578.5 364.0 354.5
--------- --------- ---------
Third parties:
Increase in long-term liabilities - - 0.9
Decrease in noncurrent assets 0.6 0.5 2.9
Dividends and interest on capital (gross) 0.4 1.3 -
Working capital from merger 0.1 - -
Long-term financing 68.7 52.9 64.5
-------- --------- ---------
69.8 54.7 68.3
-------- --------- ---------
Total sources 648.3 418.7 422.8
-------- --------- ---------
USES OF FUNDS
Permanent assets:
Investments - - 0.8
Property, plant and equipment 171.5 145.7 149.0
Deferred charges 51.3 57.4 32.6
-------- --------- ---------
222.8 203.1 182.4
-------- --------- ---------
Dividends and interest on capital 76.3 250.8 54.3
-------- --------- ---------
Transfer from long-term to current liabilities 86.0 86.7 71.3
Decrease in long-term liabilities 51.2 11.5 -
Acquisition of treasury shares 0.3 - -
Acquisition of shares from minority stockholders 212.5 - -
Taxes on realization of revaluation reserve 0.8 0.7 0.7
Decrease in minority interest 1.0 13.8 1.5
-------- --------- ---------
351.8 112.7 73.5
-------- --------- ---------
Total uses 650.9 566.6 310.2
-------- --------- ---------
INCREASE (DECREASE) IN WORKING CAPITAL (2.6) (147.9) 112.6
======== ========= =========
REPRESENTED BY
Current assets:
At end of year 1,186.9 1,045.2 1,190.8
At beginning of year 1,045.2 1,190.8 1,112.9
-------- --------- ---------
141.7 (145.6) 77.9
-------- --------- ---------
Current liabilities:
At end of year 468.2 323.9 321.6
At beginning of year 323.9 321.6 356.3
-------- --------- ---------
144.3 2.3 (34.7)
-------- --------- ---------
INCREASE (DECREASE) IN WORKING CAPITAL (2.6) (147.9) 112.6
======== ========= =========
The notes are an integral part of the financial statements.
F-10
ULTRAPAR PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Amounts in millions of Brazilian reais - R$, unless otherwise stated)
-------------------------------------------------------------------------------
1. OPERATIONS
Ultrapar Participacoes S.A. (the "Company" or "Ultrapar") is a holding
company organized under the laws of the Federative Republic of Brazil
which, through its ownership of various operating subsidiaries, is engaged
in the distribution of Liquefied Petroleum Gas (LPG) in Brazil, the
production of chemicals and petrochemicals, and related services such as
the storage and transportation of LPG and chemicals.
The Company purchases the principal raw material, ethylene, for its
chemical and petrochemical business from two of Brazil's three naphtha
crackers (Petroquimica Uniao and Braskem). Petroleo Brasileiro S.A. -
Petrobras is the sole source of supply for naphtha. Petrobras is also the
sole source of supply for LPG in Brazil.
2. PRESENTATION OF THE FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING
POLICIES
These financial statements were prepared in accordance with accounting
practices adopted in Brazil, which include the indexation of permanent
assets and stockholders' equity through December 31, 1995.
These financial statements have been translated into English from the
original financial statements issued in Portuguese. In addition, certain
terminology changes have been made and the notes to the financial
statements have been expanded to conform them more closely to reporting
practices prevailing in the United States of America.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting practices adopted in Brazil to record transactions and
prepare the financial statements comply with those prescribed by Brazilian
corporate law and specific standards established by the Brazilian
Securities Commission (CVM), which differ in certain respects from
accounting principles generally accepted in the United States of America
(U.S. GAAP). See Note 23 for further discussions of the differences and
the reconciliations of stockholders' equity and net income under both sets
of principles.
The following is a summary of significant accounting policies followed in
the preparation of the financial statements:
F-11
a) Consolidation principles
The consolidated financial statements include the accounts of the
Company and all of its subsidiaries in which the Company directly or
indirectly controls more than 50% of the voting share capital, as
listed below. Intercompany investments, asset and liability balances,
income and expenses, as well as the effects arising from significant
intercompany transactions, were eliminated. Minority interest in
subsidiary companies is presented separately in the financial
statements.
Company ownership - % (i)
December
------------------------------
2002 2001
---- ----
Subsidiary companies:
Ultragaz Participacoes S.A. (+) 100 77
Companhia Ultragaz S.A. 86 86
Bahiana Distribuidora de Gas Ltda. 100 100
Utingas Armazenadora S.A. 56 56
LPG International Inc. 100 -
Ultraquimica Participacoes S.A. (+) 100 100
Ultraquimica Florestal Ltda. - 100
Melamina Ultra S.A. Industria Quimica 93 93
Oleoquimica do Nordeste Ltda. 100 100
Oxiteno S.A. - Industria e Comercio (ii) (+) 100 48
Oxiteno International Corporation 100 100
Oxiteno Overseas Co. 100 100
Camacari Renovada S.A. - 100
Oxiteno Nordeste S.A. - Industria e Comercio 99 97
Terminal Quimico de Aratu S.A. - Tequimar (ii) 19 19
Ultracargo Participacoes Ltda. (+) 100 100
Transultra - Armazenamento e Transporte Especializado Ltda. 100 100
Terminal Quimico de Aratu S.A. - Tequimar (ii) 80 80
Ultratecno Participacoes Ltda. (+) 100 100
Ultradata S/C Ltda. (+) - 100
Imaven Imoveis e Agropecuaria Ltda. (+) 100 100
Imaven Importadora e Exportadora Ltda. - 98
(i) Represents total ownership interest in both voting and nonvoting
stock. Indirect interests are stated at the percentage owned by
the direct subsidiary.
(ii) Consolidated since a controlled subsidiary company owns more
than 50% of voting stock.
(+) Direct subsidiary.
In March 2002, the Company's subsidiary Oxiteno S.A. - Industria e
Comercio made a public tender offer to acquire the outstanding shares
of its subsidiary, Oxiteno Nordeste S.A. - Industria e Comercio. This
public tender offer was concluded on April 16, 2002 with the
acquisition of 93,871 shares, representing approximately 73.3% of the
shares held by minority stockholders. Oxiteno S.A. - Industria e
Comercio, which previously held 97% of the total capital of Oxiteno
Nordeste S.A. - Industria e Comercio, increased to 99%.
F-12
On May 22, 2002, the registration of Oxiteno Nordeste S.A. -
Industria e Comercio as a public company with the Brazilian
Securities Commission (CVM) was canceled. The total purchase price in
connection with this transaction amounted to R$ 4.5.
In November 2002, Imaven Importadora e Exportadora Ltda. and Camacari
Renovada S.A. were liquidated, and Ultraquimica Florestal Ltda. and
Ultradata S/C Ltda. were merged into Oleoquimica do Nordeste Ltda.
and Ultraquimica Participacoes S.A., respectively.
b) Cash and cash equivalents
Comprises highly liquid temporary cash investments (with original
maturity dates of three months or less or readily convertible to
cash).
c) Trade accounts receivable
Trade accounts receivable are stated at estimated net realizable
values. The allowance for doubtful accounts is based on the estimated
losses and is considered by management to be sufficient to cover
probable losses on the realization of accounts receivable.
d) Inventories
Are stated at the average cost of acquisition (or production) or at
market, or net realizable values, whichever is lower.
e) Investments in associated companies
Investments in businesses not controlled by the Company, but over
which it has significant influence, are accounted for using the
equity method. See Note 9.
f) Other investments
Other investments are recorded at cost less provision for losses, if
expected to be other than temporary.
g) Property, plant and equipment
Property, plant and equipment are stated at cost historical
monetarily restated through December 31, 1995, and revaluation
adjustments based on appraisal reports issued by independent
appraisers, less accumulated depreciation. Revaluation increments are
credited to the revaluation reserve component of stockholders' equity
and subsequently transferred to retained earnings as the related
assets are depreciated or disposed.
Depreciation is calculated on the straight-line basis at the annual
rates described in Note 10, based on the estimated useful lives of
the assets.
F-13
h) Deferred charges
Deferred charges mainly consist of costs incurred in the
implementation of projects to install equipment at customers'
facilities (Ultrasytem) and projects to modernize systems
(implementation of Oracle System), as mentioned in Note 11.
i) Income taxes
Income and social contribution taxes (a federally mandated tax based
on income) are accrued on taxable results at the applicable tax
rates.
The accrual for income tax includes the effects of tax holidays,
where applicable. Deferred income and social contribution taxes on
temporary differences are recognized in accordance with CVM
Resolution No. 273/98.
j) Compensated absences
The liability for future compensation for employee vacations is fully
accrued as earned.
k) Assets and liabilities denominated in foreign currency or subject to
indexation
Assets and liabilities denominated in foreign currencies are
translated into reais at the exchange rate reported by the Brazilian
Central Bank (BACEN) at each balance sheet date. Exchange gains and
losses are recognized in income.
Assets and liabilities denominated in reais and contractually or
legally subject to indexation are restated to the balance sheet date
by applying the corresponding index, with related gains and losses
recognized in income.
l) Revenues and expenses
Revenues from sales are recognized when products are delivered to the
customer or services performed and the transfer of risks, rights and
obligations associated with the ownership of products take place.
Expenses are accounted for on the accrual basis. Advertising
expenses, which are expensed as incurred, amounted to R$ 8.8, R$ 6.6
and R$ 3.4 for the years ended December 31, 2002, 2001 and 2000,
respectively. Shipping and handling costs, classified as selling
expenses and expensed as incurred amounted to R$ 45.0, R$ 37.4 and R$
31.2 for the years ended December 31, 2002, 2001 and 2000,
respectively.
m) Cost of sales and services
Costs of sales and services rendered include the cost of LPG,
chemical and petrochemical products, distribution, transportation and
filling costs.
n) Earnings per share
Earnings per share are calculated based on the annual weighted
average of total number of shares outstanding during each of the
years where such earnings are reported.
F-14
o) Use of estimates
The preparation of financial statements in accordance with accounting
practices adopted in Brazil requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses for the periods presented. Although
these estimates are based on management's best available knowledge of
current and expected future events, actual results could be different
from those estimates.
4. CORPORATE REORGANIZATION
In 2002, the Company effected a corporate reorganization, disclosed in a
press release published on October 15, 2002, and approved at the
Extraordinary Stockholders' Meeting held on October 30, 2002. This
reorganization was primarily intended to: (i) streamline the corporate
structure of subsidiaries and associated companies, (ii) reduce cost, and
(iii) obtain concentration of capital market liquidity in one company.
The main effects of the reorganization were:
I) Merger of Gipoia Participacoes Ltda. (an entity under common control
of the controlling shareholder of the Company): increase of the
Company's interest in Ultragaz Participacoes S.A., from 77% to 100%
of total capital, with the issuance of 7,850,603,880 common shares.
II) Merger of Oxiteno S.A. - Industria e Comercio shares: increase of the
Company's interest in Oxiteno S.A. - Industria e Comercio, from 48%
to 100% of total capital. With the merger, 5,430,005,398 common
shares and 3,410,659,550 preferred shares were issued by the Company
to the non-controlling stockholders of Oxiteno S.A. - Industria e
Comercio, who opted to remain with the Company in exchange for
shares. Stockholders of Oxiteno S.A. - Industria e Comercio, who
opted not to remain with the company, were paid a total of R$ 208.0,
net of withholding income tax.
The corporate reorganization was based on the balance sheets of Gipoia
Participacoes Ltda. and Oxiteno S.A. - Industria e Comercio as of June 30,
2002. In accordance with the merger terms and conditions, the Company
included 100% of results of Ultragaz Participacoes S.A. and Oxiteno S.A. -
Industria e Comercio in its results of operations beginning July 1, 2002.
F-15
5. CASH AND CASH EQUIVALENTS
These investments, contracted with banks of good standing, are comprised
substantially of fixed income securities, funds linked to interbank
deposit (CDI) rates and currency hedge, which are stated at cost plus
accrued income (on a "pro rata temporis" basis).
2002 2001
-------- --------
Fixed income securities and funds 417.9 556.7
Foreign investments (*) 127.0 81.1
Bills of exchange - 2.3
Currency hedge (**) 39.5 (19.8)
Cash 53.5 35.7
-------- --------
637.9 656.0
======== ========
(*) Investments made by the indirect subsidiary Oxiteno Overseas Co.,
principally in money market funds.
(**) Accumulated gains or losses on swap positions. The total amount
hedged through these swaps is US$ 104.7.
6. ACCOUNTS RECEIVABLE
2002 2001
-------- --------
Local customers 246.0 148.4
Foreign customers 81.4 59.8
(-) Advances on foreign exchange contracts (43.4) (49.6)
(-) Allowance for doubtful accounts (12.4) (9.4)
-------- --------
271.6 149.2
======== ========
7. INVENTORIES
2002 2001
-------- --------
Finished products 67.6 59.6
Raw materials 20,1 15.4
Liquefied Petroleum Gas (LPG) 7.9 7.8
Supplies and cylinders for resale 10.7 11.7
-------- --------
106.3 94.5
======== ========
F-16
8. RECOVERABLE TAXES
Represented, substantially, by credit balances of State Value-Added Tax
(ICMS), Federal Excise Tax (IPI), and prepaid income and social
contribution taxes, which can be offset against future taxes payable.
2002 2001
-------- --------
Income and social contribution taxes 68.3 54.1
State Value-Added Tax - ICMS 42.6 59.6
Federal Excise Tax - IPI 1.9 6.2
Other 2.3 1.3
-------- --------
115.1 121.2
======== ========
9. INVESTMENTS IN ASSOCIATED COMPANIES
A summary of financial information for the Company's equity investments is
as follows:
2002
---------------------------------------------------------------------
Quimica da
Plenogas Oxicap Nordeste Bahia
Distribuidora Industria de Quimica S.A. - Industria e
de Gas S.A. Gases Ltda. Norquisa Comercio S.A.
---------------------------------------------------------------------
Number of shares or quotas held 1,384,308 125 60,426,077 3,174,500
Adjusted net equity - R$ - 2.5 - 10.1
Loss for the year - R$ - (0.3) - -
Ownership percentage - % 33.33 25.00 8.73 45.56
2002
---------------------------------------------------------------------------------------
Fabrica Quimica da
Plenogas Oxicap Carioca de Nordeste Bahia
Distribuidora Industria de Catalizadores Quimica S.A. - Industria e
de Gas S.A Gases Ltda. S.A.-FCC Norquisa Comercio S.A. Total
---------------------------------------------------------------------------------------
Changes in investments:
Balance at the beginning of the year - 0.7 15.4 42.3 4.6 63.0
Write-off of revaluation reserve - - (2.7) - - (2.7)
Dividends received - - (0.4) - - (0.4)
Equity pick-up - (0.1) (1.0) - - (1.1)
Cost of investments sold - - (11.3) - - (11.3)
Allowance for loss - - - (40.6) - (40.6)
---------------------------------------------------------------------------------------
Balance at the end of the year - 0.6 - 1.7 4.6 6.9
=======================================================================================
F-17
2001
----------------------------------------------------------------------------------
Fabrica Quimica da
Plenogas Oxicap Carioca de Nordeste Bahia
Distribuidora Industria de Catalizadores Quimica S.A. - Industria e
de Gas S.A. Gases Ltda. S.A.-FCC Norquisa Comercio S.A.
----------------------------------------------------------------------------------
Number of shares or quotas held 1,384,308 125 125,536,199 60,426,077 3,174,500
Adjusted net equity - R$ - 2.8 77.0 486.8 10.1
Net income (loss) for the year - R$ - (0.3) 10.9 (4.6) -
Ownership percentage - % 33.33 25.00 20.00 8.73 45.56
2001
---------------------------------------------------------------------------------------
Fabrica Quimica da
Plenogas Oxicap Carioca de Nordeste Bahia
Distribuidora Industria de Catalizadores Quimica S.A. - Industria e
de Gas S.A Gases Ltda. S.A.-FCC Norquisa Comercio S.A. Total
---------------------------------------------------------------------------------------
Changes in investments:
Balance at the beginning of the year - 0.7 12.1 43.7 4.6 61.1
Write-off of revaluation
reserve - - - (0.3) - (0.3)
Dividends received - - (0.9) (0.4) - (1.3)
Equity pick-up - - 4.2 (0.7) - 3.5
---------------------------------------------------------------------------------------
Balance at the end of the year - 0.7 15.4 42.3 4.6 63.0
=======================================================================================
2000
----------------------------------------------------------------------------------
Fabrica Quimica da
Plenogas Oxicap Carioca de Nordeste Bahia
Distribuidora Industria de Catalizadores Quimica S.A. - Industria e
de Gas S.A. Gases Ltda. S.A.-FCC Norquisa Comercio S.A.
----------------------------------------------------------------------------------
Number of shares or quotas held 1,384,308 125 125,536,199 60,426,077 3,174,500
Adjusted net equity - R$ - 2.8 60.7 499.5 10.1
Net income (loss) for the year - R$ - (0.3) 2.4 65.1 -
Ownership percentage - % 33.33 25.00 20.00 8.73 45.56
2000
---------------------------------------------------------------------------------------
Fabrica Quimica da
Plenogas Oxicap Carioca de Nordeste Bahia
Distribuidora Industria de Catalizadores Quimica S.A. - Industria e
de Gas S.A Gases Ltda. S.A.-FCC Norquisa Comercio S.A. Total
---------------------------------------------------------------------------------------
Changes in investments: -
Balance at the beginning of the year - 0.2 8.9 36.1 4.6 49.8
Capital increase - 0.6 - - - 0.6
Equity pick-up - (0.1) 3.2 7.6 - 10.7
---------------------------------------------------------------------------------------
Balance at the end of the year - 0.7 12.1 43.7 4.6 61.1
=======================================================================================
In the financial statements, the investments of subsidiary Oxiteno S.A. -
Industria e Comercio, in Oxicap Industria de Gases Ltda. and Quimica da
Bahia Industria e Comercio S.A. are accounted for under the equity method
based on their financial statements as of November 30, 2002, and the
investment in the associated company Nordeste Quimica S.A. - Norquisa is
accounted for under the equity method through July 31, 2001, based on the
degree of management influence, as established by CVM Instruction No.
247/96, net of the allowance for loss on realization in the amount of R$
40.6 (see Note 17).
F-18
In November 2002, the Company sold its investment in associated company
Fabrica Carioca de Catalisadores S.A. - FCC for R$ 30.7.
10. PROPERTY, PLANT AND EQUIPMENT
2002 2001
----------------------------------- -----------------------------------
Annual Cost, Cost,
depreciation including Accumulated including Accumulated
rates - % revaluations depreciation Net revaluations depreciation Net
------------ ------------ ------------ ----- ------------ ------------ -----
Land 47.2 - 47.2 39.1 39.1
Buildings 4 321.1 (109.9) 211.2 302.2 (97.7) 204.5
Machinery and equipment 5 to 10 571.8 (287.0) 284.8 521.7 (249.7) 272.0
Gas tanks and cylinders 10 197.7 (91.0) 106.7 175.0 (80.9) 94.1
Vehicles 20 to 30 107.5 (72.4) 35.1 90.6 (60.4) 30.2
Furniture and fixtures 10 11.9 (4.2) 7.7 10.0 (3.2) 6.8
Construction in progress - 39.9 - 39.9 35.3 - 35.3
Other 10 to 20 72.7 (25.8) 46.9 42.9 (17.0) 25.9
---------- ---------- -------- ---------- ---------- --------
1,369.8 (590.3) 779.5 1,216.8 (508.9) 707.9
========== ========== ======== ========== ========== ========
Capitalized interest amounted to R$ 6.6, R$ 7.1 and R$ 7.6 for the years
ended December 31, 2002, 2001 and 2000, respectively.
Construction in progress refers mainly to renovations of industrial
complexes of subsidiaries. Other items primarily comprise computer
equipment and commercial property rights.
On July 11, 2002, the indirect subsidiary Terminal Quimico de Aratu S.A. -
Tequimar won the auction and signed a contract for use of the site on
which it operates the Aratu Terminal for another 20 years, renewable for
the same period. The price paid by Tequimar in this transaction amounted
to R$ 12.0, and will be amortized over 40 years, equivalent to annual
amortization of R$ 0.3. In the course of this negotiation, Tequimar
obtained a reduction of approximately R$ 0.2 in the annual cost of leasing
this area.
11. DEFERRED CHARGES
Represented substantially by costs incurred in the implementation of
systems modernization projects - R$ 19.9 (R$ 11.0 in 2001), being
amortized over five to ten years, and expenditures for the installation of
Ultrasystem equipment at customers' locations - R$ 58.0 (R$ 55.9 in 2001),
being amortized over three years, which is the average life of the
respective LPG supply contracts with these customers.
F-19
12. FINANCINGS
a) Composition
Index/ Annual interest
Description 2002 2001 Currency rate - % Maturity and amortization
------------------------------- ------ ------ ------------- ----------------- ---------------------------------
Foreign currency:
Eurobonds - 139.6 US$ 9.0 See d) below
International Finance
Corporation - IFC 17.7 23.3 US$ 9.38 Semiannually to 2003
Syndicated loan 212.5 - US$ 7.15 Semiannually to 2004
Financing for inventories
and property additions 3.8 8.7 US$ From 1.75 to 6.01 Semiannually and annually to 2003
Advances on foreign exchange
contracts 73.9 33.6 US$ From 3.04 to 10.5 Maximum of 219 days
National Bank for Economic
and Social Development
(BNDES) - EXIM 17.8 - US$ 5.25 Quarterly to 2003
Export prepayments 23.2 - US$ From 8.0 to 16.3 Semiannually and annually to 2003
------ ------
Subtotal 348.9 205.2
------ ------
Local currency:
National Bank for Economic Monthly, quarterly and
and Social Development 182.0 169.9 TJLP + IGP-M From 1.5 to 6.5 semiannually to 2008
(BNDES) 28.9 10.4 UMBNDES From 10.57 to 12.47 Monthly to 2007
FINAME 23.6 27.7 TJLP From 1.8 to 4.4 Monthly to 2007
Onlending operations - 1.5 TJLP 4.0 Monthly to 2002
------ ------
Subtotal 234.5 209.5
------ ------
Total financing 583.4 414.7
------ ------
Current (219.8) (124.5)
------ ------
Long-term 363.6 290.2
====== ======
TJLP = long-term interest rate
IGP-M = general market price index
UMBNDES = BNDES monetary unit. This is a "basket"of currencies, representing the composition of BNDES's debt.
FINAME = government agency for machinery and equipment financing
b) Annual maturities of financings
2002
---------
2003 219.8
2004 273.3
2005 43.1
2006 32.5
2007 12.9
Thereafter 1.8
---------
583.4
=========
F-20
c) Collateral
December 31
---------------------
2002 2001
-------- --------
Amount of borrowings secured by:
Property, plant and equipment 26.8 36.4
Shares of associated companies 18.2 16.3
Minority stockholder guarantees 42.2 60.6
-------- --------
87.2 113.3
======== ========
Other loans are guaranteed either by the Company (see Note 14.d), or
by the future flow of export.
d) Covenants
With respect to the loan from the IFC, the subsidiary Oxiteno
Nordeste S.A. - Industria e Comercio has entered into covenants which
limit indebtedness of such subsidiary and of Oxiteno S.A. - Industria
e Comercio (guarantor of the loan), impose conditions for
transactions with affiliates and subsidiaries of Oxiteno Nordeste and
Oxiteno, and for dividends, establish liens, and limit transactions
with stockholders, certain investments, and defined consolidations,
mergers and asset sales. The subsidiaries are in compliance with such
covenants and believe that they do not significantly restrict the
ability to manage their activities.
e) Eurobonds
The US$ 60 million 9% notes issued by the subsidiary, Companhia
Ultragaz S.A. (jointly, severally and unconditionally guaranteed by
the Company and Ultragaz Participacoes S.A.), which were due in 2005
and had a put/call exercisable in 2002, were purchased in June 2002
by the indirect subsidiary, LPG International Inc. using funds
obtained from a syndicated loan maturing in August 2004.
13. STOCKHOLDERS' EQUITY
a) Capital
The Company is a listed corporation with shares traded on the Sao
Paulo and New York Stock Exchanges. Subscribed and paid-up capital is
represented by 69,691,268,828 shares without par value, consisting of
51,264,621,778 common and 18,426,647,050 preferred shares.
On December 31, 2002, 4,112,155,000 preferred shares were outstanding
in the New York Stock Exchange - NYSE, in the form of American
Depositary Receipts - ADRs. The following table shows the effects of
the corporate reorganization detailed in Note 4.
F-21
Number of shares
Capital - -----------------------------------
Events R$ millions Common Preferred Total
---------------------------------------- ----------- -------------- -------------- --------------
At December 31, 2001 433.9 37,984,012,500 15,015,987,500 53,000,000,000
Shares issued for:
Merger of Gipoia Participacoes Ltda. 38.5 7,850,603,880 - 7,850,603,880
Merger of shares of Oxiteno
S.A. - Industria e Comercio 191.6 5,430,005,398 3,410,659,550 8,840,664,948
----- ------------- ------------- -------------
At December 31, 2002 664.0 51,264,621,778 18,426,647,050 69,691,268,828
===== ============== ============== ==============
Preferred shares are nonconvertible into common shares and nonvoting,
entitle their holders to dividends at least 10% higher than those
attributable to common shares, and have priority in capital
redemption, without premium, in the event of liquidation of the
Company.
b) Treasury shares
The Company is authorized to acquire its own shares at market price,
without capital reduction, to be held in treasury.
In 2002, preferred shares were acquired at the average price of R$
19.67 per thousand shares, and, after the corporate reorganization,
20,199,760 shares were held in treasury as of December 31, 2002.
c) Revaluation reserve
This reserve reflects the revaluation write-up of assets of
subsidiary and associated companies; realization occurs on
depreciation, write-off or sale of the revalued assets and is
transferred to retained earnings, net of the related tax effects.
The realized portion of the revaluation reserve, based on
depreciation, write-off or sale of the revalued assets of subsidiary
and associated companies, is transferred to retained earnings,
together with the corresponding tax effects recorded by the
subsidiary and associated companies.
In some cases, the taxes on the revaluation reserve of certain
subsidiary and associated companies are recognized only on
realization of this reserve, because the revaluations occurred prior
to the publication of CVM Deliberation No. 183/95. The unrecognized
deferred tax charges on these reserves total R$ 8.6 (R$ 9.3 in 2001).
d) Profit reserves
Legal reserve
-------------
Under Brazilian corporate law, the Company is required to appropriate
5% of annual earnings to a legal reserve, until the balance reaches
20% of capital stock. This reserve may be used to increase capital or
absorb losses, but may not be distributed as dividends.
F-22
Reserve for unrealized profits
------------------------------
This reserve is primarily comprised of undistributed equity earnings
of subsidiaries and is established in conformity with article 197 of
Brazilian corporate law; realization normally occurs on receipt of
dividends or sale or write-off of investments.
Reserve for retention of profits
--------------------------------
This reserve is supported by the investment program, in conformity
with article 196 of Brazilian corporate law (as demonstrated in item
e) below) and includes, both, a portion of net income and realization
of revaluation reserves.
e) Dividends
Stockholders are entitled to minimum annual dividend of 50% of
adjusted net income, calculated under the terms of Brazilian
corporate law.
Proposed dividends as stated in the Company's financial statements,
subject to approval at the Stockholders' Annual Meeting, are
calculated under the terms of Brazilian corporate law, particularly
articles 196 and 197, as follows:
2002
--------
Net income 222.3
Legal reserve (11.1)
Retention of profits - article 196 (105.6)
--------
Compulsory dividends 105.6
Reserve for unrealized profits (40.6)
Interim dividends (20.0)
Proposed dividends payable (45.0)
--------
-
========
Management proposes to transfer a portion of net income to the
"Reserve for retention of profits", in order to support the business
expansion project established in its investment plan.
Of the total amount of dividends the Company has distributed R$ 20.0
on an interim basis and R$ 45.0 remain payable as of December 31,
2002.
F-23
14. CONTINGENCIES AND COMMITMENTS
a) Disputed taxes, contributions and labor claims
The Company and its subsidiaries are contesting the payment of
certain taxes and contributions and have made escrow deposits of
amounts pending final legal decisions. In addition, the Company and
its subsidiaries are exposed to labor claims filed by former
employees. Management believes that the accrued liability for legal
proceedings and accumulated interest, which is recorded in other
liabilities, is sufficient to meet probable and reasonably estimable
losses in the event of unfavorable rulings on these matters.
Although there can be no assurance that the Company will prevail in
every case, management does not believe that the ultimate disposition
of tax, legal and labor contingencies not provided for will have a
material effect on the Company's financial condition or results of
operations.
Escrow deposits and accrual for probable losses based on the advice
of external legal counsel, are summarized below:
2002 2001
------------------------ -----------------------
Escrow Provision Escrow Provision
deposits made deposits made
-------- --------- -------- ---------
Income tax - - 0.1 0.7
Social contribution - 2.9 - 10.4
Labor claims 4.5 1.5 4.9 0.4
Taxes on revenues 0.1 23.7 0.1 50.9
Other 2.4 - 1.6 -
-------- -------- -------- --------
7.0 28.1 6.7 62.4
======== ======== ======== ========
The Company and its subsidiaries obtained preliminary injunctions to
pay taxes on revenues (PIS and COFINS) without the changes introduced
by Law No. 9,718/98, which increased the COFINS tax rate by 1%, as
well as the extended incidence of PIS and COFINS on other revenues.
The principal issue, however, concerned the collection of these taxes
by the refinery that supplies LPG using the tax substitution system
on behalf of the subsidiary companies, Companhia Ultragaz S.A. and
Bahiana Distribuidora de Gas Ltda. The tax substitution method, which
increased the calculation basis of PIS and COFINS by four times the
LPG price changed by the refineries, continued until June 30, 2000,
when the rates of these taxes were increased for the refineries and
reduced to zero for distributors.
However, based on legal counsel's opinion, Company management opted
to pay, on November 26, 2002, the amounts previously accrued for the
PIS and COFINS tax substitution, as well as the increase of 1% in the
COFINS rate, taking advantage of the benefit provided in Executive
Act No. 75 of October 24, 2002.
The Company and its subsidiaries are still challenging the incidence
of these taxes on other revenues. The unpaid amounts were accrued in
the financial statements of the Company and its subsidiaries in the
total of R$ 23.7 (R$ 49.3 in 2001).
F-24
The indirect subsidiary Terminal Quimico de Aratu S.A. - Tequimar
obtained a favorable decision on its lawsuit contesting the payment
of the social contribution tax introduced by Law No. 7,689/88. The
subsidiary obtained a favorable decision, however the Federal
Government filed a motion for a new trial to reverse the previous
decision. Based on legal counsel's opinion and the outcome of recent
cases judged by the Federal Supreme Court, the subsidiary opted to
pay this tax on July 31, 2002, using the tax benefit provided by
Executive Act No. 38 of May 14, 2002, and Federal Revenue Authority
Regulation No. 900 of July 19, 2002.
The Petrochemical Industry Labor Union, which represents the
employees of the indirect subsidiary Oxiteno Nordeste S.A. -
Industria e Comercio, filed class action suits against the Company in
1991 demanding compliance with the adjustments established in
collective labor agreements or other specific indices, in lieu of the
salary policies effectively practiced by the Company. Based on the
opinion of its legal advisors, who analyzed the final ruling of the
Federal Supreme Court (STF) on the class action suit in which the
labor union is a plaintiff, as well as the status of the specific
suit against the indirect subsidiary, management does not believe
that it is necessary to record a provision at December 31, 2002.
The Company and its subsidiary companies have other ongoing
administrative and judicial suits, which the internal and external
legal advisors consider to be of low or remote risk; therefore, no
provisions for possible losses on these cases have been recorded.
b) Environmental issues
The Company and its subsidiaries are subject to federal, state and
local laws and regulations relating to the environment. These laws
generally provide for control of air and effluent emissions and
require responsible parties to undertake remediation of hazardous
waste disposal sites. Civil penalties may be imposed for
noncompliance. The Company provides for remediation costs and
penalties when a loss is probable and the amount is reasonably
determinable. It is not presently possible to estimate the amount of
all remediation costs that might be incurred or penalties that may be
imposed; however, management does not presently expect that such
costs and penalties, to the extent not previously provided for, will
have a material effect on the Company's consolidated financial
position or results of operations.
At present, management is not aware of unasserted environmental
claims or assessments.
F-25
c) Take or pay commitments
The subsidiary Terminal Quimico de Aratu S.A - Tequimar has contracts
with CODEBA - Companhia Docas do Estado da Bahia and Suape - Complexo
Industrial Portuario Governador Eraldo Gueiros, in connection with
its harbor facilities in Aratu and Suape, respectively. Such
contracts establish minimum movement of products of 1,000,000 tons
per year for Aratu effective through 2022 and 250,000 tons per year
for Suape effective through 2027. If annual movement is less than the
minimum required, the subsidiary is obligated to pay the difference
between the actual movement and the minimum contractual movement
using the harbor duty rates in effect at the date established for
payment. As of December 31, 2002, such rates were R$ 3.67 and R$ 3.44
per tons for Aratu and Suape, respectively. The Company has been in
compliance with the minimum movements of products in connection with
these contracts since their inception.
The indirect subsidiary Oxiteno Nordeste S.A. - Industria e Comercio
has a supply contract with Braskem S.A. (formerly, of Copene
Petroquimica do Nordeste S.A.) effective through 2012, which
establishes a minimum annual ethylene consumption level. The minimum
purchase commitment and the actual demand for the years ended
December 31, 2002 and 2001, expressed in tons of ethylene, are
summarized below. If the minimum purchase commitment is not met, the
subsidiary is liable for a fine of 40% of the current ethylene price
for the quantity not purchased.
Actual demand
Minimum purchase ----------------------------------------------------
commitment 2002 2001 2000
---------------- ---------- ---------- ----------
In tons 137,900 164,354 184,772 173,067
============ ========== ========== ==========
d) Responsibilities for sureties and guarantees
The Company is responsible for sureties and guarantees offered to
subsidiary companies amounting to R$ 359.6 as of December 31, 2002.
F-26
15. FINANCIAL INCOME AND EXPENSES
2002 2001 2000
--------- --------- ---------
Financial income:
Interest on cash and cash equivalents 188.2 103.3 126.0
Monetary variation and foreign exchange gains 44.6 12.2 6.0
Interest from customers 3.8 4.0 1.6
Other 1.4 1.2 6.4
--------- --------- ---------
238.0 120.7 140.0
========= ========= =========
Financial expenses:
Interest on loans (56.3) (51.3) (52.4)
Banking charges (4.1) (4.2) (3.9)
Indexation charges and foreign exchange losses (112.2) (61.0) (18.3)
CPMF, PIS, COFINS and IOF taxes on financial transactions (32.9) (29.0) (21.2)
Other (4.0) (6.3) (0.8)
--------- --------- ---------
(209.5) (151.8) (96.6)
========= ========= =========
16. RISKS AND FINANCIAL INSTRUMENTS
The principal risk factors, to which the Company and the subsidiary
companies are exposed reflect strategic-operating and economic-financial
aspects. The strategic-operating risks (such as demand, competition,
technology and innovation, relevant structural changes in the industry,
etc.) are addressed by the Company's management model. The
economic-financial risks mainly reflect customer defaults, macroeconomic
variables such as foreign exchange and interest rates, as well as the
characteristics of the financial instruments used by the Company. These
risks are managed through control policies, specific strategies and the
determination of limits, as follows:
o Customer default - These risks are managed by specific policies for
accepting customers and credit analysis and are mitigated by
diversification of sales. Oxiteno S.A. - Industria e Comercio and
Oxiteno Nordeste S.A. - Industria e Comercio have recorded allowances
of R$ 6.8 (R$ 9.4 in 2001) for probable losses on receivables.
Additionally, Companhia Ultragaz S.A., in response to a market
situation of sharply increased prices and reduced volumes,
implemented stricter monitoring of its customers' financial
situations, resulting in the recording of an allowance for probable
losses of R$ 8.3 on the realization of its accounts receivable.
o Interest rates - The Company and its subsidiaries adopt conservative
policies to obtain and invest funds and to minimize the cost of
capital. The short-term investments of the Company and its
subsidiaries are comprised substantially of transactions linked to
interbank deposit (CDI) rates. A portion of the financial assets is
destined for foreign currency hedges, as described below. Funds
obtained originate from BNDES financing and from abroad, as described
in Note 12.
F-27
o Exchange rate - Basically, the subsidiaries use foreign currency
hedge instruments available in the financial market to cover their
liabilities denominated in foreign currencies. Given the volatility
of exchange rates during 2002, the Company fully hedged its foreign
currency exposure. Such hedges have amounts, periods and indices
equivalent to bank loans denominated in foreign currencies, to which
they are linked. The following summary shows the Company's foreign
currency assets and liabilities, translated into Brazilian reais at
December 31, 2002:
Book value Book value
---------- ----------
2002 2001
Assets:
Currency swap transactions and interest 381.0 213.4
Foreign cash and cash equivalents 127.3 81.2
Receivables from foreign customers, net of advances
on export contracts 38.0 10.2
---------- ----------
Total 546.3 304.8
---------- ----------
Liabilities:
Foreign currency financing 348.9 205.2
Import transactions payables 12.5 12.2
---------- ----------
Total 361.4 217.4
---------- ----------
Net asset position 184.9 87.4
========== ==========
The exchange variation on cash and cash investments of the subsidiary
Oxiteno Overseas Co. was recorded as financial income in the
statement of income for the years ended 2002, 2001 and 2000, in the
amount of R$ 44.1, R$ 12.8 and R$ 5.6, respectively. The Company and
its subsidiaries recorded in income the net effect of the devaluation
of the Brazilian real in 2001, and did not use the deferral option
provided for by CVM Resolution No. 404/01. Except for the interest
held by Oxiteno S.A. - Industria e
Comercio in Petroquimica Uniao S.A., mentioned below, the other
financial instruments recorded in the financial statements as of
December 31, 2002 were accounted for in conformity with the
accounting criteria and practices described in these notes.
The investment in Petroquimica Uniao S.A., representing 1.95% of
total capital, was acquired at a privatization auction held in 1994,
and is presented in the financial statements at cost restated through
December 31, 1995, amounting to R$ 18.7. The market value of this
investment at December 31, 2002, based on the quotation of the
investee's shares in the Sao Paulo Stock Exchange, was approximately
R$ 12.6.
Management believes that no valuation provision is necessary for this
investment, in view of its clear strategic and permanent nature,
since the investee is an important supplier of raw material to
Oxiteno S.A. - Industria e Comercio. Also, the acquisition of this
investment was made using long-term financing from BNDES, at
favorable interest rates compared to those prevailing in the market.
F-28
17. NON-OPERATING EXPENSES, NET
Comprised substantially of the provision for loss, in the amount R$ 40.6,
on the investment of Oxiteno Nordeste S.A. - Industria e Comercio in
Nordeste Quimica S.A. - Norquisa, which reflects the estimated market
value of the assets as well as the results on sales of permanent assets,
especially on sales of cylinders and of the indirect participation in
Fabrica Carioca de Catalisadores S.A. - FCC.
18. INSURANCE COVERAGE
Ultrapar maintains insurance coverage in amounts considered sufficient to
cover losses from eventual damage to assets, as well as civil
responsibility for involuntary, material and/or physical damages caused to
third parties arising from its industrial and commercial operations,
considering the nature of its activities and the advice of its insurance
consultants.
19. RELATED COMPANIES
2002
----------------------------------------------------
Loans Trade accounts
------------------------ ----------------------
Assets Liabilities Receivable Payable
-------- ----------- ---------- -------
Serma Associacao dos Usuarios de Equipamentos de
Processamento de Dados e Servicos Correlatos 0.8 2.3 - 0.4
Petroquimica Uniao S.A. - - - 3.6
Oxicap Industria de Gases Ltda. - - - 0.5
Agip do Brasil S.A. - - 0.2 -
Quimica da Bahia Industria e Comercio S.A. - 6.6 - -
Petroleo Brasileiro S.A. - Petrobras - - - 13.9
Copagaz Distribuidora de Gas S.A. - - 0.1 -
Braskem S.A. - - - 13.1
Supergasbras Distribuidora de Gas S.A. - - 0.1 -
Cia. Termeletrica do Planalto Paulista - TPP 1.0 - - -
Plenogas Distribuidora de Gas S.A. - 1.0 - -
Other related companies 0.8 0.3 0.1 0.4
-------- -------- -------- --------
Total at December 31, 2002 2.6 10.2 0.5 31.9
======== ======== ======== ========
Total at December 31, 2001 1.7 11.0 0.6 42.6
======== ======== ======== ========
F-29
2002
----------------------------------------
Transactions
----------------------------------------
Financial
income
Sales Purchases (expenses)
-------- --------- --------
Petroquimica Uniao S.A. - 64.5 -
Oxicap Industria de Gases Ltda. - 4.9 -
Agip do Brasil S.A. 3.3 - -
Quimica da Bahia Industria e Comercio S.A. - - (0.6)
Petroleo Brasileiro S.A. - Petrobras - 1,334.8 -
Petrogaz Distribuidora S.A. 0.6 2.2 -
Copagaz Distribuidora de Gas S.A. 1.1 - -
Braskem S.A. 38.6 271.2 -
Supergasbras Distribuidora de Gas S.A. 1.9 - -
Cia. Termeletrica do Planalto Paulista - TPP - - 0.2
Other related companies 1.4 1.1 -
-------- -------- --------
Total - 2002 46.9 1,678.7 (0.4)
======== ======== ========
Total - 2001 18.3 1,236.2 (0.5)
======== ======== ========
Total - 2000 9.6 977.9 (0.5)
======== ======== ========
The loan balances with Quimica da Bahia Industria e Comercio S.A. and with
Cia. Termeletrica do Planalto Paulista - TPP are indexed to the Long-term
Interest Rate (TJLP). The other loans do not have financial charges nor
maturity dates. Sale and purchase transactions are principally related to
the purchase of raw materials, other materials and storage services, which
occur based on normal arm's length prices and market conditions.
20. INCOME TAXES
a) Deferred income and social contribution taxes
The Company and its subsidiaries recognize deferred tax assets and
liabilities, arising from tax operating losses, temporary
differences, inflationary profit, revaluation of property, plant and
equipment and others, based on the assumption that deferred tax
assets will be realized through future operating profitability.
Management expects to realize these deferred tax assets over a
maximum period of three years. Deferred income and social
contribution taxes arise from the following principal temporary
differences:
F-30
2002 2001
-------- --------
Noncurrent assets:
Deferred income and social contribution taxes on:
Accruals that will be tax-deductible only when the
expenses are incurred 27.6 24.1
Income and social contribution tax loss carryforwards 5.7 3.2
-------- --------
33.3 27.3
======== ========
Long-term liabilities:
Deferred income and social contribution taxes on:
Revaluation of property, plant and equipment 2.1 2.5
Income earned abroad 32.7 21.5
-------- --------
34.8 24.0
======== ========
b) Income tax reconciliation
Income and social contribution taxes are reconciled to statutory tax
rates as follows:
2002 2001 2000
-------- -------- --------
Income before taxes, equity in earnings and minority interest 350.0 230.8 240.4
Statutory tax rates - % 34.0 34.0 34.0
-------- -------- --------
Income and social contribution taxes at statutory tax rate (119.0) (78.5) (81.7)
Adjustments to reconcile the statutory tax rate to the
effective tax rate:
Operating provisions and nondeductible expenses/
nontaxable revenues (1.2) 6.2 (1.5)
Adjustments to estimated income 3.1 3.4 3.0
Realization of inflationary profit - 2.0 -
Interest on capital paid 0.2 10.5 5.4
Others 0.1 1.3 (2.7)
-------- -------- --------
Income and social contribution taxes before tax credits (116.8) (55.1) (77.5)
Tax credits:
Workers' meal program (PAT) 0.7 0.3 0.5
Cultural incentives 1.2 0.3 -
Benefits of tax holidays 43.5 27.0 29.7
-------- -------- --------
Income and social contribution taxes per statement of income (71.4) (27.5) (47.3)
======== ======== ========
Current (110.1) (58.4) (81.7)
Deferred (4.8) 3.9 4.7
Benefits of tax holidays 43.5 27.0 29.7
F-31
c) Tax loss carryforwards
At December 31, 2002 the Company has a full valuation allowance
against deferred tax assets of certain subsidiaries with limited
prospects of generating taxable income, which amount to R$ 1.3 (R$
3.4 in 2001) with respect to income tax loss carryforwards and R$ 0.3
(R$ 0.8 in 2001) with respect to social contribution losses.
Tax loss carryforwards may be used to offset up to 30% of taxable
income for future periods and do not expire.
d) Tax exemption
The following indirect controlled companies enjoy partial or total
exemption of federal income tax in connection with a governmental
program for the development of the Northeast Region of Brazil, as
follows:
Exemption Expiration
Subsidiary Units - % date
-------------------------------------------- ---------------------------- --------- ----------
Oxiteno Nordeste S.A. - Industria e Comercio Camacari plant 100 2006
Bahiana Distribuidora de Gas Ltda. Mataripe base 100 2003
Juazeiro base 100 2004
Suape base 100 2007
Terminal Quimico de Aratu S.A. - Tequimar Aratu Terminal 100 2003
Suape Terminal (acetic acid
and butadiene byproducts) 100 2005
Tax benefits from income tax exemption are recorded in a specific
capital reserve account in stockholders' equity by the subsidiaries.
In the consolidated statements of income, these benefits are reported
as "benefit of tax holidays".
Bahiana Distribuidora de Gas Ltda. has certain requests under
analysis by Federal Revenue authorities relating to the Ilheus and
Aracaju bases which, once approved, will represent a reduction of
37.5% of income tax starting in 2003.
21. STOCK OPTION PLAN
At the General Ordinary and Extraordinary Stockholders' Meeting held on
April 27, 2001, the stockholders approved the Stock Option Plan, to be
offered to managers and employees in positions of responsibility of the
Company and its subsidiaries. No options had been granted under this plan
up to December 31, 2002.
F-32
22. EMPLOYEE BENEFITS AND PRIVATE PENSION PLAN
The Company and its subsidiaries offer benefits to their employees, such
as life insurance, health care and a pension plan. In addition, they offer
loans for the acquisition of vehicles and personal computers to employees
of certain subsidiary companies. These benefits are recorded on the
accrual basis and terminate at the end of the employment relationship.
In August 2001, the Company and its subsidiaries began to offer their
employees a defined contribution pension plan. Adoption of this plan,
managed by Ultraprev - Associacao de Previdencia Complementar, was
approved at the Board of Directors' Meeting on February 15, 2001. Under
the terms of the plan, the basic contribution of each participating
employee is defined annually by the participant between 0% and 11% of
his/her salary. The sponsoring companies provide a matching contribution
in an identical amount as the basic contribution. As participants retire,
they may opt to receive monthly: (i) a percentage varying between 0.5% and
1.0% of the fund accumulated in their name at Ultraprev, or (ii) a fixed
monthly amount which will extinguish the fund accumulated in the
participant's name during a period of between 5 and 25 years. As such,
neither the Company nor its subsidiaries assume responsibility for
guaranteeing the levels of amounts or periods of receipt for the
participants that retire under this plan. In 2002, the Company and its
subsidiaries contributed R$ 2.9 (R$ 1.2 in 2001) to Ultraprev, which was
charged to income for the year. The total number of employee participants
as of December 31, 2002 was 4.9, with no participants retired to date.
Additionally, Ultraprev has 2 active participants and 33 former employees
receiving defined benefits according to the policies of a previous plan.
Considering that the fair market value for the plan's assets significantly
exceeds the present actuarial value of the accumulated benefit
obligations, the sponsoring entities have not been contributing to the
plan for these 35 participants. On the other hand, the sponsoring entities
do not believe that it would be possible to recover any amounts from the
plan, based on legislation applicable to closed private pension entities.
As a result, no asset or liability relating to these participants has been
recorded in the financial statements of the sponsoring companies.
23. SUMMARY AND RECONCILIATION OF THE DIFFERENCES BETWEEN ACCOUNTING
PRACTICES ADOPTED IN BRAZIL AND ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED STATES OF AMERICA (U.S. GAAP)
I - Description of the GAAP differences
The consolidated financial statements of the Company are prepared in
accordance with accounting practices adopted in Brazil, which comply
with those prescribed by Brazilian corporate law and specific
standards established by the Brazilian Securities Commission (CVM).
Note 3 to the consolidated financial statements summarizes the
accounting policies adopted by the Company. Accounting policies,
which differ significantly from U.S. GAAP, are summarized below.
F-33
a) Inflation accounting
As discussed in Note 2, the consolidated financial statements
account for the effects of inflation, through December 31, 1995.
Under U.S. GAAP, Brazil was considered to be a highly
inflationary economy until July 1, 1997, and the recognition of
the effect of inflation was required until no later than
December 31, 1997.
In determining amounts under U.S. GAAP, the effects of inflation
for the years ended December 31, 1996 and 1997 were determined
using the "Indice Geral de Precos -Disponibilidade Interna -
IGP-DI" index, which is widely-accepted and respected index
published monthly by the Fundacao Getulio Vargas.
Through December 31, 1995, the Company used indices established
by the government to restate balances and transactions for
purposes of its corporate law financial statements. Such indices
do not necessarily represent changes in general price levels, as
would be required under U.S. GAAP.
Because the Company's management believes that the "Indice Geral
de Precos - Disponibilidade Interna - IGP-DI" is an appropriate
and consistent measure of the general price inflation in Brazil
and, because of its availability, for U.S. GAAP purposes, the
Company adopted the IGP-DI for restatement of its financial
statements through December 31, 1995, replacing the government
mandated index. This procedure is consistent with the
recommendation by the Brazilian Task Force (organized under the
AICPA International Practices Task Force to review the issue of
the appropriate index to be used for preparing price-level
adjusted financial statements of Brazilian companies filing with
the SEC) of using the IGP-M or IGP-DI for such purposes. Thus,
all nonmonetary assets and liabilities were restated using the
IGP-DI since the inception of the Company, through December 31,
1997.
b) Reversal of fixed asset revaluations and related deferred tax
liabilities
For U.S. GAAP reconciliation purposes, the revaluation of fixed
assets and the related deferred tax effects recorded in the
financial statements prepared in accordance with accounting
practices adopted in Brazil have been eliminated in order to
present fixed assets at historical cost less accumulated
depreciation. Accordingly, the depreciation on such revaluation
charged to income has also been eliminated for U.S. GAAP
reconciliation purposes.
c) Deferred charges
Accounting practices adopted in Brazil permit the deferral of
research and development costs and of pre-operating expenses
incurred in the construction or expansion of a new facility
until the facility begins commercial operations. Deferred
charges are amortized over a period of five to ten years.
For U.S. GAAP reconciliation purposes, such amounts do not meet
the conditions established for deferral and, accordingly, have
been charged to income and the related amortization under
accounting practices adopted in Brazil have been reversed.
F-34
d) Investments in associated companies
As from 1996 Brazilian corporate law allows certain less than
20% - owned associated companies in which an investor owns more
than 10% of voting stock to be accounted for on the equity
method.
For U.S. GAAP reconciliation purposes, less than 20% - owned
associated companies have been accounted for on the basis of
cost for all years presented.
e) Capitalization of interest in relation to construction in
progress
Under accounting practices adopted in Brazil, prior to January
1, 1996 the Company was not required to capitalize the interest
cost of borrowed funds as part of the cost of the related asset.
Under U.S. GAAP, capitalization of borrowed funds during
construction of major facilities is recognized as part of the
cost of the related assets.
Under U.S. GAAP, interest on construction-period borrowings
denominated in foreign currencies is capitalized using
contractual interest rates, exclusive of foreign exchange or
monetary correction gains or losses. Interest on
construction-period borrowings denominated in reais is
capitalized.
f) Income taxes
Under accounting practices adopted in Brazil and U.S. GAAP, the
liability method of accounting for income taxes is followed.
Under accounting practices adopted in Brazil, the Company
recognizes deferred income taxes based on the combined income
tax of 34%. Such combined income tax rate includes 25% of income
tax and 9% of social contribution. This 9% social contribution
rate was based on a provisional measure whereas the rate
established by enacted law was 8% until December 30, 2002, when
such provisional measure was converted into law (Law No. 10,637
of December 30, 2002).
Under U.S. GAAP, the provisional measures discussed are not
considered to be enacted law. Therefore, for 2000 and 2001 the
combined deferred tax effect calculated on temporary differences
would be 33% rather than 34%.
g) Acquisitions and business combinations
Under accounting practices adopted in Brazil assets and
liabilities of acquired entities are reflected at book values.
Under U.S. GAAP, generally, business combinations are accounted
for by the purchase method utilizing fair values.
For U.S. GAAP reconciliation purposes, fair values have been
assigned to acquired assets and liabilities in business
combinations in accordance with U.S. practices applicable to
each specific transaction.
F-35
Under Brazilian corporate law, purchases by subsidiaries of
treasury stock from minority stockholders are initially recorded
at cost. Upon cancellation of these shares, the difference
between cost and the related book value of the subsidiary's
stockholders' equity is recorded by the parent company and in
the consolidated financial statements as a capital gain or loss.
Direct purchases by the parent company of subsidiaries' stock
from minority stockholders are recorded at cost, with the
difference between cost and the related book value of the
subsidiaries' stockholders' equity recorded as a capital gain or
loss by the parent company and in the consolidated financial
statements.
Under U.S. GAAP, purchases of treasury stock by subsidiaries
from minority stockholders and direct purchases by the parent
company of subsidiaries' stock from minority stockholders are
recorded as step acquisitions under the purchase method, with
assignment of the purchase price to the underlying assets and
liabilities based on their fair values and recording of goodwill
to the extent that the purchase price exceeds the proportionate
amount of the net fair value of the assets and liabilities. No
gain or loss is recognized upon either purchase or cancellation
of the shares.
Corporate reorganization
------------------------
As mentioned in Note 4, the Company effected a corporate
reorganization of its major subsidiaries. The reorganization
involved the exchange of minority interest in its subsidiary
Oxiteno S.A. - Industria e Comercio for shares of the Company.
Pursuant to Brazilian securities law, this subsidiary offered
withdrawal rights to its minority shareholders. These withdrawal
rights required the Company's subsidiary to buy back and cancel
shares from minority shareholders who exercised their rights.
Under accounting practices adopted in Brazil, the exchange of
shares issued by the Company for minority interest in Oxiteno
S.A. - Industria e Comercio was recorded based on the book value
of the net assets of Oxiteno S.A. - Industria e Comercio, and
the purchase price was considered to be the book value of the
shares issued.
Under U.S. GAAP, the Company has accounted for the
reorganization of its subsidiary Oxiteno S.A. - Industria e
Comercio as an acquisition of minority interest. The fair value
of the consideration given (purchase price), including the cash
paid on the exercise of the withdrawal rights of R$ 208.0, was
R$ 428.9. The purchase price of this acquisition was R$ 32.9
lower than the fair value of net assets acquired. This
difference was allocated as a reduction of property, plant and
equipment acquired. As a result of the reorganization, the
Company increased its interest in Oxiteno S.A. - Industria e
Comercio to 100% and for U.S. GAAP purposes had full
participation in the results of Oxiteno S.A. - Industria e
Comercio beginning December 1, 2002 (see date of
reorganization/acquisition below).
Date of reorganization/acquisition
----------------------------------
As mentioned in Note 4, under accounting practices adopted in
Brazil, the corporate reorganization was based on the balance
sheets as of June 30, 2002 and, as a consequence, the Company
has full participation in the results of its subsidiaries
beginning July 1, 2002.
F-36
Under U.S. GAAP, the date of acquisition ordinarily is the date
assets are received and other assets are given, liabilities are
assumed or incurred, or equity interests are issued, which was
considered to be October 31, 2002 and November 30, 2002 for the
merger of Gipoia Participacoes Ltda. (an entity under common
control of the controlling shareholder of the Company) and for
the acquisition of minority interest in Oxiteno S.A. - Industria
e Comercio, respectively. As a result, minority interest from
July 1, 2002 to the acquisition dates under U.S. GAAP were
excluded from the U.S. GAAP income of the Company in the amount
of R$ 55.4.
h) Earnings per share
Under accounting practices adopted in Brazil, it is permitted to
determine earnings per share based upon the weighted average
number of shares outstanding during each year that earnings are
reported.
Under U.S. GAAP, earnings per share are determined based upon
the weighted average number of shares outstanding during the
period, giving retroactive effect to stock splits. Entities
whose capital structures include nonconvertible securities that
may participate in dividends with common stock according to a
predetermined formula should use the two-class method of
computing earnings per share as described in the Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The calculation of earnings per share under U.S. GAAP is
shown in Note 23.V.a).
i) Available-for-sale securities
Under accounting practices adopted in Brazil, available-for-sale
securities are generally carried at cost, less provisions
charged to the statement of operations if a loss in value is
considered to be other than temporary.
For U.S. GAAP reconciliation purposes, available-for-sale
securities have been recorded at estimated market value, and the
resulting adjustments have been recognized as a separate
component of stockholders' equity, net of deferred tax effects,
until realization. During the years presented, no securities
classified under U.S. GAAP as available-for-sale were disposed
of.
j) Accounting for financial instruments
In the Company's financial statements prepared in accordance
with accounting practices adopted in Brazil financial
instruments are recorded at net settlement price as determined
on each balance sheet date and included as cash and cash
equivalents.
Under U.S. GAAP, effective January 1, 2001, all derivative
financial instruments must be reported at fair value on each
balance sheet date and classified as derivative asset or
liability. Also under U.S. GAAP, the requirements for a
derivative instrument to qualify for hedge accounting and
deferral of gains and losses are more restrictive than under
Brazilian corporate law.
F-37
k) Classification of export notes
The Company has discounted with financial institutions certain
notes under export financing arrangements with recourse. If the
original debtors fail to pay their obligations when due, the
Company would be required to repay such amounts. Under
accounting practices adopted in Brazil such transactions are
classified as a reduction of accounts receivable (see note 6).
Under US GAAP, these transactions are recorded gross as accounts
receivable and bank loans. As a consequence, current assets and
liabilities under U.S. GAAP would be increased by R$ 43.4 and R$
49.6 at December 31, 2002 and 2001, respectively. This GAAP
difference has no net income or equity effect.
l) Financial statement note disclosures
Under accounting practices adopted in Brazil, in general,
certain information are required to be disclosed in the notes to
the financial statements. The additional disclosures required by
U.S. GAAP, which are relevant to the accompanying financial
statements are included.
m) New accounting pronouncements
SFAS No. 141 - "Business Combinations"
--------------------------------------
During June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
141 (SFAS 141), "Business Combinations". SFAS 141 addresses
financial accounting and reporting for business combinations.
All business combinations in the scope of SFAS 141 are to be
accounted for using one method, the purchase method. In
addition, SFAS 141 requires that intangible assets be recognized
as assets apart from goodwill if they meet two criteria: the
contractual-legal criterion or the separability criterion. To
assist in identifying acquired intangible assets, SFAS 141 also
provides a list of intangible assets that meet either of those
criteria. In addition to the disclosure requirements prescribed
in Opinion 16, SFAS 141 requires disclosure of the primary
reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. SFAS 141 also requires
that when the amounts of goodwill and intangible assets acquired
are significant to the purchase price paid, disclosure of other
information about those assets is required, such as the amount
of goodwill by reportable segment and the amount of the purchase
price assigned to each major intangible asset class. The
provisions of SFAS 141 apply to all business combinations
initiated after June 30, 2001. SFAS 141 also applies to all
business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001, or later. The
adoption of SFAS No. 141 on January 1, 2002 did not have any
impact on the Company's financial statements.
F-38
SFAS No. 142 - "Goodwill and Other Intangible Assets"
-----------------------------------------------------
During June 2001, FASB issue SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets.
SFAS No. 142 amends SFAS No. 121, "Accounting for the Impairment
of Long Lived Assets and for long-lived Assets to Be Disposed
Of", to exclude from its scope goodwill and intangible assets
that are not amortized. SFAS No. 142 addresses how intangible
assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially
recognized in the financial statements. The provision of SFAS
No. 142 is required to be applied starting with fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 142
on January 1, 2002 did not have any impact on the Company's
financial statements.
SFAS No. 143 - "Accounting for Asset Retirement Obligations"
------------------------------------------------------------
During June 2001 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 143 (SFAS
No. 143), Accounting for Asset Retirement Obligations". SFAS No.
143 basically requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. Under SFAS
No. 143 the liability for an asset retirement obligation is
discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the
liability was initially recognized. In addition, disclosure
requirements contained in SFAS No. 143 will provide more
information about asset retirement obligations. SFAS No. 143 is
effective for financial statements issued for fiscal years
beginning after June 15, 2002 with earlier application
encouraged. SFAS No. 143 was effective for the Company beginning
on January 1, 2002 and did not have any impact on the Company's
financial statements.
SFAS No. 145 - "Rescission of SFAS Nos. 4, 44 and 64, Amendment
of SFAS 13, and Technical Corrections as of April 2002 of SFAS
145"
--------------------------------------------------------------
In April 2002, the FASB issued Statements of Accounting
Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64,
Amendment of SFAS No. 13, and Technical Corrections as of April
2002" ("SFAS 145"). As a result, gains and losses from
extinguishment of debt will no longer be classified as
extraordinary items unless they meet the criteria of unusual or
infrequent as described in Accounting Principles Boards Opinion
No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." In addition, SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical
F-39
corrections, clarify meanings or describe their applicability
under changed conditions. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002. The Company does not believe
that the adoption of SFAS No. 145 will have a material impact on
the Company's financial statements.
SFAS No. 146 -"Accounting for Costs Associated with Exit or
Disposal Activities"
-----------------------------------------------------------
In June 2002, the FASB issued Statement of Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities.
SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognised when the
liability is incurred. Under EITF No. 94-3, a liability for an
exit cost as defined in EITF No. 94-3 was recognised at the date
of an entity's commitment to an exit plan. SFAS No. 146 also
concluded that an entity's commitment to a plan, by itself, does
not create a present obligation to others that meets the
definition of a liability. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the
liability. The Company does not believe that the adoption of
SFAS No. 146 will have a material impact on the Company's
financial statements.
FIN No. 45 - "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others"
----------------------------------------------------------------
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN No. 45"). This interpretation requires certain
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
guarantees that it has issued. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN No. 45 are
effective for interim and annual periods ending after December
15, 2002. The initial recognition and initial measurement
requirements of FIN No. 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The
Company has adopted the disclosure requirements but it is
currently evaluating the impact of recognizing the fair values
of certain guarantees it has issued.
F-40
II - Reconciliation of the differences between U.S. GAAP and accounting
practices adopted in Brazil in net income
2002 2001 2000
------ ------ ------
Net income as reported under accounting practices adopted in Brazil 222.3 132.2 128.5
Reversal of revaluation adjustments:
Depreciation of property, plant and equipment 5.6 5.1 55.0
Deferred tax effects (0.6) (0.4) (13.6)
Minority interests (1.9) (0.9) (30.7)
------ ------ ------
3.1 3.8 10.7
------ ------ ------
Inflation accounting:
Property, plant and equipment - incremental depreciation (4.6) (3.3) (7.7)
Inventories and other nonmonetary assets (0.5) 0.3 (0.4)
------ ------ ------
(5.1) (3.0) (8.1)
Deferred tax effects 1.7 1.0 2.6
Minority interests - 0.6 1.9
------ ------ ------
(3.4) (1.4) (3.6)
------ ------ ------
Different criteria for:
Equity method of accounting 31.8 (7.3) (8.9)
Cancellation of subsidiaries' treasury stock 0.9 0.9 (0.9)
Deferred charges expensed:
Cost (43.1) (21.2) (29.2)
Accumulated amortization 35.2 7.1 16.8
Depreciation of interest costs capitalized during construction (1.0) (1.0) (1.0)
Fair value adjustments relating to accounting for derivative
instruments and hedging activities (50.7) 4.1 -
Other individually insignificant adjustments (1.2) (1.0) (1.1)
------ ------ ------
(28.1) (18.4) (24.3)
Deferred tax effects 9.4 5.2 7.8
Minority interests 8.0 2.6 5.7
------ ------ ------
(10.7) (10.6) (10.8)
------ ------ ------
Fair value adjustments relating to business combinations (1.6) (1.5) (1.5)
Deferred tax effect 0.5 0.5 0.5
------ ------ ------
(1.1) (1.0) (1.0)
------ ------ ------
Fair value adjustments relating to the acquisition of minority
interest in Oxiteno S.A. - Industria e Comercio (13.8) - -
Deferred tax effect 2.9 - -
Effect on minority interest arising from difference in
acquisition dates (55.4) - -
------ ------ ------
(66.3) - -
------ ------ ------
Net income under U.S. GAAP 143.9 123.0 123.8
====== ====== ======
Basic earnings per thousand shares under U.S. GAAP (in accordance
with SFAS No. 128) - R$:
Basic earnings per thousand common shares 2.28 2.23 2.24
Basic earnings per thousand preferred shares 2.51 2.55 2.57
F-41
Dilutive earning (losses) per thousand shares have not been
disclosed, since the Company has no dilutive shares. The
calculation of earnings per thousand shares is summarized in
Note 23.V.a).
III - Reconciliation of the differences between U.S. GAAP and accounting
practices adopted in Brazil in stockholders' equity
2002 2001
------- -------
Stockholders' equity as reported under accounting practices
adopted in Brazil 1,191.1 799.9
------- -------
Reversal of revaluation adjustments:
Property, plant and equipment (47.6) (54.0)
Deferred tax effects 2.1 2.5
Minority interests 3.9 14.3
------- -------
(41.6) (37.2)
------- -------
Inflation accounting:
Property, plant and equipment 37.2 41.8
Other nonmonetary assets 4.0 4.5
------- -------
41.2 46.3
Deferred tax effects (14.0) (15.3)
Minority interests (1.2) (8.8)
------- -------
26.0 22.2
------- -------
Different criteria for:
Equity method of accounting (6.6) (38.4)
Cancellation of subsidiaries' treasury stock (5.5) (6.4)
Deferred charges:
Cost (152.6) (109.5)
Accumulated amortization 86.4 51.2
Capitalization of interest costs during construction:
Cost 12.8 12.8
Accumulated amortization (9.7) (8.7)
Fair value adjustments relating to accounting for
derivative instruments (46.6) 4.1
Other individually insignificant adjustments 0.5 1.0
------- -------
(121.3) (93.9)
Deferred tax effects 44.3 34.4
Minority interests 9.9 19.6
------- -------
(67.1) (39.9)
------- -------
Fair value adjustments relating to business combinations: 7.7 9.3
Deferred tax effect (2.6) (3.1)
------- -------
5.1 6.2
------- -------
Fair value adjustments relating to acquisition of minority
interest in Oxiteno S.A.-Industria e Comercio (39.4) -
Deferred tax effect 7.9 -
------- -------
(31.5) -
Available-for-sale securities (temporary unrealized losses) (8.2) (8.7)
Deferred tax effect 2.7 2.9
Minority interest - 3.1
------- -------
(5.5) (2.7)
------- -------
Stockholders' equity under U.S. GAAP 1,076.5 748.5
======= =======
F-42
IV - Statement of changes in stockholders' equity in accordance with
U.S. GAAP
2002 2001 2000
------- ------- -------
Stockholders' equity under U.S. GAAP as of
beginning of the year 748.5 854.6 760.1
Additional paid-in capital 0.7 0.7 0.7
Net income for the year 143.9 123.0 123.8
Dividends and interest on own capital (65.0) (229.6) (31.1)
Acquisition of treasury shares: (0.3) - -
Unrealized losses (gains) on available-for-sale
securities, net of tax 0.3 (0.2) 1.1
Issuance of common and preferred shares 248.4 - -
Stockholders' equity under U.S. GAAP as
of the end of the year 1,076.5 748.5 854.6
Comprehensive income (under FAS No. 130):
Net income for the year 143.9 123.0 123.8
Unrealized losses on available-for-sale investments 0.3 (0.2) 1.1
------- ------- -------
Total comprehensive income 144.2 122.8 124.9
------- ------- -------
Accumulated other comprehensive loss as of
the end of the year (2.4) (2.7) (2.5)
======= ======= =======
F-43
V - Additional disclosures required by U.S. GAAP
a) Earnings per share
The following table provides a reconciliation of the numerators
and denominators used in computing earnings per share and the
allocation of distributed and undistributed income between
common and preferred stockholders under the two-class method of
computing earnings per share as required by SFAS No. 128.
2002
------------------------------------------
Common Preferred Total
------------ --------------- -----------
Distributed income 46.2 18.8 65.0
Undistributed income 55.7 23.2 78.9
------------ --------------- -----------
Net income 101.9 42.0 143.9
============ =============== ===========
Weighted average shares outstanding
(in thousands) 44,624,317 16,721,317 61,345,634
------------ --------------- -----------
Earnings per thousand shares - whole R$ 2.28 2.51
============ ===============
2001
------------------------------------------
Common Preferred Total
------------ --------------- -----------
Distributed income 60.6 26.4 87.0
Distributed reserves 87.1 37.9 125.0
Supplementary dividends from net income for the
year ended December 31, 2000 12.2 5.4 17.6
------------ --------------- -----------
Total distributions 159.9 69.7 229.6
Distributions from retained earnings (75.2) (31.4) (106.6)
------------ --------------- -----------
Net income 84.7 38.3 123.0
============ =============== ===========
Weighted average shares outstanding (in thousands) 37,984,013 15,015,987 53,000,000
------------ --------------- -----------
Earnings per thousand shares - whole R$ 2.23 2.55
============ ===============
2000
-------------------------------------------
Common Preferred Total
------------ --------------- -----------
Distributed income 21.7 9.4 31.1
Undistributed income 63.5 29.2 92.7
------------ --------------- -----------
Net income 85.2 38.6 123.8
============ =============== ===========
Weighted average shares outstanding
(in thousands) 37,984,013 15,015,987 53,000,000
------------ --------------- -----------
Earnings per thousand shares - whole R$ 2.24 2.57
============ ==============
F-44
b) Concentrations of credit risk
Financial instruments which potentially subject the Company to
credit risk are cash and cash equivalents and trade receivables.
Based on the factors described below, the Company considers the
risk of counterparty default to be minimal.
The Company manages its credit risk with respect to cash
equivalents by investing only in very short-term instruments
with highly-rated financial institutions. In addition,
investments are diversified in several institutions, and credit
limits are established for each individual institution.
Credit risk from accounts receivable is managed following
specific criteria for each of the segments in which the Company
operates, as follows:
Chemical segment
----------------
Oxiteno's customers for its commodity chemicals are principally
chemical companies, surface coating producers and polyester
resin producers, and customers for its specialty chemicals
comprise a variety of industrial and commercial enterprises. No
single customer or group accounts for more than 10% of total
revenue. Management believes that by distributing its products
to a variety of markets it is able to protect itself, to a
certain extent, from the effects of negative trends in any
particular market. Oxiteno acts as a member of a Credit
Committee of the Brazilian chemical manufacturers which meets
monthly to review the financial position of clients showing
past-due accounts.
Historically, the Company has not experienced significant losses
on trade receivables.
The Company has discounted with financial institutions certain
notes under export financing arrangements. If the original
debtors fail to pay their obligations when due, the Company
would be committed to repay such amounts. The amount of these
contingent obligations was R$ 43.4 and R$ 49.6 at December 31,
2002 and 2001, respectively. Credit risk related to such notes,
associated with the chemical segment, is managed following the
criteria described above.
Gas segment
-----------
Ultragaz sells its products to the retail, commercial and
industrial markets.
Sales to the retail market are carried out directly by Ultragaz
using cash terms, from which no significant credit risk exists,
or through outside distributors. Credit risk in sales to outside
distributors is reduced due to the large customer base, the
ongoing control procedures that monitor the creditworthiness of
distributors, and by short payment terms (23 days on average)
that permit continuous monitoring of distributors' compliance.
F-45
Sales to the commercial and industrial markets are made to
customers, which have signed a credit agreement with the Company
and have provided personal guarantees or collateral. Periodic
monitoring of these accounts is performed by specific staff with
the support of financial information systems.
No single customer or group accounts for more than 10% of total
revenue.
Historically, the Company has not experienced significant losses
on trade receivables.
The total allowance for doubtful accounts, for both segments, at
December 31, 2002 amounts to R$ 12.4 (R$ 9.4 in 2001).
Company is Dependent on Few Major Suppliers
-------------------------------------------
The Company is dependent on third-party manufacturers for all of
its supply of ethylene and LPG. In 2002, 2001 and 2000, products
purchased from the Company's three largest suppliers accounted
for approximately 74%, 72% and 69% of cost of sales and
services, respectively. The Company is dependent on the ability
of its suppliers to provide products on a timely basis and on
favorable pricing terms. The loss of certain principal suppliers
or a significant reduction in product availability from
principal suppliers could have a material adverse effect on the
Company. The Company believes that its relationships with its
suppliers are satisfactory.
c) Impairment of long-lived assets
The Company reviews the carrying value of property, plant, and
equipment for impairment whenever events and circumstances
indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of
assets. The factors considered by management in performing this
assessment include current operating results, trends, and
prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors.
No impairment has been recorded in the consolidated financial
statements as of December 31, 2002.
F-46
d) Guarantees
In addition to the guarantees disclosed in Note 12 and 14, the
Company has issued guarantees to financial institutions related
to amounts owed to those institutions by certain of its
customers (vendor financing). The terms of the guarantees are
equal to the terms of the related financing arrangements, which
can be as short as 60 days or as long as 90 days. There are no
recourse provisions or collateral that would enable the Company
to recover any amounts paid to the financial institutions under
these guarantees. In the event of payment of such guarantees to
those financial institutions, the Company may recover the amount
of such payment directly from its customers under the vendor
transactions. Maximum potential future payments related to these
guarantees amount to R$ 7.1. The Company has not recorded any
liability related to these guarantees at December 31, 2002.
e) Fair value of financial instruments
The fair value of financial instruments described in Note 16
approximates their book value, except for the fair value of
currency swap transactions and interest, which is R$ 334.4 and
R$ 217.5 at December 31, 2002 and 2001, respectively.
f) Statement of cash flows
Accounting practices adopted in Brazil do not require the
presentation of a statement of cash flows as required by U.S.
GAAP. Changes in working capital are presented in the statement
of changes in financial position. U.S. GAAP requires the
presentation of a statement of cash flows describing the
Company's cash flows from operating, financing and investing
activities. Statements of cash flows derived from the
information based on accounting practices adopted in Brazil
information are as follows (the reconciling items to U.S. GAAP
under item II relate exclusively to operating activities):
F-47
g) Segment information
The Company has two reportable segments: the chemical segment
and the gas segment. The chemical segment produces primarily
ethylene oxide, ethylene glycols, ethanolamines and glycol
ethers. The gas segment distributes LPG to retail, commercial
and industrial consumers mainly in the States of Sao Paulo,
Parana and Bahia. Although the Company is also engaged in
transportation and storage of chemicals and real estate
activities, none of such activities meets the criteria for a
reportable segment. Reportable segments are strategic business
units that offer different products and services. Each of the
reportable segments has a responsible senior officer.
Intersegment sales are transacted at prices approximating those
that the selling entity is able to obtain on external sales.
Financial information about each of the Company's reportable
segments based on records in accordance with accounting
practices adopted in Brazil is as follows:
2002
-------------------------------------------------------------
Gas Chemicals Other Eliminations Consolidated
---------- --------- ----- ------------ ------------
Net revenues from sales to unassociated
companies 1,942.7 966.3 85.5 - 2,994.5
Intersegment sales - - 42.2 (42.2) -
---------- --------- ----- ------------ ------------
Net revenues 1,942.7 966.3 127.7 (42.2) 2,994.5
========== ========= ===== ============ ============
Operating profit before financial income
(expense) 143.2 203.4 18.9 - 365.5
========== ========= ===== ============ ============
Financial income (expenses), net - - - - 28.5
Nonoperating expense, net - - - - (44.1)
Equity in losses of associated companies - - - - (1.7)
---------- --------- ----- ------------ ------------
Income before taxes and minority
interests - - - - 348.2
========== ========= ===== ============ ============
Additions to property, plant and
equipment according to:
Accounting practices adopted in
Brazil 86.1 54.1 31.3 - 171.5
U.S. GAAP 86.1 54.1 31.3 - 171.5
========== ========= ===== ============ ============
Depreciation and amortization charges
according to:
Accounting practices adopted in
Brazil 76.6 34.0 11.2 - 121.8
U.S. GAAP 42.4 31.9 11.1 - 85.4
========== ========= ===== ============ ============
F-48
2001
-------------------------------------------------------------
Gas Chemicals Other Eliminations Consolidated
---------- --------- ----- ------------ ------------
Net revenues from sales to unassociated
companies 1,381.1 840.6 63.0 - 2,284.7
Intersegment sales - - 40.3 (40.3) -
---------- --------- ----- ------------ ------------
Net revenues 1,381.1 840.6 103.3 (40.3) 2,284.7
========== ========= ===== ============ ============
Operating profit before financial income
(expense) 101.1 149.7 28.1 - 278.9
========== ========= ===== ============ ============
Financial income (expense), net - - - - (31.1)
Nonoperating expense, net - - - - (17.0)
Equity in earnings of associated
companies - - - - 1.9
---------- --------- ----- ------------ ------------
Income before taxes and minority interest - - - - 232.7
========== ========= ===== ============ ============
Additions to property, plant and equipment
according to:
Accounting practices adopted in
Brazil 97.9 37.1 10.7 - 145.7
U.S. GAAP 97.9 37.1 10.7 - 145.7
========== ========= ===== ============ ============
Depreciation and amortization charges
according to:
Accounting practices adopted in
Brazil 61.9 31.2 9.3 - 102.4
U.S. GAAP 36.1 29.7 10.3 (1.2) 74.9
========== ========= ===== ============ ============
F-49
2000
-------------------------------------------------------------
Gas Chemicals Other Eliminations Consolidated
---------- --------- ----- ------------ ------------
Net revenues from sales to unassociated
companies 1,125.9 693.0 59.1 - 1,878.0
Intersegment sales - - 34.7 (34.7) -
---------- --------- ----- ------------ ------------
Net revenues 1,125.9 693.0 93.8 (34.7) 1,878.0
========== ========= ===== ============ ============
Operating profit before financial
income (expense) 98.6 97.0 17.9 - 213.5
========== ========= ===== ============ ============
Financial income (expense), net - - - - 43.4
Nonoperating expenses, net - - - - (16.5)
Equity in earnings of associated
companies - - - - 9.6
---------- --------- ----- ------------ ------------
Income before taxes and minority
interest - - - - 250.0
========== ========= ===== ============ ============
Additions to property, plant and equipment
according to:
Accounting practices adopted in
Brazil 89.6 49.0 10.4 - 149.0
U.S. GAAP 89.6 49.0 10.4 - 149.0
========== ========= ===== ============ ============
Depreciation and amortization charges
according to:
Accounting practices adopted in
Brazil 42.3 39.1 9.4 - 90.8
U.S. GAAP 27.6 26.5 10.7 (1.2) 63.6
========== ========= ===== ============ ============
2002 2001
--------- ---------
Identifiable assets - accounting practices adopted in Brazil:
Gas 835.8 753.2
Chemicals 1,041.6 986.7
Other 1,014.5 676.6
Eliminations (764) (464.5)
--------- ---------
Total consolidated assets 2,127.9 1,952.0
========= =========
Identifiable assets - U.S. GAAP:
Gas 710.7 699.5
Chemicals 1,052.4 994.4
Other 1,019.4 657.4
Eliminations (769.2) (459.3)
--------- ---------
Total consolidated assets 2,013.3 1,892.0
========= =========
Investments in equity investees - accounting practices adopted in Brazil:
Chemicals 6.9 63.0
--------- ---------
Total consolidated 6.9 63.0
========= =========
Investments in equity investees - U.S. GAAP:
Gas - 1.5
Chemicals - 33.8
--------- ---------
Total consolidated - 35.3
========= =========
F-50
h) Geographical area information
All long-lived assets are located in Brazil. The Company
generates revenues from operations in Brazil as well as from
exports of products to clients located in foreign countries as
shown below:
Years ended December 31
-------------------------------
2002 2001 2000
------- ------- --------
Gross sales:
Brazil 3,505.8 2,595.7 2,064.1
Foreign countries 289.5 266.8 237.1
------- ------- --------
Total 3,795.3 2,862.5 2,301.2
======= ======= ========
Exports:
Latin America, other than Brazil 98.2 107.8 84.8
Far East 97.5 84.0 42.0
Europe 55.8 31.4 26.4
North America 19.3 33.3 80.9
Other 18.7 10.3 3.0
------- ------- --------
Total 289.5 266.8 237.1
======= ======= ========
i) Research and development expenses
Total research and development expense amounted to R$ 10.9, R$
10.2 and R$ 9.5 in the years ended December 31, 2002, 2001 and
2000, respectively.
j) Employee severance fund and termination payments
The Company is required to contribute 8% of each employee's
gross pay to an account maintained in the employee's name in the
Government Severance Indemnity Fund (FGTS). No other
contributions to the FGTS are required. Additionally, effective
September 2001, the Company is required to pay an additional tax
equal to 0.5% of gross pay. Contributions are expensed as
incurred.
Under Brazilian law, the Company is also required to pay
termination benefits to employees who have been dismissed. The
amount of the benefit is calculated as 40% of the accumulated
contributions made by the Company to the FGTS during the
employee's period of service. Additionally, effective September
2001, the Company is required to pay a social tax of 10% of
these accumulated contributions. The Company does not accrue for
these termination costs before a decision to terminate has been
made, since the benefits are neither probable nor reasonably
estimable. Actual termination costs paid on dismissal totaled R$
3.0, R$ 3.8 and R$ 3.5 in the years ended December 31, 2002,
2001 and 2000, respectively.
F-51
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
1.1 Ultrapar by-laws, as revised on December 20, 2002 (English
translation)
2.1 Ultra S.A.'s shareholders' agreement*
8.1 List of subsidiaries of Ultrapar
10.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
10.2 Documents relating to our 2002 corporate restructuring**
* Incorporated by reference to our Annual Report on Form 20-F for the fiscal
year ended December 31, 2001 filed with the SEC on May 29, 2002. (file No.
001-14950)
** Incorporated by reference to our Current Report on Form 6-K filed with the
SEC on October 15, 2002, November 1, 2002 and December 6, 2002 (file No.
001-14950).