EX-99.1
CARBONES DEL GUASARE, S.A.
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL
STATEMENTS IN U.S. DOLLARS PREPARED IN ACCORDANCE
WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE
UNITED STATES OF AMERICA (U.S. GAAP)
DECEMBER 31, 2003 AND 2002
Member firm of
ESPINEIRA, SHELDON Y ASOCIADOS [PRICEWATERHOUSECOOPER LOGO]
Espineira, Sheldon y Asociados
Avenida Principal de Chuao
Edificio Del Rio
P.O. Box 1789
Caracas 1010-A Venezuela
Telephone: 700.66.66
Telecopier: 991.52.10
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Carbones del Guasare, S.A.
In our opinion, the accompanying balance sheet and the related statements of
income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Carbones del Guasare, S.A. at December 31,
2003 and 2002, and the results of its operations and its cash flows for the
two-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
ESPINEIRA, SHELDON Y ASOCIADOS
/s/ Jose Antonio Apostolico B.
- ------------------------------
Jose Antonio Apostolico B.
CPC 18575
Maracaibo, Venezuela
March 16, 2004
CARBONES DEL GUASARE, S.A.
BALANCE SHEET
December 31,
-------------------
2003 2002
------- -------
(Thousands of
U.S.dollars)
Assets
Current assets:
Cash and cash equivalents 33,986 55,230
Accounts receivable -
Trade 84 60
Shareholders and related companies (Note 3) 57,220 16,286
Employees and other (Note 4) 972 2,008
Advances to suppliers 955 1,342
Inventories, net (Note 5) 15,728 21,561
Prepaid expenses 211 272
Value added tax (Note 10) 14,170 7,456
------- -------
Total current assets 123,326 104,215
Long-term accounts receivable (Note 4) 1,940 2,678
Fixed assets, net (Note 6) 64,567 70,527
Net deferred income tax 2,530 -
Asset retirement obligations (Notes 2-k and 12) 960 1,013
Other assets 72 268
------- -------
193,395 178,701
======= =======
The accompanying notes are an integral part of the financial statements
CARBONES DEL GUASARE, S.A.
BALANCE SHEET
December 31,
-----------------
2003 2002
------- -------
(Thousands of
U.S. dollars)
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans (Note 7) 6,250 -
Accounts payable -
Contractors and suppliers 26,149 17,359
Shareholder and related companies (Note 3) 3,443 2,817
Accruals and other payables (Note 8) 10,243 9,436
Taxes (Note 10) 10,676 25,683
------- -------
Total current liabilities 56,761 55,295
Accrual for employee termination benefits 1,274 1,277
Provision for asset retirement obligations (Notes 2-k and 12) 2,823 2,730
------- -------
Total liabilities 60,858 59,302
------- -------
Commitments and contingencies (Note 13)
Shareholders' equity, see accompanying
statement (Note 9):
Capital stock 79,699 79,699
Additional paid-in capital 1,014 1,014
Treasury stock (1,034) (1,034)
Retained earnings -
Legal reserve 1,135 1,135
Unappropriated 51,723 38,585
------- -------
Total shareholders' equity 132,537 119,399
------- -------
193,395 178,701
======= =======
The accompanying notes are an integral part of the financial statements
CARBONES DEL GUASARE, S.A.
STATEMENT OF INCOME
Years ended
December 31,
-------------------
2003 2002
------- -------
(Thousands of
U.S. dollars)
Income:
Sales of coal (Notes 2 and 3) 200,433 235,314
------- -------
Costs and expenses:
Operating costs 107,774 111,125
General, selling and administrative expenses 6,999 8,484
Contractor compensation (Note 1-b) 4,579 5,193
Depreciation (Notes 6 and 12) 14,101 13,759
Accretion expense (Note 12) 93 89
Leasing of coal mines (Note 1-b) 19,949 23,452
Exploitation tax (Note 10) 4,177 5,676
------- -------
157,672 167,778
------- -------
Operating income 42,761 67,536
------- -------
Interest income 1,335 2,226
Interest expenses (Note 8) (1,610) -
Other income net 95 9
Remeasurement adjustment 2,464 (1,411)
------- -------
2,284 824
------- -------
Income before taxes and cumulative effect
of change in accounting principle 45,045 68,360
Taxes (Note 10) 11,899 30,965
------- -------
Income before cumulative effect
of change in accounting principle 33,146 37,395
Cumulative effect of change in accounting principle, net of
taxes (Notes 2-k and 12) - 1,040
------- -------
Net income 33,146 36,355
======= =======
The accompanying notes are an integral part of the financial statements
CARBONES DEL GUASARE, S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
Retained earnings
Additional --------------------- Total
Capital paid-in Treasury Legal shareholders'
stock capital stock reserve Unappropriated equity
------- ---------- -------- ------- -------------- -------------
(Thousands of U.S. dollars)
Balances at December 31, 2001 79,699 1,014 (1,034) 1,135 72,244 153,058
Net income for 2002 - - - - 36,355 36,355
Dividends paid (Note 9):
Common shares - - - - (70,000) (70,000)
Preferred shares - - - - (14) (14)
------ ----- ------ ----- ------- -------
Balances at December 31, 2002 79,699 1,014 (1,034) 1,135 38,585 119,399
Net income for 2003 - - - - 33,146 33,146
Dividends paid (Note 9):
Common shares - - - - (20,000) (20,000)
Preferred shares - - - - (8) (8)
------ ----- ------ ----- ------- -------
Balances at December 31 , 2003 79,699 1,014 (1,034) 1,135 51,723 132,537
====== ===== ====== ===== ======= =======
The accompanying notes are an integral part of the financial statements
CARBONES DEL GUASARE, S.A.
STATEMENT OF CASH FLOWS
Years ended
December 31,
--------------------
2003 2002
------ --------
(Thousands of
U.S. dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 33,146 36,355
Adjustments to reconcile net income to net cash provided by
(used in) operating activities -
Depreciation of fixed assets and asset retirement obligations 14,101 13,759
Accretion expense 93 89
Remeasurement adjustment (2,464) 1,411
Cumulative effect of change in accounting principle, net of taxes - 1,040
Deferred income tax (2,530) -
Accrual for employee termination benefits 712 2,764
Payment of employee termination benefits (715) (3,394)
Net change in operating assets and liabilities -
Accounts receivable (40,897) 20,581
Inventories 5,833 789
Prepaid expenses 61 (55)
Value added tax (6,714) 1,121
Other assets 196 (3)
Long-term accounts receivable 738 3,040
Accounts payable, accruals and other taxes (1,810) 9,499
------- --------
Net cash provided by (used in) operating activities (250) 86,996
------- --------
NET CASH USED IN FINANCING INVESTING ACTIVITIES:
Additions to fixed assets (8,088) (23,394)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans 6,250 -
Dividends paid (20,008) (70,014)
------- --------
Net cash used in financing activities (13,758) (70,014)
------- --------
EFFECT OF REMEASUREMENT ADJUSTMENT ON CASH AND CASH
EQUIVALENTS 852 488
------- --------
CASH AND CASH EQUIVALENTS:
Net change for the year (21,244) (5,924)
At the beginning of the year 55,230 61,154
------- --------
At the end of the year 33,986 55,230
======= ========
SUPPLEMENTARY INFORMATION:
Cash paid during the year for -
Interest 1,317 -
Taxes 29,436 10,019
The accompanying notes are an integral part of the financial statements
CARBONES DEL GUASARE, S.A.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - INCORPORATION AND OPERATIONS:
a) Incorporation
Carbones del Guasare, S.A. (the Company) is engaged in the exploration and
exploitation of coal mines located in the region of Guasare, Zulia State,
Venezuela. Net assets of Carbozulia related to the mining project were
transferred as payment for capital stock subscribed in 1988 by the shareholders
Carbones del Zulia, S.A. (Carbozulia) and Agipcoal Antilles, N.V.
In 1988 the Company's shareholders entered into a joint venture agreement for
the Gran Mineria project which includes the Paso Diablo and Socuy (PIP)
concessions. In July 1995, pursuant to certain purchase agreements, Rig
Deelneming Maatschappij, B.V. (Ruhrkohle) and Shell Coal (South America) Limited
(Shell) purchased all Class "B" shares in the Company and undertook to assume
all rights and obligations derived from the joint venture agreement entered into
in 1988 by the shareholders. In October 1995 the aforementioned agreement was
amended as a result of the acquisition of Class "B" shares by Ruhrkohle and
Shell and interest expressed by Carbozulia, Ruhrkohle and Shell in assessing
joint exploration, development and exploitation of the Paso Diablo and Socuy
mining concessions. In this regard, the Company was authorized to make
disbursements in respect of this project, which would be later funded by each of
the participating shareholders according to their proportionate ownership of
Class "A" and Class "B" shares.
The joint venture agreement entered into by the Company's shareholders entailed
an initial phase, or temporary plan, based on which the Company is currently
operating, and a second, or subsequent development phase, calling for additional
investment and decisions on the part of the partners. In March 2001 this joint
venture agreement was amended to indicate that expansion of the mine would
depend on the Company's ability to produce and export coal.
In March 2001 Shell Coal (South America) Limited sold its interest to Anglo Coal
(Venezuela) Limited.
b) Operations
Leasing of coal mining -
In 1986 Corporacion de Desarrollo de la Region Zuliana (Corpozulia) entered into
a contract with the shareholder of Carbozulia, Petroleos de Venezuela, S.A.
(PDVSA), whereby the latter undertakes to lease coal mining concessions in the
Guasare region for thirty years. Carbozulia
and PDVSA are government related entities. Under this lease contract, Corpozulia
will be paid, for each metric ton of coal exported, an amount in bolivars
equivalent to 10% of the sales price at a Venezuelan port, calculated in
accordance with certain predetermined rules. In 1988 PDVSA entered into a
contract with Carbozulia whereby the former assigned and transferred to
Carbozulia all rights and obligations arising out of this lease contract. It
further established that Carbozulia would partially assign the aforementioned
lease contract to the Company.
During the year ended December 31, 2003, lease contract costs amounted to
US$19.9 million (US$23.4 million in 2002). At December 31, 2003, accounts
payable to Corpozulia amount to US$3.3 million paid during 2004 (US$2.7 million
in 2002 paid during 2003) (see Note 3).
Contractor compensation -
In April 1999 the Company awarded a management contract for the Paso Diablo Mine
to the contractor Morrison Knudsen Venezuela, S.A. to ensure the use of best
practices for coal mining, among other things, as a means of reducing operating
costs and increasing productivity in all mining-related areas. This contract is
for five years until June 30, 2004 and has a total cost of US$26.5 million.
During the year ended December 31, 2003, the cost amounted to US$4.6 million
(US$5.2 million in 2002).
Other -
On December 2, 2002, employers' and workers' organizations, together with
political and civic organizations began a National Civic Work-stoppage in
Venezuela, which seriously affected many of the country's economic activities,
especially the oil industry. As a result of these circumstances, the Company
partially suspended operations due to lack of fuel and transportation services
between December 2002 and January 2003.
The Company considers itself as operating in a single business segment (coal) in
one country only (Venezuela).
At December 31, 2003 and 2002, the Company has 1,048 and 1,019 employees,
respectively, on its monthly professional and non-professional payrolls.
At a PDVSA Board of Directors' Meeting held on October 30, 2003, the Directors
resolved to accept the terms for the transfer of activities, assets and shares
held by PDVSA in Carbozulia (the Company's shareholder) to Corporacion de
Desarrollo de la Region Zuliana (Corpozulia) and to submit it for approval at
PDVSA's Shareholders' Meeting. This free-of-charge transfer to Corpozulia of all
ownership rights to Carbozulia shares held by PDVSA was published in the
Official Gazette on February 2, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
The Company maintains its accounting books and records in Venezuelan bolivars
and prepares its financial statements in accordance with accounting principles
generally accepted in
(2)
Venezuela, which provide the basis for the payment of dividends. The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP) and have been remeasured into U.S. dollars as discussed below.
a) Measurement currency and remeasurement into U.S. dollars
The Company's main economic operating environment is the international coal
market, and its functional currency is the U.S. dollar. Most income, as well as
costs, expenses and investments, is denominated in U.S. dollars.
The financial statements in nominal bolivars were remeasured into U.S. dollars
in accordance with criteria established in Statement of Financial Accounting
Standards No. 52 (SFAS 52) "Foreign currency translation" as applicable to an
entity whose functional currency is the U.S. dollar. Pursuant to SFAS 52, the
balances in nominal bolivars have been remeasured into U.S. dollars as follows:
Account Exchange rate
- ------------------------------------------- ---------------
Current assets Current
Inventories, fixed assets, and other assets Historic
Liabilities Current
Shareholders' equity Historic
Depreciation and amortization Historic
Income and expense Monthly average
Company revenue is derived from export sales mainly billed in U.S. dollars and
their equivalent amounts in bolivars.
The remeasurement adjustment is included in the statement of income. Exchange
gains and losses arise mainly from the effect of exchange rate fluctuations on
net monetary items in the financial statements and are included in the statement
of income.
At December 31, the Company has the following monetary assets and liabilities
denominated in currencies other than the U.S. dollar (mainly bolivars), shown at
their equivalent amounts:
2003 2002
------ -------
(Thousands of
U.S. dollars)
Monetary assets 53,909 15,398
Monetary liabilities 32,516 39,373
------ -------
Total net monetary assets (liabilities)(equivalent in U.S. dollars) 21,393 (23,975)
====== =======
(3)
The Company does not engage in hedging activities on its balances and
transactions in bolivars.
The year-end exchange rate, the average exchange rate, and the interannual
increase of the Consumer Price Index (CPI), published by the Central Bank of
Venezuela (BCV), were as follows:
2003 2002
-------- --------
Purchase exchange rate at December 31 (Bs/US$1) 1,596.00 1,399.50
Average exchange rate for the year (Bs/US$1) 1,617.13 1,161.65
Interannual increase of the CPI (%) 27.08 31.22
b) Cash and cash equivalents
Cash and cash equivalents consist of money market certificates and other high
quality instruments initially maturing within three months or less. Such
investments are stated at cost, which approximates market value.
Publicly traded securities purchased for sale in the short-term are classified
as trading securities and carried at fair value. Changes in fair value and cost
are included in the statement of income.
c) Inventories
Mined coal inventories are valued based on the "first-in, first-out" (FIFO)
method. Inventories of spare parts and supplies are valued at average cost, net
of an estimated amount for obsolescence and low turnover to cover possible
losses. These costs do not exceed net realizable value. Costs include labor and
exploitation costs.
d) Fixed assets
Fixed assets are recorded at cost, net of accumulated depreciation. Additions,
renewals and improvements that significantly increase the productivity or useful
lives of the assets are capitalized; disbursements for maintenance and repairs
are expensed.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets (ten years for buildings, eight years for machinery
and ten years for furniture and other).
e) Accrual for employee termination benefits, retirement and profit-sharing
The Company accrues for its liability in respect of employee termination
benefits, which are a vested right of employees based on the Venezuelan Labor
Law and the Company's personnel benefit policies. The Company deposits employee
termination benefits in a trust fund in the name of each employee. Under certain
circumstances, this Law provides for an additional indemnity for unjustified
dismissals.
(4)
In addition, the Venezuelan Labor Law calls for a profit-sharing bonus payable
to employees for an annual amount equivalent to 15% of the Company's pre-tax
income. This bonus will range from a minimum of 15 days' salary to a maximum of
120 days' salary. During the years ended 2003 and 2002, the Company accrued and
paid a profit-sharing bonus equivalent to 120 days of salary.
In 1992 the Company set up a retirement plan to benefit a specific number of
employees, particularly professional personnel who voluntarily accept the plan
and meet length-of-service and age requirements set out in the plan. The plan
consists of defined contributions and is limited to a specific number of monthly
payments. The plan does not provide for acquired rights after reaching
retirement age and is based on certain considerations. The contribution for the
year is expensed.
f) Deferred income tax
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for income taxes" (SFAS 109). SFAS 109 requires an asset and
liability method of accounting for income tax. Under this method, deferred
income taxes reflect the net effect of the expected future tax consequences of:
(a) "temporary differences" by applying statutory tax rates applicable to future
years to differences between the amounts in the financial statements and the tax
bases of existing assets and liabilities, and (b) tax credits and tax loss
carryforwards. Additionally, under SFAS 109, the effect on deferred income taxes
of a change in tax rates is recognized as part of income for the year. If it is
more likely than not that some portion or the entire deferred income tax asset
will not be realized, an appropriate valuation allowance is recorded.
As described in Note 10, for Venezuelan tax purposes, the Company is required to
adjust the tax bases of its respective nonmonetary assets and liabilities for
the effects of inflation as from the 1993 fiscal year. Under SFAS 109, deferred
income tax assets are not recognized for the future net benefits from initial
and annual inflation adjustments.
g) Fair value of financial instruments
The fair value of a financial instrument is defined as the amount for which an
instrument can be exchanged in normal transactions between two knowledgeable and
willing parties.
At December 31, 2003, the net carrying value of cash, investment securities,
accounts receivable, bank loans, accounts payable and other accrued liabilities
approximates their estimated fair value due to the short-term maturities of
these instruments.
Long-term accounts receivable comprise balances in respect of sales to employees
of housing facilities to be amortized over ten years.
(5)
h) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses for the reporting period. Actual results
may differ from those estimates.
i) Concentration of credit risk
The financial instruments exposed to concentration of credit risk consist
primarily of cash equivalents and trade accounts receivable. The Company's cash
is placed with a diversified group of financial institutions. Accounts
receivable are currently concentrated with related companies (see Note 3).
j) Recognition of revenue, costs and expenses
As agreed with its customers, Company's revenue is derived mostly from coal
export sales in U.S. dollars or their equivalent amount in bolivars, which is
recognized when risk and ownership of coal sold is transferred. Costs and
expenses are expensed as incurred.
k) Accounting for asset retirement obligations
SFAS No. 143, which was adopted by the Company on January 1, 2002, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible, long-lived assets and the associated asset retirement
costs. The Company's asset retirement obligation (ARO) liabilities primarily
consist of spending estimates to reclaim surface land and support facilities at
both surface and underground mines, in accordance with laws, standards and
decrees issued by the Venezuelan government to protect the environment and coal
mine concession.
The Company estimates its ARO liabilities for final reclamation and mine closure
based on detailed engineering calculations of the amount and timing of future
cash spending for a third party to perform the required work. Spending estimates
are escalated for inflation, then discounted at the credit-adjusted, risk-free
rate. The Company records an ARO asset associated with the discounted liability
for final reclamation and mine closure. The obligation and corresponding asset
are recognized in the period in which the liability is incurred. The ARO asset
is amortized on the straight-line method over the life of the coal mining
concession until 2021 and the ARO liability is accreted to the projected
spending date. As changes in estimates occur (such as mine plan revisions,
changes in estimated costs, or changes in timing of the performance of
reclamation activities), the revisions to the obligation and asset are
recognized at the appropriate credit-adjusted, risk-free rate.
The Company also recognizes an obligation for contemporaneous reclamation
liabilities incurred as a result of surface mining. Contemporaneous reclamation
consists primarily of grading, topsoil replacement and revegetation of
backfilled pit areas.
(6)
The statement of income at December 31, 2002 includes the effect of the adoption
of this standard on Cumulative effect of change in accounting principle.
l) Accounting for impairment of long-lived assets
SFAS No. 144 "Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of (SFAS 144) requires that assets to be
disposed of be reported at the lower of carrying amount or fair value and
recoverable value. The Company reviews for impairment its long-lived assets to
be held or used, whenever events indicate that the carrying value of an asset
may not be recoverable. If it is not expected that an asset will be recovered
through future undiscounted cash flows, then the asset is written down to fair
value, which is generally determined from estimated discounted net future cash
flows.
m) Comprehensive income (loss)
SFAS No. 130 "Reporting comprehensive income" establishes guidelines for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income represents changes
in the Company's shareholders' equity for the period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity for the period, except those resulting from investments by owners and
distributions to owners. The Company has not identified any other component of
other comprehensive income.
n) Segment reporting
SFAS No. 131 "Disclosures about segments of an enterprise and related
information" requires a business enterprise to report financial and descriptive
information about its operating segments. Generally, presentation of segment
financial information is required on the same or similar basis as used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company considers itself as operating in a single
business segment (coal) in one country only (Venezuela).
NOTE 3 - BALANCES AND TRANSACTIONS WITH SHAREHOLDERS AND RELATED COMPANIES:
The Company belongs to a group of related companies and conducts transactions
and maintains balances for significant amounts with other members of the group
derived from export sales, services rendered, administrative services charges
and leasing coal mining.
(7)
Balances with shareholders and related companies at December 31 comprise the
following:
2003 2002
---- ----
(Thousands of
U.S. dollars)
Receivables:
Guasare Coal International, N.V. 30,116 5,588
Anglo Coal Marketing, Ltd. (shareholder) 18,899 8,400
Rag Trading Americas Corporation, USA (shareholder) 5,812 246
Rag Trading GMBH 2,097 1,794
Carbones de la Guajira, S.A. 296 258
------ ------
57,220 16,286
====== ======
Payables:
Corpozulia (Note 1-b) 3,293 2,683
Carbozulia (shareholder) 150 131
Ruhrkohle (former shareholder) - 3
------ ------
3,443 2,817
====== ======
Balances receivable from shareholders and related companies are interest-free
and have short-term maturities.
The Company exports all of its products to related companies abroad. As from
September 2003, the Company and the related company Guasare Coal International,
N.V. made coal sales amounting to Bs 61,477 million, equivalent to US$38 million
(see Note 14).
Accounts receivable from Guasare Coal International, N.V., Anglo Coal Marketing,
Ltd., Rag Trading Americas Corporation, USA and Rag Trading GMBH are mainly in
respect of coal sales.
During the years ended December 31, 2003 and 2002, coal sales to shareholders
and related companies were as follows:
2003 2002
------- -------
(Thousands of
U.S. dollars)
Guasare Coal International, N.V. 105,680 127,378
Anglo Coal Marketing, Ltd. (shareholder) 44,664 52,466
Rag Trading Americas Corporation, USA (shareholder) 35,631 15,106
Rag Trading GMBH 14,458 33,268
------- -------
200,433 228,218
======= =======
(8)
Accounts receivable from Carbones de la Guajira, S.A. are mainly in respect of
charges made for services rendered.
Accounts payable to Carbozulia are mainly in respect of administrative service
charges.
Accounts payable to Ruhrkohle are in respect of dividends declared at December
31, 2002 and paid during 2003.
NOTE 4 - ACCOUNTS RECEIVABLE FROM EMPLOYEES AND OTHER:
Accounts receivable from employees and other comprise the following:
2003 2002
----- -----
(Thousands of
U.S. dollars)
Housing Plan 2,306 3,125
Other 606 1,561
----- -----
2,912 4,686
Less-current portion 972 2,008
----- -----
Long-term portion 1,940 2,678
===== =====
The Housing Plan entails the sale to Company employees of houses located on "Mi
Fortuna" lots, as approved at the Board of Directors' Meeting of November 1998.
During 2003 the amortization of long-term accounts receivable amounted to
US$417,000, as included in the statement of income and was determined based on a
ten-year amortization period as per Company's policies.
NOTE 5 - INVENTORIES:
Inventories at December 31 comprise the following:
2003 2002
------ ------
(Thousands of
U.S. dollars)
Coal 4,039 8,840
Spare parts and supplies, net of provision for
obsolescence of US$3,200,000 in 2003 and 2002 11,689 12,721
------ ------
15,728 21,561
====== ======
At December 31, 2003, coal inventories amount to 164,335 metric tons (603,440
metric tons in 2002).
(9)
At December 31, 2003, US$8.5 million of the spare parts and supplies balance is
classified as low or slow-moving based on subledgers. The Company has set aside
a provision for inventory obsolescence amounting to US$3.2 million.
NOTE 6 - FIXED ASSETS:
Fixed assets at December 31 comprise the following:
2003 2002
-------- ---------
(Thousands of
U.S. dollars)
Buildings 50,138 48,061
Machinery 187,544 186,244
Furniture and other 14,344 16,233
-------- ---------
252,026 250,538
Less - Accumulated depreciation (195,114) (184,374)
-------- ---------
56,912 66,164
Work in progress 7,516 4,224
Land 139 139
-------- ---------
64,567 70,527
======== =========
At December 31, 2003 and 2002, fixed asset depreciation expense amounts to
US$14,048,000 and US$13,706,000, respectively.
At December 31, 2003, the balance of other projects in progress includes
improvements (mainly acquisition and installation of hardware) to the
technological platform used by the Company scheduled for completion in 2004.
NOTE 7 - BANK LOANS:
At December 31, 2003, the Company has bank loans with local financial
institutions for working capital denominated in bolivars of Bs 10,000 million
(equivalent to US$6,250,000). These loans bear 19.5% average annual interest and
mature in February 2004. They were renewed on February 2004 until April 2004.
(10)
NOTE 8 - ACCRUALS AND OTHER PAYABLES:
Accruals and other payables at December 31 comprise the following:
2003 2002
---- ----
(Thousands of
U.S. dollars)
Accrual for contingencies (Note 13) 1,944 1,705
Labor benefits and social contributions (Note 11) 2,511 2,521
Withholdings to third parties and other 2,048 594
Other payables and municipal taxes 932 1,650
Other 2,808 2,966
------ -----
10,243 9,436
====== =====
NOTE 9 - SHAREHOLDERS' EQUITY:
Capital stock -
At December 31, 2003 and 2002, the Company's capital stock is represented by
1,192,488,159 shares with a par value of Bs 1 each and shareholders' interests
as follows:
Thousands of
Shareholders Class of shares Number of shares U.S. dollars
- ------------------------------ --------------- ---------------- ------------
Carbozulia, S.A. A 576,822,452 39,463
Rag Coal International AG B 285,186,555 19,512
Anglo Coal (Venezuela) Limited B 285,186,555 19,512
Carbones del Guasare, S.A. C 15,292,597 1,034
Rag Coal International AG P 15,000,000 89
Anglo Coal (Venezuela) Limited P 15,000,000 89
------------- ------
1,192,488,159 79,699
Less - Treasury stock:
Carbones del Guasare, S.A. C (15,292,597) (1,034)
------------- ------
Total 1,177,195,562 78,665
============= ======
Among other matters, the Company's incorporation papers set out the following:
a) all shareholders have equal rights, except regarding the election of the
Board of Directors and the Chairman; the Board of Directors will be comprised of
four principal directors and eight alternates elected as follows: two principal
directors, one to act as Chairman of the Board and four alternates to be
appointed by the majority of Class "A" shareholders; two principal directors and
four alternates to be appointed by the majority of Class "B" shareholders; b)
Class "C" shares will be offered to private Venezuelan investors through a trust
fund set up for this purpose; c) Class "C" shares may not be owned by Class "A"
and "B" shareholders, by any other than Venezuelan individuals or corporations,
or by legal entities in which the Venezuelan government has more than a 50%
interest, and d) preferred Class "P" shares shall only be entitled to a
preferred dividend equivalent to the average lending rate at certain local
(11)
banks. Preferred shares shall entitle their holders to no further rights with
regard to the distribution of the Company's earnings and will be redeemed once
most Class "A" shares are owned by one or more companies whose owner is not,
directly or indirectly, the Bolivarian Republic of Venezuela. Class "P" shares
will be redeemed upon payment of subscription price plus any dividends
outstanding at the date of redemption and will entitle their holders to voting
rights only on those matters set out in the Company's bylaws.
Dividends -
In 2003 the Company paid preferred cash dividends of US$8,000 (US$14,000 in
2002). The average lending rates for 2003 and 2002 of preferred dividends were
41.06 % and 51.08 %, respectively. In addition, at Special Shareholders'
Meetings held in February and November 2003, the shareholders declared cash
dividends payable to holders of common shares of US$20 million (US$70 million in
2002).
NOTE 10 - TAXES:
Estimated tax expense at December 31 comprises the following:
2003 2002
------ ------
(Thousands of
U.S. dollars)
Income tax 14,429 30,430
Deferred income tax (2,530) -
Other - 535
------ ------
Total tax expense 11,899 30,965
====== ======
Income tax -
The Venezuelan Income Tax Law requires annual inflation adjustments to calculate
taxable income. The main reconciling items between book and tax income, which
affected computation of the income tax expense for the year, arise primarily
from the annual inflation adjustment, which is calculated by adjusting all
nonmonetary assets and liabilities and initial fiscal shareholders' equity in
accordance with changes in the Consumer Price Index (CPI) accrued for the year
or as from the date of acquisition of nonmonetary assets, assumption of
nonmonetary liabilities or increase or decrease in initial fiscal
inflation-adjusted shareholders' equity.
This Law allows investment tax credits to be carried forward for three years to
offset tax expenses. During 2003 the Company used the whole of the investment
tax credit balance for the year of US$350,000 (US$1,100,000 in 2002), and tax
credits in respect of environment-related investments of US$59,000 (US$248,000
in 2002). Under the Venezuelan Income Tax Law, differences result between the
amount of income tax computed by the Company at 34%
(12)
statutory income tax rates and the effective income tax rates for the years
reported as summarized below:
2003 2002
----- ------
(Thousands of
U.S. dollars)
Notional tax expense at the statutory income tax rate 15,267 23,193
Increase (decrease) in the statutory tax rate resulting from:
Effect of the annual inflation adjustment (6,935) (4,950)
Nontaxable and nondeductible items 341 (708)
Utilization of investment and environmental tax credits (409) (1,348)
Taxable exchange gain from financial statements expressed in
bolivars 8,629 12,832
Remeasurement adjustment (2,464) 1,411
Deferred income tax, net of provision (2,530) -
Other - 535
------ ------
Book expense 11,899 30,965
====== ======
Net deferred income tax assets at December 31 comprise the following:
2003 2002
----- ------
(Thousands of
U.S. dollars)
Difference between accounting base and
tax base and other nondeductible provisions
until payment 3,188 3,171
Provision for deferred income tax assets (658) (3,171)
----- ------
Total deferred income tax assets 2,530 -
===== ======
Business assets tax -
Business assets tax is a minimum tax, complementary to income tax. It is
calculated as 1% of the simple average of the inflation-adjusted nonmonetary
and monetary assets based on amounts at the beginning and end of the year. Under
current regulation, in 2003 and 2002 the company computed this tax together with
income tax. No business assets tax was computed for the years.
(13)
Below is a breakdown of tax computation and utilization of investment tax
credits during the years ended December 31:
2003 2002
------ -------
Thousands of
U.S. dollars)
Income tax for the year 14,838 31,778
Utilization of investment and environmental tax credits (409) (1,348)
------ -------
Tax expense 14,429 30,430
====== =======
Exploitation tax -
Exploitation tax is paid based on mined coal and amounts to 3% of production
value at pithead calculated in accordance with guidelines established by the
Ministry of Energy and Mines.
Value added tax -
At December 31, 2003, the Company has US$14.1 million, in respect of value added
tax credits, net of provision. This balance includes US$7 million (US$1.5
million in 2002) in respect of tax reimbursement certificates approved by the
National Integrated Tax Administration Service (SENIAT) during 2003 for the
October 2002 to July 2003 tax periods. It also includes US$1.1 million, for the
August 2003 tax period in respect of tax reimbursement certificates to date not
approved by SENIAT. Tax credits of US$5.1 million pending for the September to
December 2003 tax period are also included.
The aforementioned balance also includes tax credits of US$1.5 million in
respect of the August 1994 to October 2002 tax period, which were rejected by
SENIAT and for which the Company filed appeals with Tax Courts of US$1.7
million. To date, the Company has set aside a provision for rejected tax credits
of US$709,000.
During 2003 tax credits of US$875,000 were sold for the September 2002 tax
period. In addition, US$1.2 million was offset against the estimated income tax
return and US$14,000 was charged to income.
On December 10, 2003, the Company filed a tax appeal in respect of value added
tax through administrative resolutions RZ-DR-CR-2003-1090, RZ-DR-CR-2003-1092,
RZ-DR-CR-2003-1465 and RZ-DR-CR-2003-1476 for March, April, May and June 2003.
Tax credits amounting to US$134,000 were rejected. An appeal for constitutional
protection for US$3,186,000 was also filed in respect of tax credits for
exporters approved through resolutions issued by SENIAT that the Company has
been unable to use since tax reimbursement certificates have not been issued.
(14)
Transfer pricing -
In October 1999 the Venezuelan government enacted Decree No. 307 for the partial
reform of the Income Tax Law to introduce transfer-pricing regulations.
According to this reform, taxpayers that conduct transactions with related
parties abroad are required to calculate income, costs and deductions applying
the methodology set out in the Law. The Company conducts significant
transactions with related parties abroad and, at December 31, 2003, management
is making the study needed to determine the effect on taxable income that
computation of transfer prices might have. For the year ended December 31, 2002,
the Company is completing this study and has determined no impact on taxable
income at that date.
Bank debit tax -
The Venezuelan government enacted by decree the Bank Debit Tax Law in March
2002. This tax is levied upon debits or withdrawals made from current and
savings accounts, custody deposits, or any other type of demand deposit, liquid
asset funds, trust funds and other financial market funds or financial
instruments transacted by individuals or corporations with Venezuelan banks and
financial institutions.
In March 2003 a partial reform of the Bank Debit Tax Law was enacted mainly to
modify the tax rate. Bank debit tax rates were set at 1% until June 30, 2003 and
0.75% as from that date. At December 31, 2003, the Company recorded bank debit
tax expense of US$765,000 (US$547,000 in 2002), included under Operating
expenses.
NOTE 11 - ACCRUAL FOR DEFINED CONTRIBUTIONS RETIREMENT PLAN:
In December 1992 the Company set up a retirement plan to benefit a specific
number of employees, particularly professional personnel who voluntarily accept
the plan and meet length-of-service and age requirements set out in the plan.
The plan consists of defined contributions and is limited to 180 monthly
payments after the retirement date and an additional payment at the end of each
year. The Company's contributions are determined in accordance with the
employee's last salary (at December 31, 2003, the percentage was 26% of the
monthly base salary). Registered employees contribute 3% of their monthly base
salary. For the year ended December 31, 2003, expenses in this connection
amounted to US$151,000 (US$182,000 in 2002), included under General, selling and
administrative expenses. The first retirement took place during 2003 in respect
of which payments of US$2,027 were made.
Company's management used actuarial studies to determine liabilities at the
beginning of the plan in respect of benefits included in the retirement plan for
eligible personnel. At December 31, 2003, the liability amounts to US$1.3
million, shown under Accruals and other payables.
(15)
Accrued pension plan liability at December 31 comprises the following:
2003 2002
----- -----
(Thousands of
U.S. dollars
Active employees 1,203 1,144
Retired employees 64 -
----- -----
Total liability 1,267 1,144
===== =====
NOTE 12 - PROVISION FOR ASSET RETIREMENT OBLIGATION:
Reconciliation of the Company's provision for asset retirement obligation for
the years ended December 31, 2003 and 2002 is as follows:
2003 2002
---- ----
(Thousands of
U.S. dollars)
Provision at the beginning of the year 2,730 -
Upon adoption at January 1, 2002 - 1,812
cumulative effect of change in accounting principle - 829
Accretion expense of the year 93 89
----- -----
Provision at the end of the year 2,823 2,730
===== =====
At December 31, 2003 and 2002, asset retirement depreciation expense amounts to
US$53,000. The effect of accumulated depreciation of asset between 1988 and
January 1, 2002 (the date this standard was adopted) of approximately US$746,000
is recorded in the statement of income for 2002 under Cumulative effect of
change in accounting principle.
Cumulative effect of change in accounting principle as of December 31, 2002
comprises the following:
(Thousands of
U.S. dollars)
Effects of accumulated:
Accretion of liability between 1998 and January 1, 2002 829
Depreciation of asset between 1998 and January 1, 2002 746
Taxes (535)
-----
Cumulative effect of change in accounting principle 1,040
=====
(16)
NOTE 13 - CONTINGENCIES:
Tax claims -
In 1995 and 1994, the Tax Authorities issued additional tax assessments in
respect of the Company's income tax returns for 1988 through 1994. These
assessments disallowed tax exemptions on income earned during those years. In
1995 and 1996, the Company appealed these tax assessments and requested and
obtained correction of its tax payment forms. In 1996 the Board of Directors
availed itself of the Tax Amnesty Law and paid US$5,600,000 in connection with
1991 to 1994 tax years. In July 1998 the Company received settlement notices for
1991-1994; settlement for 1990 is still pending. At December 31, 2003, the
Company has accrued US$1.5 million to cover any additional liability in this
connection. In the opinion of Company's management and its legal counsel, the
outcome will be favorable to the Company since disallowance is not well grounded
in law.
Labor-related claims and assessments -
In the normal course of its business, labor-related claims and tax assessments
by the Tax Authorities have been filed against the Company for which respective
appeals have been filed. Company's management and its legal counsel expect a
favorable outcome; however, a provision of US$453,000 has been set aside to
cover this contingent liability.
NOTE 14 - EXCHANGE CONTROL:
On January 21, 2003, the Venezuelan government announced the closure of the
foreign exchange market in Venezuela. On February 5, 2003, BCV and the Ministry
of Finance began to publish the legal instruments regulating the exchange
control regime, one of which established official exchange rates of Bs
1,596/US$1 (purchase) and Bs 1,600/US$1 (sale). On that same date, the
government created the Commission for the Administration of Foreign Currency
(CADIVI) with the task of establishing the detailed rules and regulations and
generally administering the exchange control regime.
Among other things, the first of these legal instruments requires the sale of
all incoming currency to BCV and temporarily suspends all purchases and sales in
local currency of securities issued by the Venezuelan government in foreign
currency. BCV now centralizes all currency purchases and sales in the country.
CADIVI has subsequently issued resolutions on different requirements in
connection with the administration of the exchange control regime, such as user
registration, guidelines for importers and exporters, and the registration of
private-sector foreign debt at January 22, 2003.
Until March 16, 2004, the Company has applied to CADIVI for a total of US$19.4
million to pay for imports, of which US$13.9 million has already been approved.
Of these amounts, at March 16, 2004, US$2.9 million had actually been received
from BCV.
(17)
As an exporter, the Company has sold US$152 million to BCV from exports made as
from the effective date of the new exchange control regime and actually
collected up to March 16, 2004.
On February 6, 2004, the Ministry of Finance and BCV established new official
exchange rates, as from that date, of Bs 1,915.20/US$1 (purchase) and Bs
1,920/US$1 (sale). This change in the official exchange rates resulted in an
increase in the Company's assets and an exchange gain of Bs 4,903 million to be
included in the results for 2004.
Currency purchases authorized by CADIVI in process of settlement by BCV
(Authorizations for Currency Liquidation, as defined in the exchange
regulations) prior to February 6, 2004, will be settled at the official exchange
rates effective at the date such authorizations were issued by CADIVI. In this
regard, on February 6, 2004, the Company had received Authorizations for
Currency Liquidation from CADIVI of US$11 million in the process of settlement
by BCV at the official exchange rate of Bs 1,600/US$1.
As described in Note 3, as from September 2003, the Company's exports to Guasare
Coal International, N.V. are denominated in bolivars. In the opinion of
Company's management and its legal counsel, income received in bolivars as a
result of transactions abroad is not subject to the exchange control regime
since it regulates transactions generating U.S. dollars or other currencies
coming into the country.
NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS:
In April 2002 the FASB issued SFAS No. 145 "Rescission of FASB Statement Nos. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections" (SFAS
145). The most significant provision of this Statement is the rescission of FASB
Statement No. 4 "Reporting gains and losses from extinguishment of debt" (FASB
4), which required that gains and losses from extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. The provisions of this Statement, in respect of the
rescission of Statement No. 4, shall be applied for fiscal years beginning after
May 15, 2002. Any gain or loss on extinguishment of debt, classified as an
extraordinary item in prior periods and not meeting the criteria in APB Opinion
No. 30 for classification as an extraordinary item, shall be reclassified. The
adoption of SFAS 145 did not have an impact on the Company's financial position
or the results of its operations.
In June 2002 the FASB issued SFAS No. 146 "Accounting for costs associated with
exit or disposal activities" (SFAS 146). SFAS 146 addresses financial accounting
and reporting of costs associated with exit and disposal activities, including
restructuring activities, and nullifies Emerging Issues Task Force Issue No.
94-3 "Liability recognition for certain employee termination benefits and other
costs to exit an activity (including certain costs incurred in a restructuring)"
(EITF 94-3). SFAS 146 requires that the liability for a cost associated with an
exit or disposal activity be recognized when incurred. The provisions of this
Statement are
(18)
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS 146 did not have an impact on the Company's financial position
or the results of its operations.
SFAS No. 148 "Accounting for stock-based compensation - Transition and
disclosure - An amendment of SFAS No. 123" was issued in December 2002. SFAS 148
is effective for years beginning after December 15, 2002 and provides three
methods of transition for voluntary change to the fair value-based method of
accounting for stock-based employee compensation. The Company considers that
adoption of this Statement will not have an impact on its financial position or
the results of its operations.
In April 2003 the FASB issued SFAS No. 149 Amendment of Statement No. 133
"Derivative instruments and hedging activities" applicable for contracts entered
into or modified or hedging relationships designated after June 30, 2003. This
Statement amends and clarifies accounting and reporting for derivative
instruments and requires all derivatives to be recognized as either assets or
liabilities on the balance sheet, measured at fair values. The Statement permits
special hedge accounting for fair value, cash flows and foreign currency hedges
provided specific criteria are met. Certain aspects of the required hedge
criteria do not allow portfolio hedging. The adoption of this Statement did not
have an impact on the Company's financial position or the results of its
operations.
In May 2003 the FASB issued SFAS No. 150 "Accounting for certain financial
instruments with characteristics of both liabilities and equity." SFAS 150
improves accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity and requires that these
instruments be classified as liabilities in statements of financial position.
SFAS 150 is applicable to all financial instruments entered into or modified
after May 31, 2003 and is otherwise applicable for the Company's fiscal year
ending December 31, 2003. The Company considers that adoption of this Statement
will not have an impact on its financial statements.
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 45), which requires a liability to be recorded at
the inception of certain guarantees for the fair value of the obligation. The
offsetting entry is dependent on the nature of the guarantee of the asset being
recorded, such as the consideration received for providing a letter of credit or
prepaid rent for a residual value guarantee in an operating lease. The liability
recorded will typically be reduced by a credit to the results of operations as
the guarantee lapses, which generally will occur on a systematic basis over the
term of the guarantee or its settlement. The initial measurement and recognition
of FIN 45 provisions are effective for applicable guarantees written or modified
after December 31, 2002 with disclosure requirements applicable to the Company
for the year ended December 31, 2003. The adoption of this Statement did not
have an impact on the Company's financial position or the results of its
operations.
(19)
In January 2003 the FASB issued Interpretation 46 "Consolidation of variable
interest entities." FIN 46 clarifies the application of Accounting Research
Bulletin No. 51 "Consolidated financial statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. These types of entities are referred to as VIEs. FIN 46 provides
a new framework for identifying variable interest entities (VIEs) and
determining when a company should include assets, liabilities, non-controlling
interests and results of activities of a VIE. It is immediately applicable to
all VIEs created after January 31, 2003 and effective beginning the third
quarter for VIEs created prior to issuance of the interpretation. The adoption
of this pronouncement did not have an impact on the Company's financial position
or the results of its operations.
(20)